GDP is adjusted= price index = GDP inflator * Nominal GDP GDP (expenditure approach) 1-personal consumption 2-gross private investment 3-government consumption 4-net exports GDP (resource cost-income approach) 1-direct income components(wages, salaries, rents, interest, corporate profit) 2-indirect business taxes, depreciated, and net income of foreigners During the expansionary phase , real GDP increases and the rate of unemployment fall. 4 unemployments : seasonal, structural (skills someone doesn’t have), cyclical (recessionary business conditions) , frictional (temp w.) Structural employment occurs when there is a mismatch between workers skills and the jobs available. Frictional unemployment is caused by imperfect information and workers changing jobs If the consumer price index was 125 at year-end of 00 and 132.5 at year-end 01 inflation during 2001 was 132.5 / 125 =1.06 = 6% inc If a country's population (age 16 and over) is 50 million, with 2 million unemployed and 23 million currently holding jobs, the: unemploymen t rate is 8.0 percent, and the labor force participation rate is 50 percent. 2M / (2M+23M) = 2/25 = .08 = 8% Fiscal Policy-gov’t spending and taxes; primary tool for the fed budget; regulates GDP In the short run, excess AS would place downward pressure on prices if prices were above equilibrium. When consumers and business hold larger money balances, there will be a reduction in the supply of loanable funds and an increase in the interest rate. The net inflow of capital from abroad will increase as the real interest rate in the domestic loanable market increases. Recession-decline in real GDP. To get out of recession : Lower resource prices and lower real interest rates increase in AD. (Increase interest rate-slows economy) Real Inflation rate = (this year’s price index-last year/last year’s price index) *100 … dollar declines when inflation is present Participation Rate = civilian labor force/ population. Unemployment rate = # employed / # in labor force unemployment rate with economy’s max sustainable rate of output Employment to population ratio = # employed / civilian population (16+) Inflation caused by rapid expansion in the money supply Budget deficit = gov’t purchases – taxes
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