Macro Measures Unit 2 Review

Unit 2: Macro Measures Measuring Growth Definition of Gross Domestic Product (GDP): dollar value of all final goods and services within a country's border in one year GDP = C + I + G + Xn Nominal GDP: In this year's dollars Real GDP: Adjusted for inflation GDP Deflator: Measures the price of all goods produced Business Cycle Label peak, recession/contraction, trough, expansion business cycle graph with labels GDP Deflator Practice The Nominal GDP is $100 billion and the Real GDP is $80 billion. Calculate the GDP deflator. 100 / 80 = 125 The Real GDP is $100 billion and the GDP deflator is 200. Calculate the Nominal GDP. 200 * 100 = 20,000 The Real GDP is $200 billion and the GDP deflator is 120. Calculate the Nominal GDP. 200 * 1.20 = 240 The Nominal GDP is $300 billion and the GDP deflator is 150. Calculate the Real GDP. 300 / 1.50 = 200 The Nominal GDP is $100 billion and the GDP deflator is 125. Calculate the Real GDP. 100 / 1.25 = 80 Measuring Unemployment Frictional Unemployment: Looking for a new job, seasonal workers Structural Unemployment: Skills no longer apply to their current work Cyclical Unemployment: Results from recessions Natural Rate of Unemployment (NRU): Includes Frictional + Structural *Around 4-6% Full Employment *4% Measuring Inflation Market Basket: 200 commonly purchased goods CPI Practice: Using the values of the market baskets below, calculate the CPI for each year. Start with 2009 as the base year then recalculate with 2010 as the base year. Lastly, recalculate with 2011 as the base year.   | Year | Market Basket | Base Year 2009 | Base Year 2010 | Base Year 2011 | |---|---|---|---|---| | 2009 | $20 | 100 | 50 | 40 | | 2010 | $40 | 200 | 100 | 80 | | 2011 | $50 | 250 | 125 | 100 | Consumer Price Index (CPI) Equation: CPI = (Price of market basket / Price of market basket in base year) x 100 Helped or Hurt by Unexpected Inflation Assume expected inflation is 2% but actual inflation turns out to be 5%. Who is helped and hurt by inflation? | Helped   | Hurt | |---|---| | Borrowers | Lenders | | Businesses | People with fixed incomes | | - Price of products increases faster than resource costs | - Savers | Causes of Inflation 1. Quantity Theory of Money - Print too much $ 2. Demand-Pull - Too few dollars 3. Cost Push - Higher costs → higher prices Quantity Theory of Money Equation: MV = PQ Assume the amount of money is $5 and it is being used to buy 10 products with a price of $0.5 each. 1. How much is the velocity of money? 2. If the velocity and output stay the same, what will happen if the amount of money increases   to $10?