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Macroeconomic Theory > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Define : National income accounts

A

An accounting framework used in measuring current economic activity

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2
Q

What are different measurements of economic activity

A
  1. Product approach
  2. Income approach
  3. Expenditure approach
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3
Q

Product approach measures economic activity by

A

Adding the market values of goods and services produced, excluding any goods or services used up in the intermediate stages of production

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4
Q

Which approach computes economic activity by summing the value added ?

A

Product approach

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5
Q

Value added derivation

A

Value of its output - the value of input purchased from other producers

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6
Q

Income approach measures Economic activity by

A

Adding all income received by producers of output

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7
Q

Expedinture approach measures economic activity by

A

Adding the amount spent by all ultimate users of output

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8
Q

Before tax profit

A

Profit with tax included

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9
Q

If before tax profit = revenues - wages then total income in an economy equals
(Assuming that there are no other expenses)

A

Total income = wages + before tax profit

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10
Q

What is the Broadest, best-known and most often used measure for aggregate economic activity

A

GDP

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11
Q

Calculating the gross domestic product using the product approach is defined as

A

The market value of final goods and services newly produced within a nation during a fixed period of time

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12
Q

The price at which goods and services are sold is referred as

A

Market value

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13
Q

What are the main drawback of using Market value in calculating GDP

A

Excludes Non-market goods and services

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14
Q

Examples of non-market goods and services

A
  1. Homemaking and Child care
  2. Natural Resources Depletion and Pollution
  3. Underground economy
    • legal activities
    • illegal activities
  4. Services provided by the government
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15
Q

Gross Domestic Product

A

The broadest, best-known and most often used measure for aggregate economic activity

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16
Q

GDP can be derived by 3 approaches these are

A
  1. Product approach
  2. Expedinture approach
  3. Income approach
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17
Q

Define Product approach

A

Its the market value of final goods and services newly produced within a nation during a fixed period of time

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18
Q

Final goods and services are ____________

A

End products of a process

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19
Q

Intermediate goods and services are

A

Used up in the production of other goods and services in the same period they were themselves produced

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20
Q

Example of intermediate goods and services

A

Flour used in producing bread and it’s delivery service

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21
Q

Capital goods

A

A capital good is a good that itself produced and is used to produce other goods, but it’s not used up in the same period it is produced in.

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22
Q

Inventory

A

Are stocks of unsold finished goods, goods in process and raw materials held by firms.

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23
Q

______________ is the amount by which inventory increases (decreases) during the year

A

Inventory investment

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24
Q

Which technique automatically excludes intermediate goods form the measure of output

A

Value-added technique

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25
Q

Gross National Product is

A

The market value of final goods and services produced by domestic factors of production during the current period

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26
Q

GNP =

A

GDP + NFP

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27
Q

Net Factor payments (NFP)

A

Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy

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28
Q

Expenditure Approach

A

Total spending on final goods and services produced within a nation during a specific period of time

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29
Q

Income expenditure identity

What is the formula

A

Y = C + I + G + NX

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30
Q

In the expenditure approach, consumption is

A

The spending by domestic households on final goods and services including those produced abroad.

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31
Q

Consumption of goods can be classified as

A
  1. Durables
    (Long lived consumer items)
  2. Non durables
    (Shorter-lived consumer items)
  3. Services
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32
Q

In the expenditure approach, Investment includes

A

Both fixed investment “spending for new capital goods and depreciation” and inventory investment.

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33
Q

Fixed investment includes

A
  1. Business fixed investment
  2. Residential investment
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34
Q

Business fixed investment

A

Structures, equipment and intellectual property products

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35
Q

Residential investment

A

Construction of new houses and apartment buildings

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36
Q

Using the expenditure approach, government purchases of goods and services includes

A

any expenditure by the government for a currently produced good or service either foreign or domestic

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37
Q

Government purchases of goods and services excludes

A
  1. Transfer
  2. Interest payments on national debts
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38
Q

Government payments for social security is an example of

A

Transfers

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39
Q

Net exports

A

Exports - Imports

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40
Q

Exports are

A

The goods and services produced within a country that are purchased by foreigners

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41
Q

Imports are

A

The goods and services produced abroad that are purchased by a country’s residents

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42
Q

Income approach calculates GDP by

A

Adding up the income provided by producers, including profits and taxes paid to government.

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43
Q

Income approach is divided into

A
  1. Compensation of employees
  2. Proprietors income
  3. Rental income of persons
  4. Corporate profits
  5. Net interest
  6. Taxes on production and imports
  7. Business current transfer payments
  8. Current surplus of government enterprises
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44
Q

Self-employment, is it included in compensation of employees?

