1 - Definitions Flashcards
Aggregate output
Measured in GDP.
Way 1 of defining GDP
GDP is the value of final goods and services produced in the economy during a given period, count only final goods, not intermediate goods
Way 2 of defining GDP
GDP is the sum of value added in the economy during a given period
value added by a firm
the value of its production minus the value
of the intermediate goods used in production
way 3 of defining GDP
GDP is the sum of the incomes n the economy during a given period. aggregate production and aggregate income are always equal
Nominal GDP
the sum of the quantities of final goods produced times
their current price
Nominal GDP increases when…
1) the production of most goods increases. 2) the price of most goods increases
Real GDP
the sum of quantities of final goods times constant (not current) prices
Nominal GDP is also called
Dollar GDP, or GDP in current dollars
GDP is also called
GDP in terms of goods, GDP in constant
dollars, GDP adjusted for inflation, or GDP in 2009 dollars
Intermediate good
used in production of another good
recession
negative GDP growth
expansion
positive GDP growth
synchronisation
two countries GDP growth is interrelated
cyclical variables
variables that have a positive correlation
Reason 1 why measuring GDP is difficult
A tough problem in computing real GDP is how to deal with changes in the quality of existing goods. One of the most difficult cases is computers
Reason 2 why measuring GDP is difficult
The price for services from Facebook, YouTube, Wikipedia, Google is practically zero. eg. move from paid calls to Skype calls looks like less GDP because less money is spent
Reason 3 why measuring GDP is difficult
Many activities may be legal in some countries but illegal in others (e.g., prostitution, drugs)
Reason 4 why measuring GDP is difficult
only housing services are included eg. hired cleaners rather than unpaid housework
Solution for Reason 1
look at how the market values computers with different characteristics in a given year, treats goods as providing a collection of characteristics – here speed, memory and so on – each with their own price, is called hedonic pricing
Example of hedonic pricing
The quality of new laptops has increased on average by 18% a year since 1995, while their dollar price has declined by about 7% a year
employment
the number of people who have a job
unemployment
the number of people who do not have a job but have been looking for one in the last 4 weeks
labour force
the sum of employment and unemployment
unemployment rate =
unemployment / labour force
unemployment rate
the ratio of the number of people who are unemployed to the number of people in the labour force
what do most rich countries rely on to compute the unemployment rate
large surveys
the US Current Population System relies on
interviews of 60,000 households every month
Those who do not have a job and are not looking for one are counted as
not in the labour force
discouraged workers
those who give up looking for a job and so are no longer counted as unemployed
participation rate
s the ratio of the labour force to the total population of working age
Reason 1 for economists to care about unemployment
Direct effect on the welfare of the unemployed, especially those remaining unemployed for long periods of time
Reason 2 for economists to care about unemployment
a signal that the economy is not using its human resources efficiently
Very low unemployment can be a problem because
the economy runs into labour shortages and employers need to pay higher wages, which may raise prices and raise inflation
inflation
a sustained rise in the general level of prices
inflation rate
the rate at which the price level increases
deflation
a sustained decline in the price level eg Japan
GDP deflator =
Pt = Nominal GDP/Real GDP
GDP deflator
the ratio of nominal GDP to real GDP in a year
rate of inflation=
the rate of change in GDP deflator
nominal GDP =
rate of inflation + rate of growth of real GDP
Reason 1 why the set of goods produced in the economy is not the same as the set of goods purchased by consumers
some goods in the GDP are sold not to consumers but to firms, to the government, or the foreigners
Reason 2 why the set of goods produced in the economy is not the same as the set of goods purchased by consumers
Some of the goods brought by consumers are not produced domestically but are imported from abroad
Consumer Price index -
a measure of the cost of living (and of the cost of the consumption basket of a typical consumer)
CPI is published monthly by…
Bureau of Labour Statistics (BLS),
which collects price data for 211 items in 38 cities
CPI gives the cost in dollars of …
a specific list of goods and services over time
CPI and GDP deflator are …
largely similar, move together most of the time
Exception of CPI and GDP deflator moving together
in 1979 and 1980, the increase in the CPI was significantly larger than the increase in the GDP deflator due to the price of imported goods increasing relative to the price of domestically produced goods
Reason 1 why economists care about inflation
– Inflation affects income distribution when not all prices and wages rise proportionally
Reason 2 why economists care about inflation
Inflation leads to distortions due to uncertainty and because of its interaction with taxation
Inflation interaction with taxation
higher wages to match inflation means move up to higher tax bands and pay more taxes
Most economists believe the “best” rate of inflation to be
a low and stable rate of inflation between 1 and 4%
