BIG PICTURE IDEAS

#1. Economists measure the health of the economy by looking at key economic indicators like gross domestic product (GDP), the
unemployment . rate, and the consumer . price index, which measures inflation.
#2. The circular flow model shows how households, businesses, and the government . interact.
#3. Gross domestic product (GDP) is the dollar value of all final . goods and services produced within a country
in one year ..
#4. There are three types of unemployment: frictional, structural . , and cyclical. The economy is at full employment when
there is no cyclical
. unemployment.
#5. Real . GDP is adjusted for inflation and expressed in constant, or unchanging, dollars. nominal .
GDP is not adjusted for inflation.

Topic 2.1- The Circular Flow and GDP

1. How does the expenditures approach measure GDP? 2. How does the income approach measure GDP?
GDP is equal to the total of government spending, Wages + Rent + Interest + Profits = National Income.
investment spending, consumer spending, and net
exports.

GDP = C . + I . + G . + X-M . National Income = W .+ R . + i .+ PR .

3. How does the value-added approach measure GDP?
Adds the value added at each manufacturing stage to calculate GDP.

4. Businesses sell goods and services to households in the product . market and households sell resources to
businness . in the resource market.
5. Public goods and services are provided by the government . and are funded by taxes ..
6. Identify an example of each of the following:
Consumer Spending Investment Spending Government Spending Net Exports
Buying food Purchasing equipment for a Building roads Exporting motorcycles
company

Topic 2.2- Limitations of GDP

7. Identify three types of transactions that are not included in GDP. Give an example of each.
Three kinds of transactions have been eliminated from GDP: non-market activities (like volunteering at a charity), transfer payments (like unemployment
benefits), and middleman products (like wheat used by a bakery).
Identify if each statement is True or False.
8. Services are not counted in the calculation of GDP because 13. Transfer payments are not counted in the calculation of GDP. true
nothing new was produced. False 14. The equation for net exports is imports minus exports. False
9. Intermediate goods are used in the production process to 15. New housing construction is considered investment and is counted
produce final goods. True in GDP. True
10. A new paint job on a used car is not counted in GDP. False 16. Canada’s GDP includes goods produced in other countries by
11. Investment spending is spending on financial assets like stocks Canadian companies. False
and bonds. False 17. Inventories, goods that have been produced by a business but have
12. Subsidies to businesses are examples of transfer payments. not yet been sold, are counted in GDP as investment. true
True
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 Topic 2.3- Unemployment
18. For each example, identify if the person faces frictional, structural, or cyclical unemployment or if they are not counted in the labor force.
Frictional Structural Cyclical Not Counted
Avery loses her job because of a recession and decides to stop looking for work Yes

Lindsey quits her part-time job at a restaurant to search for a full-time job Yes
David lost his job at a toy factory due to a national slowdown in production Yes
After graduating from college, James lacks the skills to fill any of the available jobs Yes

Daniel retires from being a lawyer and volunteers at a local museum full time Yes
Use the info in the chart to identify the following. Show your work. 25. Assume an economy saw an increase in discouraged workers.
Does the unemployment rate overstate or understate the actual
level of joblessness in the economy? Explain.
As I already mentioned before, since discouraged workers are not
included in the labor force, the unemployment rate may be lower than
the true number of unemployed people.

19. Number of workers in the labor force. 800 = 600 + 120 + 80 26. What happens to the unemployment rate when full-time workers
involuntarily become part-time workers? Explain.
20. Labor force participation rate. 50% = 800/1600 x 100 Since these workers are still working, the unemployment rate stays
the same, but it represents joblessness as opposed to full
21. What is the equation for calculating the unemployment rate? employment.