A

False

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45
Q

Rental income from assets can be classified into

A
  1. Tangible
  2. Intangible
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46
Q

Net interests is equal to

A

Interest received - interest paid

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47
Q

Statistical discrepancy is equal

A

Production measure of output (NNP) - income measure of output (NI)

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48
Q

NNP is equal

A

NI + Statistical discrepancy

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49
Q

Statistical discrepancy is positive when

A

Income measure < production measure

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50
Q

Depreciation is

A

The value of capital wears out during the period over which economic activity is measured.

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51
Q

Depreciation is added on what to calculate GNP

A

NNP

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52
Q

Net Factor payments is equal

A

GNP - GDP

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53
Q

Private disposable income is

A

The income of the private sector

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54
Q

Private disposable income measures

A

The amount of income the private sector is available to spend

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55
Q

Private disposable income

A

Y + NFP + TR + INT -T
( Where TR represents transfers from government and T as direct taxes)

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56
Q

Net government income is

A

The net income of the government sector

57
Q

Net government income is equal to

A

GNP - Private Disposable Investment

58
Q

Short form of the Net government income

A

Net government income = T- TR -INT

59
Q

Private disposable income plus Net government income

A

= Y + NFP = GNP

60
Q

Wealth is equal

A

Assets - liabilities

61
Q

Wealth measures

A

The economic well-being of the underlying economic unit

62
Q

National wealth measures

A

The wealth of an entire nation

63
Q

Rate of saving is an important determinant of

A

Wealth

64
Q

Saving of an economic agent equals

A

Current income - spending on current needs

65
Q

Saving rate of an economic agent is

A

Its savings / its income

66
Q

The three measures of saving are

A

1.Private saving
2.Government saving
3.National saving

67
Q

Private saving is the saving of

A

The private sector

68
Q

Private saving equals

A

Private disposable income - consumption

69
Q

The equation of private saving

A

S(pvt)=(Y+NFP-T+TR+INT)-C

70
Q

Private saving rate is

A

Private saving / private disposable income

71
Q

Government saving is

A

Net government income - government purchases of goods and services

72
Q

Government saving equation

A

S(gvt)=(T-TR-INT)-G

73
Q

Government savings is the same as

A

Government budget surplus

74
Q

Budget surplus equals

A

Government receipts - government outlays

75
Q

National saving is

A

The saving of the economy as a whole

76
Q

National saving equals

A

Private saving + government saving

77
Q

The equation of national savings

A

S=S(pvt)+S(gvt)

78
Q

Expanded equation of national saving

A

S=Y+NFP-C-G

79
Q

National saving equals

A

Total income of the economy - spending to satisfy current needs

80
Q

Uses of private saving

A

Private saving is used to fund new capital investment, finance budget deficit and acquire assets from or lend to foreigners

81
Q

The following equation comes from
S=I+(NX+NFP)

A

S=Y+NFP-C-G ===>
S=(C+I+G+NX)+NFP-C-G

82
Q

Current account balance equals

A

(NX+NFP)

83
Q

Current account balance is

A

Payment received from abroad - payment need to foreigners in exchange for goods and services

84
Q

In this equation S=I+(NX+NFP), (NX+NFP) is

A

Current account balance

85
Q

This equation S=I+CA is for _______

A

private saving

86
Q

If S=S(pvt)+S(gvt) then S(pvt) equals

A

S-S(gvt)

87
Q

An expanded equation of S(pvt)=S-S(gvt)

A

S(pvt)=I+(-S(gvt))+CA

88
Q

-S(gvt) is

A

Government budget deficit

89
Q

Investment (I) is

A

Construction and purchase of new capital and inventory investment

90
Q

Government budget deficit is

A

To cover difference between outlays and receipts

91
Q

Current account balance finance

A

The difference between borrowing or lending

92
Q

___________ variables are measured per unit of time

A

Flow

93
Q

___________ Variables are defined at a point in time

A

Stock

94
Q

Flow variable is the rate of change in a

A

Stock variable

95
Q

Wealth of a nation is called its

A

Net worth

96
Q

Wealth is a ______ while saving is a _________

A

Stock, flow

97
Q

Saving shows

A

The accumulation of assets or reduction in liabilities

98
Q

Domestic physical assets are

A

Stock of capital goods and land

99
Q

Net foreign assets are equal to

A

Foreign asset (owned by domestic residents) - foreign liabilities (domestic assets owned by foreigners)

100
Q

Net foreign assets represent

A

Claims on foreigners that are not offset by foreigner’s claims on domestic economy.

