Mnemonic: CPA TIRED

1. Profits of Corporations
2. Income of Proprietors
3. Adjustments
4. Taxes
5. Interest
6. Rental Income
7. Employee Wages
8. Depreciation

1. Includes only final goods and services
2. Disaster recovery increases GDP
3. Economic activity in developing countries impossible to capture
4. Goods are counted before they are sold
5. Value of liesure time is not included

1. Decline in consumer confidence
2. Major innovation (renders existing business obsolete)
3. Miscalculation in fiscal policy by government

1. Average workweek for manufacturing workers
2. New orders for consumer goods
3. New orders for nondefense capital goods
4. Building permits for houses
5. Stock prices
6. Money supply
7. Spread between short & long term interest rates
8. Consumer expectations

1. Average duration of unemployment
2. Ratio of inventories to sales
3. Average prime interest rate
4. Commercial and industrial loans outstanding
5. Ratio of consumer debt to personal income

1. Number of nonfarm employees
2. Personal Income minus transfer payments
3. Level of industrial production
4. manufacturing and trade sales

Current year price index - Base year price index

Base year price index

Most common index used to calculate nominal GDP. Base period is 1982-84.

CPI = Cost of mkt basket current year  x 100

Cost of market basket 1982-84  

Demand outpaces supply. Inflation is generated by unsatisfied demand. Economy can't produce enough, so prices of existing goods soar.

"Too many dollars chasing too few goods."

Everyone included in the employed workforce is considered "equally employed"; no distinction between part time & full time.

1. Under age 16
2. incarcerated or institutionalized
3. Homemakers, full time students, retirees
4. Discouraged workers (able to work but not seeking work)

Figures often distorted by "under the table" employees and discouraged workers who falsely claim to be looking for work

Directly related to low economic output. Companies lay off workers to cut costs, which leads to decrease in output, prices, and demand.

Also called "demand-deficient unemployment"

Primary economic cost is value lost from goods and services not produced by idle employees (GDP Gap).

Burden is spread unequally among workers: blue collar hit harder than white collar; low skill workers have higher unemployment than highly skilled. Young and ethnic minorities typically see higher levels of unemployment, but no difference between genders seems to exist.

Fiscal Policy

Discretionary v. Nondiscretionary

Discretionary involves spending that is under the control of individuals within the government. (Defense contracts)

Nondiscretionary is that which is enacted into law (Social Security). No individual can decide to modify nondiscretionary spending.

1. Tax Policy
2. Spending (infrastructure, military, etc.)
3. Transfer payments (welfare, food stamps, unemployment comp)

Keynesian Theory

Deployment of Fiscal Policy

Expansionary Policies are used when recessionary gap exists, to stimulate aggregate demand. Taxes are cut, government spending increases, and transfer payments rise.

Contractionary policies are used when inflationary gap exists, to suppress aggregate demand. Taxes go up, government spending is cut, and transfer payments decrease (leading to less disposable income)

Two Methods: borrowing (sell T-bills) or printing money. Increased government presence in the marketplace leads to the "crowding out effect" in which small venture capitalists are unable to obtain financing. Printing additional money devalues the currency ("Too many dollars chasing too few goods") and leads to inflation.

M1 - Currency & checking accounts

M2 - Savings & Money Market accounts, small time deposits (<$100k), Money market mutual funds, M1

The rate banks charge each other for overnight loans.

The rate falls when the Fed buys Treasury securities (loosens money supply), and rises when Treasury securities are sold (tightens money supply).

Money supply is loosened if recession is expected and tightened to ward off inflation.