Chapter 2 - The Data of Macroeconomics Flashcards
What is the best measure of economic performance?
GDP
How often is GDP calculated? Where is the information from? What 2 kinds of data are used?
Quarterly from primary data sources (administrative data and statistical data)
administrative data: products of govt. functions (tax collections:)
statistical data: govt. surveys (retail establishments, farm activity)
What 3 things does GDP measure?
Total output of G&S
Total income of all individuals
Total expenditure of all individuals (spent to buy G&S)
What is the circular flow?
firms receive labor and expenditures, households recieve goods and income
what are the three equivalent approaches to GDP? What is the underlying logic? What is the fundamental identity of national income?
Any output produced (product approach) is bought by someone (expenditure approach) and results in income to someone (income approach)
What are the equation(s) and definition for GDP as total output (Approach 1)?
GDP as total output: market value of all final goods and services produced within econ in period.
GDP = value of all final goods produced = sum of all stages of production
Value added = value output - value intermediate goods used to produce
aka. value added = revenue - cost of intermediate goods
Market value (MV) = P*Q
What is the benefit of using market value of goods? What is the disadvantage?
(GDP as total output)
Benefit: allows adding together unlike items by using common value for all.
Challenge: misses nonmarket items (household production)
What are the final goods? What is included?
final G&S: not intermediate,(made and used in production same period)
Capital goods: used to produce other goods, not used in same period (ex. ovens)
Inventory investment: change in all: unsold FG, WIP, RM)
What are imputed value goods? What are 2 examples?
imputed value: estimated value of goods/services with no market value
EX. housing services (homeowners): GDP includes rent that owners pay
imputed rent: is in homeowner’s expenditure and homeowner’s income
EX. Valuing govt. services: 911, senators salary
GDP measure’s value at their cost (wages)
subjectivity: what is the value of these services to different customers (ex. not all value health care the same)
What is the formula for GDP under the expenditure approach
Y = C + I + G + NX
Value of total output = aggregate expenditure
Consumption, Investment, Gov spending, Net exports
What is included in the consumption (C) component of aggregate demand?
the value of goods bought by households
includes:
durable (car, appliance)
nondurable (food, clothing)
services (intangible)
What is Gross Fixed Investment (I) component of aggregate demand? What does it include? What is the formula?
Gross-fixed investment (I): spending on new capital, a physical asset used in future production
Includes:
- Business fixed investments: spending on plant and equip
- Residential fixed investment: spending by consumers/landlords on housing
- Inventory Investment: change in the value of all firm’s inventories
Formula:
Gross investment = net investment (additions to capital) + depreciation
What are stock and flow quantities?
Stock: quantity measured at point in time (ex. as at today)
EX. wealth, #people with degrees, gov. debt, credit balance
Flow: quantity measured per unit of time, rate of change (ex. during this year)
EX. annual savings, #nwe grads this year, gov. deficit
What is government spending (G)? what is excluded ?
Government spending (G): on g&s
Excludes:
Transfer payments (one-way transactions; included in gov outlays, used in consumption component)
How can you avoid double counting when calculating G
avoid double counting by excluding transfer payments, since they are included in C component
What are net exports? what is the formula?
What impact does closed economy have on NX
net spending from abroad on our g&S
Formula: NX = exports - imports
NX = 0 under a closed economy (no outside trade)
What is the definition and equation for GDP under the income approach
GDP at factor cost
GDP = NI + NIBT + Dep + factor income paid - factor income received
How do you calculate GDP from income approach (interim calculations)
NI = NNI- NIBT
NIBT = taxes - subsidies = NNI - NI
Dep. = given typically
GDP = NI + NIBT + Dep + factor income paid - factor income received
GDP vs GNP
When are each preferred/ideal?
GDP: total income earned by domestically located factors of prod. (regardless of people’s origin)
- Ideal: considering economic performance, activity within a nation (country only)
GNP: total income earned by nation’s factor of production (regardless of where they are located)
- ideal: economic activity created by CAD ppl inside/outside of Canada (people only)
What is GNP equation vs GDP equation (going from one to another)
What are the differences in the formulas?
GNP = GDP + factor income received - factor income paid
GDP = GNP - factor income received + factor income paid
GNP includes factor income received by domestic factors of production located abroad
GDP: includes factor income paid to foreign factors of production located domestically
what is NNI? Formula? % of GNP?
Net National Income (NNI): consumption of fixed capital.
NNI is the net result of economic activity (depreciation tal, cost of production)
NNI = GNP - Depreciation
Typically, NNI ~ 10% of GNP
What is National Income (NI)? Formula? 3 Components?