101
Q

Net foreign assets include

A

Both physical and financial assets

102
Q

Why domestic financial assets held by domestic residents are excluded from national wealth

A

Since it only involves changing ownership but there is no increase in assets

103
Q

National wealth changes in two ways

A

1.Changing the value of assets or liabilities
2.Change in the national saving

104
Q

Changes in the value of assets or liabilities can happen of

A

1.An increase in stock prices
2.Wearing out or depreciation of physical assets

105
Q

Types of variables

A
  1. Nominal variables
  2. Real variables
106
Q

Nominal variables are measured in terms of

A

Current market values

107
Q

Real variables are measured in terms of

A

Prices of a base year

108
Q

Which type of variable adjust for price changes

A

Real variables

109
Q

Real GDP is called

A

constant-dollar GDP

110
Q

Real GDP measures

A

The physical volume of an economy’s final production using the prices of a base year

111
Q

Nominal GDP “current – dollar GDP” is

A

the dollar value of an economy’s final output measured at current market prices

112
Q

Chain weighted indexes are sometimes used to measure

A

Real GDP

113
Q

Growth rate of real GDP computed using chain weighted real GDP is

A

A sort of average growth rate of real GDP computed using year 1 as the base year and the growth rate computed using year 2 as the base year

114
Q

Which type of average growth rate of real GDP effectively updates base year automatically

A

Chain-weighting

115
Q

A price index is

A

A measure of the average level of prices for some specified set of goods and services, relative to the prices in a specified base year

116
Q

The two most known Price Indexes

A
  1. GDP deflator
  2. Consumer Price
    Index (CPI)
117
Q

GDP Deflator is

A

a price index that measures the overall level of prices of goods
and services included in the GDP

118
Q

GDP deflator is the amount by which nominal GDP must be

A

divided or deflated
to obtain real GDP

119
Q

GDP Deflator derivation fromula

A

100 *(NominalGDP/ RealGDP)

120
Q

If GDP Deflator = 100 * (Nominal GDP ÷ Real GDP) then the RealGDP equals

A

Nominal GDP ÷ (GDPDeflator / 100)

121
Q

In the base year, real GDP equals

A

nominal GDP

since GDP deflator = 100

122
Q

Consumer Price Index (CPI) is

A

a price index that measures the prices of consumer goods

123
Q

The derivation formula of the CPI equals

A

(Current Cost of a Basket of Consumer Items ÷ Cost of the Same Basket in the Reference Base Year ) * 100

124
Q

Why does the CPI require the use of a reference base period

A

for comparing prices
over time

125
Q

Why does the CPI require the use of a expenditure base period

A

for determining the
basket of goods used in the index

126
Q

The inflation rate equals

A

The percentage increase in the price index per period

127
Q

inflation rate derivation formula

A

((Pt+1 – Pt) / Pt) * 100

128
Q

Which price index is used by policy makers to determine the effect of a certain policy change

A

CPI

129
Q

Which price index is used to determine the cost of living

A

CPI

130
Q

Why the CPI can sometimes overstate inflation

List several reasons why this could happen

A
  1. Fails to adjust to substitution effect
  2. Does not reflect price changes in
    new technology goods
  3. Influenced by uncontrolled
    price fluctuations

Substitution effect refers to Changes in the basket of goods and services

131
Q

Core CPI is the CPI after excluding

A

commodities with volatile prices

132
Q

Core CPI is either measured by

A

excluding selected items with volatile prices or by statistically ruling out extreme individual price movements

133
Q

Which CPI reflects a more accurate measure for cost of living

CPI inflation or core inflation

A

CPI inflation

134
Q

Interest rate is

A

a rate of return promised by a borrower to a lender

135
Q

Interest rates is also known as

A

the rate of return on capital

136
Q

Real interest rate of an asset is

Define the real rate of return

A

the rate at which the real value or the purchasing power of the asset increases over time

137
Q

Nominal interest rate is

Define nominal rate of return

A

The rate at which the nominal value of an asset increases overtime

138
Q

Real interest rate derivation formula

A

Nominal Interest Rate (i) – Inflation (π)

139
Q

The Expected Real Interest Rate is

A

The nominal interest rate minus the expected rate of inflation

r = i – (π^e)

Macroeconomic Theory (8 decks)

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