Chapter 19

Question 1

What is macroeconomic analysis?

Answer 1

-explains past patterns in aggregate economic activity and tries to predict future changes

Question 2

What is a recession?

Answer 2

-it is a period lasting at least two quarters in which aggregate economic output falls.

Question 3

What is national income accounts? What is a national income and product account?

Answer 3

• they measure the level of aggregate economic activity in a country.
• it is the system of national income accounts that is used by the US government

Question 4

What is Gross domestic product?

Answer 4

-the market value of the final GS produced in a country during a given period of time.

Question 5

Production approach

Answer 5

We are interested in valuing the end product in a chain of production. (inventories included too)
-sum up the market value that is added by each domestic firm in the production process (value added: sales revenue-purchases of intermediate product from other firms)

-summing each firm’s value added to the production process.
-computing for each firm the difference between sales revenue and the purchase of
intermediate products, then summing this difference across all firms.

Question 6

Expenditure approach

Answer 6

Add up all soled goods, and G in inventories. (inventory is coded as being “purchased” by the firm)
-consumption, investment, government expenditure, exports, imports

Question 7

Income approach

Answer 7

income of workers and owners (every part of the revenue goes somewhere)
-(labor income+capital income)
-tracking the flow of funds from firms to the owners of the factors of production.
-adding together the income payments received by the various agents in the
economy
-summing labor income and capital income.

Question 8

What are factors of production?

Answer 8

-inputs to the production process

Question 9

Describe the circular flow diagram

Answer 9

page 485

note that expenditure=production=income=factors of production

Question 10

What is the national income accounting identity?

Answer 10

Y=C+I+G+X-M

Question 11

What is not counted into the GDP? (8)

Answer 11

1)Physical capital depreciation
-reduction of the value of capital due to obsolescence and wear and tear
ex: also changes in our health
2)Home production
3)The underground economy
-intentionnaly hidden transactions, illegal professions,
4)Negative externalities
=>cen be positive contributors (locks, bodyguards)
5)Gross national product (the market value of production generated by the factors of production (K,L) owned or possessed by residents of a particular nation.
6)Increase in income inequality
-varies across countries and over time
-moderate creates incentives to work hard
-high creates costs
-extremely high: social unrest, support for populist politicians
7)leisure
8)cross-border movments of capital and labor

Question 12

GNP formula

Answer 12

GNP=GDP+production of US onwed K,L in foreign countries-production of foreign-owned K,L in the Us

Question 13

Does GDP buy happiness?

Answer 13

-positive correlation between GDP and life satisfaction

Question 14

What is nominal and real GDP?

Answer 14

N GDP: total value of production (final GS) using current market value of each unit produced

R GDP: total value of production (final GS) using market prices from a specific base year to determine the value of each unit that is produced.

Question 15

What is the GDP deflator?

Answer 15

100 * Nominal GDP/real GDP

It is a measure of how prices of GS produced in a country have risen since the base year= overall level of prices in the economy

Question 16

What is the consumer price index?

Answer 16

CPI= 100* (buying a basket of consumer goods using target year prices)/(cost of buying the same basket of consumer G using base-year prices)

Question 17

What is the key difference between GDP deflator and CPI?

Answer 17

• GDP deflator studies the basket of goods that is produced domestically. Includes things that households don t purchase. (locomotives, stations,…)
• CP studies a particular basket of consumer goods. Includes things that households purchase but are not counted in GDP: (value added by imports)

A product can have different weight in the two baskets.

Question 18

What is inflation rate?

Answer 18

-rate of increase in prices

Infl 2015= (price index 2015-price index 2014)/price index 2014

(same as for GDP deflator, both can be used to measure inflation rate)

Question 19

Adjusting nominal variables formula

Answer 19

Value 2015= (price index 2015/Price index xxx)*value in xxx

-used to express historical price or value for a more recent year (in dollars for example)

Question 20

Give one example of how a decision of yours or those around you can
affect the measured level of GDP, and how it affects welfare?

Answer 20

This question is aimed at understanding what GDP measures and how it is related to
welfare. There are many decisions made by you or those around you that can affect
the level of GDP. For example, eating in or out, doing your own laundry or taking it to
a dry cleaner, mothers’ decision to stay home or work. Whether to “marketize” certain
“production activities” affect the measured level of GDP and could be important for
welfare if the opportunity costs of such production activities are different across
individuals. For example, if it is cheaper (adjusting for quality) to buy than produce
certain products yourself (which includes time cost and input costs) then buying the
product increases both GDP and welfare.
Other examples include: • Eat in or out
• Do own laundry or take outside • Buy imported goods or goods made in domestic country
• Hire a nanny or ask family members to look after your kids

Question 21

Comparing GDP using exchange rate, as opposed to PPP, will most likely

Answer 21

• underestimate the income of poor countries

- overestimate the income of affluent countries

Question 22

What do production functions plot against each other?

Answer 22

The two graphs plot output against capital stock, holding efficiency units of
labour constant