Measurement of Economic Performance — Hard Practice Quiz
A Macroeconomics cheat sheet for Measurement of Economic Performance — every key formula with its symbols defined — plus a hard-level practice quiz to test recall.
Formulas & key concepts
The national income and product accounts, a system that tracks the flows of money among the major sectors of the economy.
A simplified model showing how money moves between households and firms through the product and factor markets.
A person or group of people who share income and make consumption and saving decisions together.
An organization that produces goods and services for sale.
Markets where firms sell the finished goods and services they produce to households.
Markets where households sell the factors of production, such as labor, land, and capital, to firms.
Household spending on final goods and services.
A share representing partial ownership of a company.
An IOU issued by a borrower that promises to repay the lender with interest.
Payments the government makes to households, such as Social Security, without receiving a good or service in return.
Household income after taxes are subtracted and transfers are added; the amount available to spend or save.
The portion of disposable income that households do not spend on consumption.
The banks, stock markets, and bond markets that channel private savings toward borrowers and investment.
Money the government raises by selling bonds to cover the gap between spending and tax revenue.
Government spending on goods and services.
Goods and services produced domestically and sold to other countries, bringing funds into the economy.
Goods and services bought from other countries, sending funds out of the economy.
Stocks of goods and raw materials that firms hold for future sale or use; counted as investment.
Spending on new productive physical capital, such as machinery and buildings, plus changes in inventories.
Goods and services sold to the final user; only these count toward GDP.
Inputs used up in producing other goods; excluded from GDP so output is not double-counted.
The total market value of all final goods and services produced within a country during a given period.
A producer's sales value minus the cost of its intermediate inputs; adding up value added across all producers yields GDP.
GDP can be found by summing value added by all producers, summing spending on domestic final goods, or summing all income paid to factors of production; all three give the same total.
The expenditure approach to GDP: consumer spending plus investment plus government purchases plus net exports.
Exports minus imports; the international trade component of GDP.
The economy's total quantity of final goods and services produced.
The value of final output measured using the prices of a fixed base year, which strips out the effect of price changes.
The value of aggregate output measured using current-year prices.
Real GDP divided by population; a gauge of average output per person, though not an appropriate goal in itself.
The method of computing real GDP by averaging the growth rates obtained from an early base year and a late base year.
First developed in the United States, GDP accounting has since become a standard tool for economic analysis and policymaking around the world.
People who currently hold a part-time or full-time job.
People who do not have a job but are actively looking for work.
The sum of the employed and the unemployed.
The percentage of the population aged 16 and older that is in the labor force.
The percentage of the labor force that is unemployed and actively seeking work.
Nonworking people who have given up searching for a job and therefore are not counted as unemployed.
People who want to work and have looked recently but are not currently searching, so they are left out of the labor force.
Workers who hold part-time jobs but want full-time work, or who work below their skill level.
It can overstate joblessness by counting people still searching after receiving an offer, and understate it by ignoring discouraged, marginally attached, and underemployed workers.
The unemployment rate tends to fall when real GDP grows faster than average and rise when growth is below average.
The time and effort workers spend looking for a suitable job.
Short-term unemployment that arises as workers search for jobs, including new entrants and those between jobs.
Unemployment resulting from a persistent surplus of workers at the going wage, caused by factors such as minimum wages, unions, and efficiency wages.
Above-equilibrium wages firms pay to raise productivity and reduce turnover, which contributes to structural unemployment.
The sum of frictional and structural unemployment; the unemployment that remains even when the economy is healthy.
The portion of unemployment that rises and falls with the business cycle.
The natural rate of unemployment plus cyclical unemployment.
The natural rate changes over time with labor force characteristics, labor market institutions, and government policies.
Unemployment rates differ sharply by age, region, and demographic group, and are typically higher for the youngest and oldest workers than for those in their prime years.
The annual percentage change in the aggregate price level.
When wages and incomes rise along with prices, real wages and real income are unchanged, so a rising price level by itself does not reduce overall purchasing power.
The wage rate adjusted for inflation, reflecting actual purchasing power.
