Ch 1 + Ch 2 - The science and data of macroeconomics Flashcards
What are endogenous and exogenous variables?
Endogenous: Those variables that a model tries to explain. Are determined within the model and are the model’s output.
Exogenous: Those variables that a model takes as given. Come from outside the model and serve as the model’s input.
What do we mean by market clearing?
The assumption that markets are normally in equilibrium, so the price of any good or service is found where the supply and demand curves intersect.
What do market-clearing models assume?
Market-clearing models assume that all wages and prices are flexible, in the real world some wages and prices are sticky.
Market-clearing models might not describe the economy at every instant, but they do describe the equilibrium towards which the economy gravitates. Therefore, price flexibility is a good assumption for studying long-run issues.
What is price stickiness?
Prices are sticky - they adjust only sluggishly in response to supply/demand imbalances. E.g. labour contracts that fix the nominal wage for a year or longer
Contract for fitness/ sports club
Price stickiness is a better assumption for studying short run behaviour.
How does the behaviour of the economy depend on whether prices are sticky or flexible?
If prices are sticky, then demand won’t always equal supply.
This helps explain:
- Unemployment
- The occasional inability of firms to sell what they produce
Long run - prices flexible, markets clear, economy behaves very differently
How is micro- and macroeconomics related?
Link between macro and micro: when we study economics as a whole, we must consider the decisions of individual economic actors.
Because aggregate variables are the sum of the variables describing many individual decisions, macroeconomic theory rests on a microeconomic foundation.
What are the two ways to view GDP?
- Total expenditure on domestically-produced final goods and services
- Total income earned by domestically-located factors of production
What is the difference between stocks and flows? And which category does GDP belong to ?
A stock is a quantity measured at a given point in time, whereas a flow is a quantity measured per unit of time.
Examples of flow variables: GDP, CPI, GDP deflator
Point out that a specific quantity of a flow variable only makes sense if you know the size of the time unit.
Another point: It is often the case that a flow variable measures the rate of change in a corresponding stock variable
How does national income accounts compute the total value of different goods and services?
They use market prices because these prices reflect how much people are willing to pay for a good or service.
How is inventory treated in GDP?
The owners of the firm are supposed to have ‘purchased’ the inventory, and the firm’s profit is not reduced by the additional wages it has paid. Because the higher wages raise total income and greater spending on inventory raises total expenditure, the economy’s GDP rises.
The sale of out inventory does not affect GDP - there is spending by consumers but there is inventory disinvestment by the firm.
What is an imputed value?
Some goods and services are not sold in the marketplace and thus do not have market prices; hence we must estimate their value. Such an estimate is called an imputed value.
What are imputations especially important for?
Imputations are especially important for determining the value of housing.
Rent is part of GDP. However, many people own their own house. To take account of the housing services enjoyed by homeowners, GDP included the ‘rent’ that homeowners ‘pay’ to themselves. National statistics agencies typically estimate what the market rent for a house would be if it were rented. This imputed rent is included both in the homeowner’s expenditure and in the homeowner’s income.
Where else do we use imputations?
Imputations also arise in valuing government services.
E.g. police officers, firefighters. The national income accounts include these services in GDP by valuing them at their cost.
What are chained-volume measures of GDP?
The base year changes continuously over time. These various year-to-year growth rates are then put together to form a ‘chain’ that can be used to compare the output of goods and services between any two dates.
What is investment?
The general rules is that the economy’s investment does not include purchases that merely reallocate existing assets among different individuals. Investment creates new capital.
