chapter 2: macroeconomics indicators

Question 1

the uses of CPI

Answer 1

• to harmonize countries
• health index
• Smoothed index
• Central index

Question 2

GDP

Answer 2

Gross Domestic Product equals the market value of all final goods & services produced within a given geographic area in a given period of time

or

equals the total expenditure on final goods & services produced within a given geographic area in a given period of time.

Question 3

Macroeconomic Indicators

Answer 3

• Measuring Unemployment
• Measuring Economic Activity
• Measuring The Cost of Living
• Appendix: Measuring Growth

Question 4

Microeconomics is concerned with

Answer 4

1. Individual decisions, such as
   - households
   - corporations
2. Interactions between economic agents on one specific market
3. Incidence of public interventions

Question 5

Macroeconomics is concerned with all questions related to the global workings of an economy among which:

Answer 5

1 Evolution (growth) of economic activity and income long-run trend & short-run fluctuations
causes of income inequalities between countries

2 Global (un)employment

3 Inflation (growth of the general level of prices)

4 Influence of public authorities on the above-mentionned variables

5 Consequences of public debt

Question 6

The activity rate depends on

Answer 6

• The activity rate depends on the average schooling length (beyond compulsory education)
• cultural determinants (e.g. attitude w.r.t. workplace gender equality)
• the importance of early retirement

Question 7

Aggregate

Answer 7

Synthetic indicator of a set of elementary variables

Question 8

Ockham’s razor

Answer 8

Macroeconomists drastically simplify reality
and consider only a very restricted number of agents (Households, Enterprises, Government, Rest of the world) and markets (Goods & Services, Factors of production, Money).

Question 9

How is unemployment defined?

Answer 9

1 Claimant count ➥ Number of claimants
PRO: Easy and cheap to establish
How is unemployment defined?

2 Labour-force survey ➥ No work during the reference week, willing to work in the coming 2 weeks and actively looking for employment for at least 4 weeks, or waiting to start working within 3 months
PRO: Uniform definition (ILO)
CON: Costly to establish

Question 10

Natural Rate of Unemployment

Answer 10

The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates.

Question 11

Cyclical Unemployment

Answer 11

The cyclical unemployment is the deviation of unemployment from its natural rate.

Question 12

Economic activity

Answer 12

= Value of “what is traded” in an economy

(Why “value” and not “quantity”?= Compare an economy producing only carrots with an
economy producing computers)

Question 13

Value Added

Answer 13

The value added of a production i = 1, . . . , n during period t is the difference between:

• the market value of that production Pit Qit
  and the market value of the intermediate goods & services consumed for its production (:CIit)

Question 14

GNP

Answer 14

Gross National Product:

➥ . . . produced by resident factors of production in a given period . . .

Question 15

NDP

Answer 15

Net Domestic Product:

➥ . . . the market value, taking depreciation into account, of all final goods & services . . .

Question 16

GDP is a measure of

Answer 16

1 total production of final G&S on the territory
➥ Sum of all values added

2 total income generated on the territory
➥ Sum of all primary incomes

3 total expenditure on the territory’s final production
➥ Sum of all spendings

Question 17

Primary Income

Answer 17

Primary incomes describe the earnings received in compensation for the creation of value added.

• the sum of all values added is necessarily
  equal to the sum of all primary incomes

Question 18

Secondary incomes

Answer 18

such as allowances, unemployment or
retirement benefits, etc.

are transfers of money, i.e., not compensations for creating value added

Question 19

The earnings from creating value added are distributed to

Answer 19

• public authorities (production taxes, incl. VAT)

- factors of production (labour, capital. . . )

Question 20

gross mixed income

Answer 20

The earnings distributed to the self-employed (worker + shareholder)

Question 21

GDI

Answer 21

Gross Domestic Income, (GDP as total income) equals the sum of all primary incomes created within a given geographic area in a given period of time.

• does NOT include secondary income

Question 22

Disposable Income

Answer 22

Household Disposable Income

= Primary Income + Received Transfers - Paid Transfers

Question 23

Suppose we find different values for GDP in two different periods of time.