Income adjusted for inflation.
The resources wasted when high inflation drives people to make extra trips and take extra effort to minimize their cash holdings.
The real cost to businesses of updating their listed prices when inflation is high.
Costs that arise when high inflation makes money a less reliable yardstick for measuring value.
Because long-term contracts are written in dollars, higher-than-expected inflation benefits borrowers and hurts lenders, while lower-than-expected inflation does the reverse.
The stated interest rate on a loan, not adjusted for inflation.
The nominal interest rate minus the rate of inflation.
The process of bringing down a high inflation rate, which is very costly, so policymakers try to avoid high inflation in the first place.
A single measure summarizing the overall level of prices in the economy.
A fixed set of goods and services used to track how prices change over time.
The cost of the market basket in a given year divided by its cost in a base year, multiplied by 100.
The most common measure of the aggregate price level, tracking the cost of a basket bought by a typical urban household.
Economists disagree about whether the CPI overstates true inflation, for example by not fully accounting for consumer substitution and quality improvements.
A price index for goods and services purchased by firms, often an early warning of future consumer inflation.
A price measure equal to nominal GDP divided by real GDP, times 100.
Extreme inflation episodes, such as 1980s Israel and Zimbabwe, drove people to spend cash almost immediately, a vivid illustration of shoe-leather costs.
Practice quiz
A country's economy reports the following for a given year: Consumer Spending ($C$) is $1000 \text{ billion}$, Government Purchases ($G$) are $300 \text{ billion}$, Exports ($X$) are $200 \text{ billion}$, and Imports ($IM$) are $150 \text{ billion}$. Firms started the year with $50 \text{ billion}$ in inventories and ended the year with $70 \text{ billion}$ in inventories. Additionally, new factories and equipment worth $200 \text{ billion}$ were purchased. What is the Gross Domestic Product ($GDP$) for this country?
- $1550 \text{ billion}$
- $1570 \text{ billion}$
- $1520 \text{ billion}$
- $1600 \text{ billion}$
Answer: $1570 \text{ billion}$
Assume a household's total income is $80,000$. They pay $15,000$ in taxes and receive $5,000$ in government transfers. Out of their disposable income, they spend $55,000$ on consumption. If the government decides to cut transfers by $2,000$ and simultaneously the household increases its consumer spending by $1,000$ (assuming total income and taxes remain constant), how does this impact the household's private savings and the funds available for financial markets from this household?
- Private savings decrease by $3,000$, reducing funds available to financial markets.
- Private savings decrease by $1,000$, reducing funds available to financial markets.
- Private savings increase by $1,000$, increasing funds available to financial markets.
- Private savings remain unchanged, with no impact on financial markets.
Answer: Private savings decrease by $3,000$, reducing funds available to financial markets.
In a country, the adult population is $200 \text{ million}$. There are $120 \text{ million}$ employed individuals and $10 \text{ million}$ unemployed individuals actively seeking work. Due to a recent economic downturn, $5 \text{ million}$ people have stopped looking for jobs, becoming discouraged workers, and are not counted in the labor force. If half of these discouraged workers ($2.5 \text{ million}$) suddenly re-enter the labor force and actively search for jobs but do not immediately find employment, what would be the new unemployment rate, assuming no other changes?
- The unemployment rate would decrease to approximately $7.4\%$.
- The unemployment rate would increase to approximately $9.4\%$.
- The unemployment rate would remain unchanged as no new jobs were created.
- The unemployment rate would increase to approximately $10.0\%$.
Answer: The unemployment rate would increase to approximately $9.4\%$.
In a given year, a country's Nominal GDP is $20 \text{ trillion}$. The GDP Deflator for that year, using a base year of $2010$, is $125$. If, in the following year, Nominal GDP increases by $6\%$ and the GDP Deflator increases by $2\%$, what is the approximate percentage change in Real GDP?
- Approximately $8\%$ increase.
- Approximately $4\%$ increase.
- Approximately $4\%$ decrease.
- Approximately $6\%$ increase.
Answer: Approximately $4\%$ increase.
