Notes
GDP
- GDP is the market value of all final goods and services produced within a country in a period. It excludes intermediate goods, used goods, stocks, transfer payments and nonmarket work.
- $GDP = C + I + G + (X - M)$. Consumer spending is the largest part.
- Real GDP adjusts for prices: $\displaystyle \text{Real GDP} = \frac{\text{Nominal GDP}}{\text{price index}} \times 100$. GDP per capita divides GDP by population. The growth rate is the percent change in real GDP.
The business cycle
- Expansion, peak, contraction, trough. A recession is a significant decline in activity; a depression is a severe, long one. Leading indicators help forecast turns.
Unemployment
- Unemployment rate $\displaystyle = \frac{\text{unemployed}}{\text{labor force}} \times 100\%$, where labor force = employed + unemployed (people actively looking).
- Discouraged workers are not in the labor force. Types: frictional, structural, cyclical, seasonal. Full employment means no cyclical unemployment.
Inflation
- $\displaystyle CPI = \frac{\text{basket cost now}}{\text{basket cost in base year}} \times 100$. Inflation rate $\displaystyle = \frac{CPI_{\text{new}} - CPI_{\text{old}}}{CPI_{\text{old}}} \times 100\%$.
- Causes: demand-pull, cost-push and rapid money growth. Inflation hurts savers, lenders and people on fixed incomes and can help borrowers with fixed-rate loans.
- Real interest rate $\approx$ nominal rate $-$ inflation rate.
Topics in this unit
Each topic has its own short notes and practice.
Practice
The new house is newly produced (counted as investment); the used car was counted when it was first made.
$800 + 200 + 250 + (120 - 170) = 1{,}200$.
$\displaystyle \frac{4}{80} = 0.05$.
$\displaystyle \frac{231 - 220}{220} = \frac{11}{220} = 0.05$.
Unemployment caused by a downturn in the business cycle is cyclical.
A fixed income buys less and less as prices rise.
Free response
Write your answer first, then open the scoring guide.
Free-response question
A country has a working-age population of 200 million people. Of these, 117 million are employed and 13 million are unemployed and looking for work.
(a) Calculate the size of the labor force, the unemployment rate and the labor force participation rate.
Show the answer and scoring guide
Labor force $= 117 + 13 = 130$ million. Unemployment rate $\displaystyle = \frac{13}{130} = 10\%$. Participation rate $\displaystyle = \frac{130}{200} = 65\%$.
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(b) The CPI rose from 200 to 210 over the year, and the average hourly wage rose from $20.00 to $20.60. Calculate the inflation rate and explain what happened to workers' real wages.
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Inflation rate $\displaystyle = \frac{210 - 200}{200} = 5\%$. Wages rose $\displaystyle \frac{0.60}{20.00} = 3\%$. Because prices rose faster than wages, real wages fell by about 2%: workers can buy less with their pay than a year earlier.
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(c) Nominal GDP grew from $1,000 billion to $1,080 billion, and the price index rose from 100 to 108. Calculate this year's real GDP and explain what it shows about the economy's growth.
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Real GDP $\displaystyle = \frac{1{,}080}{108} \times 100 = 1{,}000$, or $1,000 billion in base-year prices. Real GDP did not change, so the economy produced no more goods and services than before. The entire 8% rise in nominal GDP came from higher prices.
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