Chapter 2 - The Data of Macroeconomics Flashcards
CPI Formula
CPI = (Cost of basket in current period/Cost of basket in base period) * 100
GDP Deflator Formula
GDP Deflator = (Nominal GDP/Real GDP) * 100
Labour Force Formula
Labour Force = Employed + Unemployed
Unemployment Rate Formula
Unemployment Rate = (Unemployed/Labour Force) * 100%
Labour Force Participation Rate Formula
Labour Force Participation Rate = (Labour Force/Working-Age Population) * 100%
What are the 3 approaches to computing GDP?
-Expenditure
-Income
-Value Added
Expenditure Approach to Calculating GDP
Total expenditure on domestically produced final goods and services. Y = C + I + G + NX
Income Approach to Calculating GDP
Total income earned by domestically located factors of production.
Value Added approach to Calculating GDP
Value Added = Value of Output - Value of Intermediate Goods
Stock
Quantity measured at a point in time
Flow
Quantity measured per unit of time
Gross Domestic Product (GDP)
Total income earned by domestically located factors of production, regardless of nationality.
Gross National Product (GNP)
Total income earned by the nation’s factors of production, regardless of where located.
Inflation Rate Formula
Inflation Rate = ((CPI [Year 2] - CPI [Year 1])/(CPI [Year 1])) * 100%
Circular Flow Model
Firms provide income in exchange for labour from households.
Households give businesses money (expenditure) in exchange for goods produced by businesses.
Why do the different methods of computing GDP give the same result?
Every dollar a buyer spends becomes income to the seller
True or False: Sale of used goods are included in GDP
False, only new goods are included in GDP
Durable Goods (give an example)
Goods that last a long time
Eg. cars, home appliances
Nondurable Goods (give an example)
Goods that last a short period of time
Eg. food, clothing
Services (give an example)
Intangible items purchased by consumers
Eg. Dry cleaning, haircut
Consumption (C)
The value of all goods and services bought by households
Why does CPI overstate inflation?
-Substitution Bias
-Introduction of new goods
-Unmeasured changes in quality
Substitution Bias
A reason why CPI overstates inflation.
CPI uses fixed weights (quantities).
Thus, it cannot illustrate consumers’ ability to substitute towards goods whose relative prices have fallen.
Introduction of new goods
A reason why CPI overstates inflation.
New goods make consumers better off
Thus, the real value of the dollar increases. But, CPI remains the same.