A student takes out a $10$-year fixed-rate loan for college tuition with a nominal interest rate of $5\%$. Both the student and the lender initially expect the average inflation rate over the loan's term to be $2\%$. However, due to unexpected economic events, the actual average inflation rate turns out to be $4\%$. How does this unexpected change in inflation affect the real interest rate and the financial positions of the student (borrower) and the lender?
- The real interest rate increases, benefiting the lender and hurting the student.
- The real interest rate decreases, benefiting the student and hurting the lender.
- The real interest rate remains unchanged, benefiting neither party.
- The nominal interest rate adjusts automatically, benefiting the lender.
Answer: The real interest rate decreases, benefiting the student and hurting the lender.
Consider a simplified circular-flow diagram where the government sector is introduced. Initially, the government collects taxes and makes some government purchases and transfers. If the government significantly increases its spending on new infrastructure projects (Government Purchases) and simultaneously increases unemployment benefits (Government Transfers), how would these actions primarily affect the flows in the product and factor markets, assuming no immediate change in tax rates?
- Both government purchases and transfers would primarily increase the flow of money from firms to households in factor markets.
- Government purchases would increase flows in product markets, while transfers would primarily increase flows from households to financial markets.
- Both actions would lead to increased demand for goods and services in product markets and increased demand for factors of production in factor markets.
- Government purchases would decrease, and government transfers would increase, leading to a net decrease in overall economic activity.
Answer: Both actions would lead to increased demand for goods and services in product markets and increased demand for factors of production in factor markets.
A country is experiencing a severe economic recession, causing many businesses to close and leading to a surge in layoffs. Simultaneously, rapid technological advancements are making certain skills obsolete, and the government has reduced funding for job retraining programs. How would these combined events likely impact the country's actual unemployment rate and its components (cyclical, frictional, and structural unemployment)?
- The actual unemployment rate would decrease, primarily due to a fall in cyclical unemployment.
- The actual unemployment rate would increase, with both cyclical and structural unemployment contributing to the rise, and thus an increase in the natural rate.
- The actual unemployment rate would increase, but only due to a rise in frictional unemployment.
- The natural rate of unemployment would decrease, offsetting the rise in cyclical unemployment.
Answer: The actual unemployment rate would increase, with both cyclical and structural unemployment contributing to the rise, and thus an increase in the natural rate.
Consider the production of a wooden chair. A logging company sells raw timber to a sawmill for $100$. The sawmill processes the timber and sells lumber to a furniture manufacturer for $250$. The furniture manufacturer uses the lumber to build a chair, which it sells to a retail store for $400$. Finally, the retail store sells the chair to a consumer for $550$. What is the total contribution to Gross Domestic Product ($GDP$) from this chain of production, and what is the total value added?
- The total contribution to $GDP$ is $1300$, and the total value added is $1300$.
- The total contribution to $GDP$ is $550$, and the total value added is $550$.
- The total contribution to $GDP$ is $400$, and the total value added is $400$.
- The total contribution to $GDP$ is $250$, and the total value added is $250$.
Answer: The total contribution to $GDP$ is $550$, and the total value added is $550$.
In Year $1$, the Consumer Price Index ($CPI$) is $120$, and a worker earns a nominal annual wage of $60,000$. In Year $2$, the $CPI$ rises to $126$. If the worker's real wage is to remain constant between Year $1$ and Year $2$, what must their nominal annual wage be in Year $2$?
- $60,000$
- $63,000$
- $66,000$
- $57,000$
Answer: $63,000$
A car manufacturer produces $10,000$ cars in a given year, each with a market value of $25,000$. During the same year, $9,000$ of these cars are sold to consumers (Consumer Spending, $C$). The remaining $1,000$ cars are added to the manufacturer's inventory. Assume no other components of GDP ($G$, $X$, $IM$) for simplicity. What is the total contribution of this car production to the country's Gross Domestic Product ($GDP$) for that year?
- $225,000,000$
- $250,000,000$
- $200,000,000$
- $275,000,000$
Answer: $250,000,000$
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