National Income (NI): adjusted NNI for indirect business taxes (such as sales tax)
measures how much everyone in the economy has earned
NI = NNI - IBT
3 components:
compensation employees (wage/benefit)
corporate profit
non-incorporated business and net interest income:
= rent - expenses + interest pay/earnings
IBT: changes market price depending on the elasticity of S/D (ex. sales tax)
What is personal income? What is Formula? What is Personal Disposable Income?
PI: income that households and non-corporate. businesses receive
PI = NI - corp. profit + dividend - social insurance contributions + gov transfers - net interest
where.. net interest = interest paid - interest received
Personal Disposable Income: PI after tac
PDI = PI - personal tax payments
What is nominal GDP? What is real GDP? What are their respective change factors?
Nominal GDP: measures values using current prices (Pcurrent*Qcurrent = Nominal GDP)
change factors: change in P, Q produced
Real GDP: measures values using prices at a base year (Pbase*Qcurrent = Real GDP)
Change factors: change in Q (takes out price effect)
what does real GDP show us?
shows us true increase in production and employment
when are real GDP and nominal GDP equal?
they are equal at the base year
Define the inflation rate. What graphically represents the inflation rate?
Inflation rate: percentage increase in the overall level of prices
Graphically: inflation rate is the slope of the GDP deflator
What is the GDP Deflator?
GDP deflator: one measure of price level (ratio of nominal GDP to real GDP)
What is the formula for the DSG Deflator
What is the significance of value?
GDP Deflator = (nominal GDP/Real GDP)*1
if deflator <100: avg. price falling
if deflator =100: avg. price constant
if deflator <100: avg. price rising
In any given base year, what value is the GDP deflator?
100
Becuase:
1/1*100 = 100
what is the formula for inflation
inflation (current period) = (Deflator_current - Deflator_previous) / deflator_previous) * 100
aka = new-old/old
What is consumer price index?
Who is it published by?
measure of overall level of prices.
published by stats Canada
What is CPI uses
track change in household cost of living
adjusts contracts for inflation
allow comparisons of dollar amounts over time
How do we build CPI
survey consumer basket
compute the value of the basket monthly (using formula)
Formula: CPI (any month) = 100*(currentcostforbasket / baseperiodcostforbasket)
What is the formula for the CPI of any given month
CPI (any month) = 100* (basket current cost month) / basket base cost month
why does CPI overstate inflation? (3 reasons)
Substitution bias: CPI fixed weights do not reflect consumer substitution affect
introduction of new goods: consumers more better off 0> rise real dollar value, CPI fixed weights (unimpacted)
Unmeasured changes in quality: improvements increase dollar value (not often)
What is the magnitude and consewuesnces of bias in CPI stating inflation?
Distorts private contracts (L wage overstated by more than the CPI_
Magnitude: CPI overstates inflation by 1.1% per year
increases in gov outlays: 1/3 federal gov outlay, tie benefits to CPI (ex. social security, food stamps, military/civil servant pensions) aka transfer payments
CPI vs GDP deflator:
what is differenc in basket size?
What is difference in basket of goods composition/structure
What goods are included in each (speaking domestic/internationally)
GDP deflator: prices of all G&S
CPI: subset of total goofs (not all)
- relevant for household averages
GDP Deflator: basket changes yearly (Paasche; variable)
CPI: basket is fixed (Laspeyres: constant)
GDP: price of capital goofd include (if made domestically)
CPI: prices of imported goods included (and the domestic ones)
What are the two arithmetic tricks for working with %changes
%change (X*Y) = %changeX + %changeY (approximation)
%change (X/Y) = %changeX - %change Y (approximation)
What is formula for:
Population
WAP
LF
population = WAP + NWAP
WAP = LF + NLF
LF = E + U
What is included in Working age population (WAP)
What is included in non-working age population (NWAP)
WAP: 15+
exceptions: not in jail/hospital/institutions
NWAP: <15
or in institutional care
What is the Labor force? Who is included?
Labor force: the amount of labor available for producing G&S.
includes: employed & unemployed
LF = U + E
What criteria must be met to be unemployed
active efforts finding work in last 4 weeks
waiting for a call back from a temp lay-off
starting job within one month
What are the two labor market indicators
unemployment rate and LF participation rate
Who is Not in Labor Force (NFL)?
full-time students and discouraged workers
What is the labor force survey (LFS)? What info is found through this?
stats Canada monthly survey of about 56,000 households
Info found: labor market stats
ex. # in LF
unemployment rate
participation rate
What is unemployment rate formula?
%LF unemployed
U-rate (%) = U/LF*100
What is ldefinition and formula abor force participation rate?
LFPR: % of adult population that works or is looking
LFP rate (%) = LF/POP*100
What happends to LFP rate and U rate when there is a recession? expansion?
Recession:
LFP falls
U rate rises
Expansion:
LFP rises
U rate falls
