Notes

Explain the two ways the GDP is measured.
Answer: Income Approach: This is the most accurate way of calculating GDP. It is calculated by simply adding up all the income earned in the economy.
Expenditure Approach:This is a practical way of calculating GDP. It is calculated by estimating the annual amount spent in four categories of final goods and services, which include: consumer, business, and government goods and services, as well as, net exports and imports. The amount spent in each category is added up and this total equals GDP.

What are the goals of the U.S. economic policy? Give a brief explanation of each.
Answer:
Efficiency: Obviously a strong economy is an efficient one.
Growth: U.S. economic policy calls for a steady growing economy.
Equity: The U.S. government has established a number of programs designed to help those less fortunate in society meet their basic needs
Security: A secure economy is a stable one.
Stability: A stable economy supports a stable society.
Freedom: Economic freedom is of great importance in U.S. economic policy goals.

What is the difference between nominal and real GDP?
Answer: Nominal GDP is calculated using the current prices in a year; real GDP is calculated using constant or unchanging prices.
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Analyze the four phases of the business cycle. Include a description of the phase and the factors involved.
Answer: Expansion is when the economy is growing and real GDP increases. At the peak, real GDP figures level off. There is no more growth but just a steady "status quo" to the economy.
Contraction occurs when the economy begins to lag a bit and takes a downhill turn. During this time the real GDP figures fall and the economy slows. Finally it reaches a trough. At the bottom of the business cycle, the real GDP figures stop decreasing and level off. The economy is at its lowest point.

List the factors that influence the business cycle.
Answer: Customer viewpoints, uncontrollable events, interest rates, and capital investment influence the business cycle.

How do economists forecast business cycles?
Answer: Economists often look at the operations of the Stock Market. Not always, but often, if a recession is coming, the Stock Market will take a quick nosedive. Also, economists use the data collected by the Conference Board. This is an organization that conducts economic research, has a list of leading economic indicators that it follows, and it publishes monthly reports that note changes in these indicators. It looks at such data as the prices of stocks sold in the Stock Market, as well as, interest rates and contracts for new products and large equipment. Economists review this data every month looking for trends that might show a possible recession in the future.
-------------------------------------------------------------------------------------------------------------------------------------List and describe the four types of unemployment.
Answer: Frictional is when people take time to find a job. Cyclical is unemployment that is affected by downturns in the economy or during a contraction in the business cycle. Structural occurs when workers skills do not match the jobs available. Season unemployment is short-term unemployment that occurs because a job cannot be performed during a particular season.

How does the government calculate the employment rate?
Answer: The unemployment rate is calculated by taking the number of employed and unemployed people and adding them together to get the total number of people in the labor force.
Then the number of unemployed people is divided by the total labor force and then multiplied by 100. This final figure shows the percentage of those unemployed in the labor force.

Name the ways the unemployment rate influences economic performance.
Answer: Extremely low rates of unemployment are actually not very desirable in the economy. During periods of rapid growth, companies may encounter difficulties hiring enough workers to fill all production jobs. During these times, companies may encounter problems finding new employees, causing competition between companies. As companies try to attract workers, they will increase potential wages. This then forces producers to increase the prices of their goods to cover the increased labor costs, resulting in high inflation (high prices). High inflation can force the economy into a contraction as consumers stop purchasing high priced products.
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Describe the concept of inflation.
Answer: Inflation is a general rise in the prices of goods and services.

How is inflation measured?
Answer: The government uses the Consumer Price Index to help them calculate the inflation rate.
The formula used is: Year #1 = Year #2 Price x (Year #1 CPI divided by Year #2 CPI).

What are the names of the three theories that explain the causes of inflation?
Answer: Quantity Theory, Demand-Pull Theory, Cost-Push Theory

How is inflation used as a measure of economic performance?
Answer: When inflation is rising, economists know that there may be a variety of causes (as mentioned in the previous screens). There is either too much money in the economy, demand for goods exceeds the supply, the costs of producing goods has risen, or a combination of all three. This information tells government leaders that they must either decrease the amount of money in circulation (monetary policy) or cut government spending (and possibly raise taxes) in order to bring down prices (fiscal policy).