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Measuring the Economy 2

Terms

Introduction and Summary

Inflation

Base Year  -  The year from which the original quantities and/or prices are taken in the calculation of an index.
Benefits  -  Non-cash payments made to employees. For instance, health care plans or pensions.
Bureau of Labor Statistics  -  The government organization responsible for regularly gathering data about the economic status of the population.
Comparison Year  -  The year for which the quantities and/or prices of goods or services are replaced by those of the base year in the calculation of an index.
Cost of Living  -  An index based on the amount of money necessary to purchase the market basket of goods and services purchased by the average consumer, relative to the same basket in an earlier year.
CPI (Consumer Price Index)  -  The consumer price index is a cost of living index that is based on a fixed market basket of goods and services purchased by the average consumer.
Cyclical Unemployment  -  Deviations from the natural rate of unemployment based on normal fluctuations in the business cycle.
Efficiency Wages  -  Wages paid by a firm to an employee that are above the market-clearing wage with the intention of keeping the employees healthier, happier, and of high productivity. Efficiency wages increase unemployment by creating a surplus of labor at the given wage.
Efficient Market  -  A market where the quantity supplied is equal to the quantity demanded and the price of goods is set at the equilibrium price.
Employed  -  An individual who is currently working at a job.
Equilibrate  -  Describes the movement of the factors of a market so that the quantity supplied is equal to the quantity demanded and the price of goods is set at the equilibrium price.
Equilibrium Wage  -  The wage in the labor market where labor supply is equal to labor demand and the market clears.
Expected Inflation  -  When economists and consumers plan upon the presence of inflation, and this expectation is reflected in the economic decisions made by these groups.
Fixed Basket  -  A set group of goods and services whose quantities do not change over time. A fixed basket is used in the calculation of the CPI.
Flexible Basket  -  A group of goods and services that changes both in composition and quantity as consumers' preferences change. A flexible basket is used in the calculation of the GDP deflator, for instance.
Frictional Unemployment  -  A type of unemployment in which an individual is between jobs.
Full Capacity  -  When the economy is producing at an output level that corresponds to the natural rate of unemployment, or about 6%.
Full Employment  -  When the unemployment level is at, or very close to, 6% (the natural rate of unemployment).
Full Output  -  The level of output that occurs when the labor force is at full employment.
Gross Domestic Product (GDP)  -  The gross domestic product is the total value of all goods and services produced in an economy.
GDP Deflator  -  The ratio of the nominal GDP to the real GDP. It shows the overall price level by comparing the cost of a basket of goods from one year to the next.
Inflation  -  An increase in the overall price level.
Job Search  -  The active process of looking for a job.
Labor Market  -  The market where firms supply jobs and individuals supply labor and in which wage is the equilibrating factor.
Labor Unions  -  Groups of workers who rally together to improve the pay and conditions on the job.
Laspeyres Index  -  An index where the basket of goods is fixed.
Macroeconomic Economy  -  This refers to the economy as a whole, as opposed to a view of the economy as based on the actions of individual actors.
Market-Clearing Level  -  The level, price, or quantity where supply and demand are equal.
Menu Costs of Inflation  -  Costs associated with inflation that arise when firms have to change printed price schedules.
Minimum Wage Laws  -  Government imposed minimum hourly wages that must be observed. The minimum wage is aimed at providing a minimum standard of living, but also have the ancillary effect of increasing unemployment.
National Output  -  The total value of goods and services produced by an economy in a specified time period. Also known as GDP.
Natural Rate of Unemployment  -  The rate of unemployment that the economy tends to hover around. Most economists believe that this value is around 6%.
Nominal GDP  -  The total value of all goods and services produced in an economy, valued at current dollar, and not adjusted for inflation.
Nominal Prices  -  Prices of goods and services valued at dollars current when the goods and services were provided. Nominal prices are not adjusted for inflation.
Okun's Law  -  This details the inverse relationship between unemployment and real GDP. Click here to see the Okun's Law Formula.
Out of the Labor Force  -  Describes people who are not employed and are not currently looking for employment. This includes children and retirees.
Paasche Index  -  An index based upon a flexible basket of goods and services.
Phillips Curve  -  Describes the general inverse relationship between unemployment and inflation. Click here to see the Phillips Curve Formula.
Potential Output Level  -  The output of an economy when all of the productive factors, including labor, are used at their normal rate. In terms of unemployment, this corresponds to a 6% unemployment rate.
Price Level  -  The general cost of items within an economy relative to one another.
Price of Labor  -  The wage paid to workers.
Production Capability  -  The production level of an economy when all of the productive factors, including labor, are used at their normal rate. In terms of unemployment, this corresponds to a 6% unemployment rate.
Purchasing Power  -  The amount of goods and services that a unit of currency can buy.
Real GDP  -  The total value of all goods and services produced in an economy valued at constant dollars, or adjusted for inflation.
Real Value  -  The value of something at constant dollars, or adjusted for inflation.
Shoeleather Cost of Inflation  -  Costs of expected inflation caused by people having to make more trips to the bank to make withdrawals because they do not want to keep cash on hand.
Stagflation  -  When inflation and unemployment both increase. This phenomenon seems to negate the general applicability of the Phillips Curve.
Standard of Living  -  The level of economic well-being that an individual enjoys.
Structural Unemployment  -  Unemployment due to a mismatch between workers' skills and firms' needs.
Substitute  -  An item that is purchased in lieu of a more expensive or less desirable item.
Total Labor Force  -  The sum of employed workers and unemployed job searchers.
Unemployed  -  Describes individuals who are not currently working but are currently searching for a job.
Unexpected Inflation  -  Inflation that economists and consumers do not expect.
Value of a Dollar  -  The purchasing power of a dollar.
Wage  -  The amount of money paid to a worker.
Formulae
 
Percentage change in the price level [CPI(earlier year) - CPI(later year)] / CPI(earlier year) or [GDP(earlier year) - GDP(later year)] / GDP(earlier year)
 
Okun's Law Percentage change in real GDP = 3% - 2(change in the unemployment rate)
 
Unemployment Rate Unemployment rate = (unemployed)/(employed + unemployed)
 
Phillips Curve Inflation = ((expected inflation) - B) ((cyclical unemployment rate) + (error))

where B equals a number greater than zero that represents the sensitivity of inflation to unemployment.

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