Quiz 1
Explain the difference between Nominal GDP, Real GDP, and Real GDP per capita
Nominal GDP is total output measured in current year prices.
Real GDP is that same total using base year prices to eliminate the effects of inflation or deflation.
Real GDP per capita is the total output in base year prices on a per person basis.
The best way to analyze a country’s standard of living over time is to examine the economic growth of...
Real GDP per capita
Joe Smith takes out a fixed rate loan from First Bank in Newton. Both Joe Smith and First Bank anticipate a 2% inflation rate when they agree to the loan with an interest rate of 7%. However, the inflation rate is much higher than expected at 10%. Because of this high unexpected inflation rate, who wins and who loses?
Joe Smith wins because he is paying back his loan with a rate that is lower than the inflation rate. First Bank loses because inflation is higher than the interest rate so it is being paid back in dollars that are worth less than when they were originally loaned out.
GDP: Expenditure Approach
GDP = C + I + G + (X - M)
C = Consumption, I = Investment, G = Government Spending, X = Exports, M = Imports
The cost of a "market basket" of goods was $200 in the base year. Today, that same basket costs $250. What is the current CPI?
Answer: 125 Calculation: (250 / 200) x 100 = 125$
Inventory investment is:
a. New residential housing
b. Capital goods, such as factories and equipment
c. Goods that businesses plan to acquire
d. Unsold goods that businesses have on hand
d. Unsold goods that businesses have on hand
Business Cycle stages:
Peak, contraction, trough, recovery, expansion, and back to peak
A labor union signs a three-year contract with a company that guarantees a 4% annual raise. At the time of signing, both parties expect inflation to stay at 2%. Unexpectedly, inflation spikes to 8% over the next year. Who wins, who loses?
The company wins. The workers' "Nominal Wage" went up by 4% but the "Real Wage" (purchasing power) actually fell. Since inflation is higher than their raise, the workers can buy fewer goods than they could the year before. The company wins because their labor costs have decreased in real terms while they can likely charge higher prices for their products.
Unemployment Rate = (Unemployed / Labor Force) x 100
A city has 10,000 people total. 5,000 are employed, 500 are actively looking for work, and 4,500 are retired or not looking for work. What is the Unemployment Rate?
Answer: 9.09%
Calculation: [500 / (5,000 + 500)] x100 = 9.09%
GDP Equation:
Consumption + Investment + Government + NX (Exports – Imports)
The total amount of goods and services that households, businesses, government, and foreign purchasers will buy at each price level
Alex and Ben both borrow $10,000. Alex gets a Fixed-Rate Loan at 6%. Ben gets an Adjustable-Rate Loan (ARM) that adjusts based on inflation. Inflation was expected to be 2% but suddenly jumps to 9%.
Alex wins. Alex’s interest rate is "locked." He pays 6% interest while inflation is 9%, meaning he is paying a negative real interest rate 3%. He is effectively being paid to borrow money. Ben, however, sees his interest rate adjust upward to match the 9% inflation. Ben does not get the "inflation windfall" that Alex (and Joe Smith in your original example) received.
CPI: Consumer Price Index
CPI = (Price of Market Basket in Current Year / Price of Market Basket in Base Year) x 100
Using the same city of 10,000 people (where 5,500 are in the Labor Force), what is the Labor Force Participation Rate?
Answer: 55%
Calculation: (5,500 / 10,000)x100 = 55%
John works full-time as a waiter but has a degree in architecture. As a result, John is considered to be...
underemployed
What does NOT improve employee productivity?
Hiring more workers
Ms. Frye recently lost her job at First National Bank where she worked as a bank teller helping customers cash checks and deposit money. Ms. Frye could be frictionally unemployed, structurally unemployed or cyclically unemployed, depending on his specific situation. Explain how she could fit into each of these categories.
Frictional if she has transferable skills to find another job, if she is “in between” jobs
Structural if the job there are no more jobs in her field of skills, if she doesn’t have skills to do jobs available
Cyclical if a recession led the bank to lay off workers, if the business cycle led to her job loss
Real GDP per capita
Real GDP per Capita = Real GDP / Population
In a small economy, Consumers spend $500, businesses invest $200 in new equipment, the Government spends $150 on roads, and the country exports $50 worth of goods while importing $70 worth of goods. What is the GDP?
Answer: $830 Calculation: $500 (C) + 200 (I) + 150 (G) + (50 - 70) (X_n) = 830$