• What could cause this difference?

Answer 23

The two values might be different because:

☞ the volume of final production has changed
☞ the prices at which production is valued have changed!

Question 24

Nominal Variable

Answer 24

Variable measured in current monetary units, i.e., based on the prices that prevail when measured

Examples:

• Total purchases at a store checkout
• Balance of a bank account

Question 25

Real GDP or GDP in Volume

Answer 25

Value of all final goods & services based on the prices of a reference year rather than on the current prices.

Question 26

Two methods for computing real GDP: (what you need)

Answer 26

1 GDP at constant prices | 2 GDP at chained volumes

Question 27

Using constant prices leads to issues such as:

Answer 27

1) How to value new goods that didn’t exist in the base period? 2) Should we keep the same price if the quality of a good has significantly increased/decreased since the base period? 3) Shouldn’t changes in relative prices be reflected?

Question 28

Per-Capita GDP & GNP

Answer 28

- The ratio GDPt/Nt, is the primary income created by a resident on average. - The ratio GNPt/Nt, is the primary income received by a resident on average

Question 29

International Comparisons | Difficulties:

Answer 29

1 Exchange rate fluctuations 2 Disparities in purchasing power r (i.e., quantity of G&S onemonetary unit can buy) within a monetary zone

Question 30

Purchasing-Power Parity Index

Answer 30

A PPP index is a conversion rate between two currencies that is calculated by comparing the domestic purchasing power of each currency

Question 31

is GDP/cap. | A Good Measure of Well-Being?

Answer 31

Indicator of material living conditions in a country Does not account for income inequalities Does not account for these (correlated) aspects: - Health, life expectancy - Leisure, out-of-market activities - Environment - Crime rate, etc

Question 32

Consumer Prices Index:

Answer 32

The CPI measures the overall cost of goods and services bought by a typical consumer.

Question 33

Inaccuracies / Remarks of Measuring The Cost of Living

Answer 33

1 Substitution bias 2 Introduction of new goods 3 Unmeasured changes in quality

Question 34

Substitution bias

Answer 34

☞ Consumer adjust their consumption in reaction to changes in relative prices (they consume less of the goods whose price has risen comparatively more) ➥ CPI overstates inflation

Question 35

Introduction of new goods

Answer 35

☞ Greater choice for consumers ➥ CPI loses representativeness

Question 36

Unmeasured changes in quality

Answer 36

☞ The quality of the G&S contained in the basket can change and this would justify a change in prices ➥ If quality rises, CPI overstates inflation

Question 37

CPI vs. GDP Deflator Comparison: | - Similarities

Answer 37

Both measure the overall level of prices ➥ Both can be used to compute inflation Both depend on the chosen base period ➥ The value in any period only makes sense when compared to the value in another period

Question 38

CPI vs. GDP Deflator Comparison: | - Differences

Answer 38

- Price level of what is consumed [CPI] vs. Price level of what is produced [Deflator] - Fixed basket [CPI] vs. Quantities change [Deflator]

Question 39

Real Variable

Answer 39

Ratio of a nominal variable to a price index

Question 40

Indexation, | Existing Indices In Belgium

Answer 40

``` 1 CPI 2 Harmonized CPI 3 Health index (“indice santé”) 4 Smoothed index (“indice lissé”) 5 Central index (“indice pivot”) ```

Question 41

Harmonized CPI

Answer 41

☞ Common European methodology to enable comparisons between EU countries

Question 42

Health index (“indice santé”)

Answer 42

☞ Based on the CPI product basket without - alcoholic beverages - tobacco products - motor fuels (except for LPG)

Question 43

Smoothed index (“indice lissé”)

Answer 43

☞ Arithmetic (= rekenkundig) average of the 4 latest monthly health indices

Question 44

Central index (“indice pivot”)

Answer 44

☞ Theoretical threshold that triggers an indexation wheneverthe smoothed index exceeds it ☞ Each threshold is 2% higher than the previous one