Section 13.

1. Wars are included in GDP, because they almost always involve the production of
weapons and the destruction of resources and capital goods, all of which have a direct
effect on the economy. Volunteer work is not included in GDP because there’s no money
involved, so it doesn’t directly affect the economy.

3.

GDP Type Definition How is it measured?

Nominal GDP A measurement of the C+I+G+(X-M) in current

economy’s output for the dollars (which reflect the
current year in current purchasing power of the
dollars. dollars in the year that they
are spent).

Real GDP A measurement of the C+I+G+(X-M) in constant

economy’s output in constant dollars, whose value is based
dollars. off of a fixed rate from a
“base year.”

Per capita GDP A measurement of the C+I+G+(X-M) in constant

economy’s output in constant dollars divided by population.
dollars that takes population
size into account.

3b. Real GDP is used to compare GDP from various time periods because the value of
dollars remains constant and adjusts the GDP for inflation. Since inflation changes all the time,
it’s necessary to account for it in order to compare GDP from different time periods.
3c. Per capita GDP is used to compare GDP from different countries because it accounts
for population size. Countries with larger populations will naturally have larger GDP, so it’s not a
good indicator of how productive countries are in comparison to each other. By taking
population size into account and using it to calculate per capita GDP, the playing field is leveled.

4. GDP is not a good measure of economic health because it can overcount destruction and social
breakdown, but undercount social benefits (volunteers, stay-at-home parents, etc.). GDP only
really describes how much the country is producing overall; GDP =/= economic health.
Section 13.3

2.
Type of Unemployment Definition Example

Frictional Unemployment Unemployment that results Unemployment after

from changing jobs or graduating high school
seeking a first job

Cyclical Unemployment Unemployment that Being laid off in a

follows the natural ups and recession
downs of the economy.

Structural Unemployment Results from a Aluminum workers are laid

technological change in the off when an aluminum
structure of the economy plant closes and are
that workers cannot adapt unemployed while they
to. The demand for the learn new skills.
worker’s skills decreases.

Seasonal Unemployment When businesses shut A farmer is laid off during

down for part of the year the winter.
(usually because of
weather) and their workers
are out of work.

Institutional When the government Unemployment during the

Unemployment prevents employment Covid-19 lockdown

2b. Institutional unemployment is most associated with an economy, because it is

the result of direct government intervention. The other types of unemployment are all
natural in the ups and downs of the economy, economic growth, and times of year.
2c. Even a fully employed economy will still have frictional, structural, and
seasonal unemployment. This is because the causes for these types of unemployment are
still relatively independent of the economy. People will always be unemployed while
changing jobs, learning new skills (because their profession is no longer needed), or laid
off for seasonal work.

3. The unemployment rate is not a good measurement of economic health because it only
accounts for a specific group of people who are unemployed but are still looking for
work. It doesn’t consider “discouraged” workers or involuntarily part-time workers.
Section 13.4

2.

Adjusting for Inflation Definition How is it measured?

Nominal cost of living The price, in current dollars, Dollars

of the basic goods & services
that people need.

Real cost of living The nominal cost of living Dollars + adjustment for the
adjusted for inflation. inflation rate

Nominal wages Wages based on current Dollars

prices.

Real wages Nominal wages adjusted for Dollars + adjustment for the
inflation inflation rate

2b. Economists use this information to determine whether things cost more than they
used to or not by comparing the real cost of living and real wages. When they do this, they can
determine if the relationship between the cost of living and wages has remained the same, or if it
has become imbalanced.
3.

4. The main causes of inflation are an increase in the money supply, an increase in overall
demand, and increases in the cost of factors of production or energy prices.
5. Next page
 6. Inflation rate is not a good measure of economic health because it has a number of biases
(substitution bias, outlet substitution bias, new product bias, and quality change bias–all
relating to things that the CPI doesn’t consider) that can lead the CPI to overestimate
inflation up to 1%. In addition, inflation is only an increase in the price of goods/services
in an economy. There are many other important factors of the economy besides just
prices. I know that I have answered “no” for all three economic indicators, but the way I
understand it is that none of them are good indicators of economic health by themselves.
All three are needed to properly gauge the state of the economy.

Section 13.5

2.
Phase Real GDP Unemployment Rate Inflation Rate

Expansion Rises Generally falls Generally increases

Peak Stops Stops Stops and may start

decreasing

Contraction Falls Generally rises Generally falls

Trough Stops Stops Stops and may start

increasing
3.

Causes & Characteristics of an Expanding Causes & Characteristics of a Contracting

Economy Economy

● Increasing business investment ● Falling GDP

● Increased employment ● Decreasing real wages
● Discovery of new resources ● Decreasing employment
● Innovation(s) ● Decreasing profits
● High consumer confidence ● Decreasing production
● Rising wages & profits ● Negative shocks to the economy
● Increased borrowing and spending ● Rising interest rates
● Rising GDP ● Decreasing borrowing & spending
● Shortages
● Rising prices

4. An economy may stop expanding and start contracting due to a negative shock to the
economy, rising interest rates, or shortages.

5. A recession is a decline in economic activity lasting at least six months; a depression is a

prolonged decline in economic activity coupled with plunging GDP and skyrocketing
unemployment.

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