Number of Unemployed People /Labor Force x 100

27. What is the natural rate of unemployment (NRU)?
22. Calculate the unemployment rate. 10% = 80/800 x 100 The amount of unemployment that continues despite full-time
employment is represented by NRU, which also includes systemic and
frictional unemployment.
23. Assume that 50 of the 80 unemployed workers also become
discouraged workers. Calculate the new unemployment rate. 28. Fully explain why “full employment” does not mean 0%
4% = 30/750 x 100 unemployment.
24. Why are discouraged workers not included in the unemployment In a strong, dynamic economy, structural and frictional
rate? unemployment are still included in full employment.
Because they are not actively looking for work, discouraged
workers are not seen as being in the labor force.
\

Topic 2.4- Price Indices and Inflation

29. Identify the equation for the CPI. 31. If the CPI for a given year is 200 then the change in prices between that
Cost of current basket / Cost of basket in base year x 100 year and the base year is 100 . %.
32. If the CPI for a given year is 90 then the change in prices between that
30. Fill in the chart. Start with 2020 as the base year then year and the base year is -10 . %.
recalculate with 2021 as the base year. 33. Assume the value of a market basket for a given year is $220 and the same
basket in the base year is $200. Calculate the CPI.
110 = (220 / 200) x 100

100 34. Assume the CPI is 120 and the current value of the market basket is $600.
50
What is the dollar value of the same basket using base year prices?
200 100 500 = (600 / 120) x 100

125 35. Assume the CPI is 140 and the value of a market basket adjusted for
250
inflation is $200. What is the dollar value of the basket in current prices?
150 75 280 = (200 x 140) / 100

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 Topic 2.4- Price Indices and Inflation (continued)
36. What is the difference between the CPI 38. The nominal GDP is $100 billion and the real GDP is $80 billion. Calculate the GDP deflator.
and the GDP Deflator? 125 = (100 billion /80 billion) x 100
The CPI tracks changes in the prices of a set 39. The Real GDP is $100 billion and the GDP deflator is 200. Calculate the nominal GDP.
bundle of goods and services that consumers
200 billion = 100 billion x (200/100)
typically use. Additionally, shifts in prices for all
domestically produced goods and services are 40. The real GDP is $200 billion and the GDP deflator is 120. Calculate the nominal GDP.
tracked by the GDP Deflator.
240 billion = 200 billion x (120/100

37. Identify the equation for the GDP deflator. 41. The nominal GDP is $300 billion and the GDP deflator is 150. Calculate the real GDP.
200 billion = 300 billion / (150/100)
(Nominal GDP / Real GDP) x 100
42. The nominal GDP is $100 billion and the GDP deflator is 125. Calculate the real GDP.
80 billion = 100 billion / (125/100)

Topic 2.5- Costs of Inflation

43. Identify who is hurt and who is helped by unexpected inflation. Identify if the following are helped or hurt by unexpected inflation.
Those harmed include savers, fixed-income individuals, and lenders. 44. A tenant who pays $1850 for rent each month. Helped
Borrowers and those with variable earnings or prices benefited.
45. An elderly couple living off fixed income. Hurt

Topic 2.6- Real v. Nominal GDP

46. Nominal GDP is measured in current prices and does not account for inflation . whereas real .
GDP is expressed in constant, or unchanging, dollars.
True or False:
47. Real GDP must increase when the Nominal GDP increases. false
48. Nominal GDP is always greater than the Real GDP. false
Use the table with data for Country X to calculate the following for 2023. Show your work.
49. Real GDP. 50. Real GDP per capita.
2500 = (3000 X 100) / 120 25 per capita = 2500 / 100

51. Based solely on the data, has the average standard of living for a person living in country X increased or decreased? Explain.
The average level of living has gone up. The true GDP for each person in 2023 is $25, rather than $20 in 2022 ($2000 / 100 = $20), despite
the fact that the GDP Deflator shows inflation. An improvement in the level of living is suggested by this rise in real GDP per capita.

Topic 2.7- Business Cycles

Use the letters on the graph to identify the following:
52. Peak A 55. Trough B
53. Potential GDP C 56. Expansion D
54. Recession (contraction) E

Use the graph to identify if each statement is True or False.

57. At C the economy is at full employment. True
58. When the economy is at point A there is only frictional unemployment. False

59. When the economy is at point B there is only cyclical unemployment. False
60. Unemployment decreases when the economy moves from E to D. True
61. At C the economy has 0% unemployment. False

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