Chapter 4 Flashcards
What is National Product and National Income?
National Product is the value of all the goods and services produced in the nation. National income is the total income created by producing the national product. Therefore, the production of output by way of producing the national product generates income for the nation.
What is aggregation?
It is the connection between economic interactions at the micro and macro levels. At the macro level it refers to the relationships that exist between economy-wide totals, averages or other economic aggregates.
What is nominal national income?
It is the total national income measured in current dollars
What is real national income?
Real national income is the national income measured in constant (base-period) dollars. It changes only when quantities change
What is the most commonly used measure of national income?
GDP (gross domestic product)
What is GDP?
It is the monetary value of all final goods and services produced in an economy during a given period of time (usually a year)
How can GDP be measured?
It can be measured in real or nominal terms
What is the major movement of real GDP?
It is a positive trend that increased real output by almost four times since 1975
What do we call this positive trend?
It is referred to as long-term economic growth
What else is demonstrated around this trend by real GDP?
Short-term fluctuations are also demonstrated
What can these short-term fluctuations around this positive trend (or long-term fluctuation) be called?
They can be called the business cycle as the actual GDP fluctuates around potential GDP
Are both real GDP and nominal GDP used to measure output?
Yes, they are
Can nominal GDP and real GDP grow as a result of economic growth?
Yes, but nominal GDP grows faster as it is measured using current prices rather than an agreed-upon constant price
What is the equation for the percentage change in real GDP growth?
[New(Real GDP) - Old(Real GDP)] / Old(Real GDP*100)
What is the equation for the percentage change in nominal GDP growth?
[New(Nominal GDP) - Old(Nominal GDP)] / Old(Nominal GDP*100)
What are the aspects of the business cycle graph?
Through, recession, recovery, peak
What is the gap between actual GDP and potential GDP called in the business cycle?
It is called the Output Gap
What are the phases of the Business Cycle?
Trough, Recession, Recovery and Peak
What is Trough?
The stage of the economy’s business cycle that marks the end of a period of declining business activity and the transition to expansion.
What are the characteristics of the Trough?
Unemployment and low level of output
What is a Recession?
It is a period of time where there is a fall in real GDP for 2+ quarters (a quarter is a part of the year, usually 3 month periods)
What are the characteristics of a Recession?
High unemployment
What is Recovery?
It is the process of reallocating resources and workers from failed businesses and investments to new jobs and uses after a recession
What is the Peak?
It is the top of the cycle and indicates a “boom” where there is so much production, overtime salaries, etc. It also leads to high inflation (cost of production, salaries, etc increase)
What is the Output Gap as shown in a business cycle graph?
It is a gap between potential GDP and actual GDP that allows us to understand inflation and unemployment or the current state of the economy due to the given circumstances
What is actual GDP? Potential GDP?
Actual GDP is the GDP of the economy as measured by the present data. Potential GDP is the GDP when the economy works at normal levels, showing what it can produce when it is balanced. The gap between these two lines is the Output Gap.
What is a time series? (To help better understand what a business cycle is)
A time series is a series of data points indexed in time order. Most commonly, a time series is a sequence taken at successive equally spaced points in time. Thus it is a sequence of discrete-time data
What does the Output Gap measure? What is it’s equation?
It measures the difference between potential output and actual output. Output Gap = Y-Y* (Y=actual output and Y*=potential output)
What is the Output Gap called when Y < Y*
Recessionary Gap
What is the Output Gap called when Y>Y*?
Inflationary Gap
What occurs when there is a recessionary gap (recession)?
High unemployment rates and lost output
What occurs when there is an inflationary gap (boom)?
High inflation rates
What is Employment?
Number of persons 15 years of age or older who have jobs
What is Unemployment?
Number of persons 15 years of age or older who are not employed but are actively searching for a job
What is the Labour Force?
Number of persons employed + number of persons unemployed
What is the Unemployment rate?
Unemployment as expressed by a % of the labour force
What is the Unemployment rate equation?
Unemployment rate = Number of people unemployed/Number of people in the labour force x 100
What are the types of Unemployment?
Frictional, Structural, and Cyclical
What is Frictional Unemployment?
Natural turnover of the labour market
What is Structural Unemployment?
mismatch between jobs and workers
What is Cyclical Unemployment?
When real GDP < potential (amount of unemployment that occurs due to the recessionary output gap)
What is Full Employment?
When economy is at potential GDP but we have some unemployment, meaning that frictional and structural unemployment are still occurring
When does the natural rate of unemployment occur?
The natural rate of unemployment occurs only when we have frictional and structural unemployment (NAIRU)
When does cyclical unemployment occur?
When real GDP is less than potential GDP
What is the unemployment equation?
Unemployment = Labour Force - Employment
Why does unemployment matter?
It has enormous social significance as it can cause social unrest such as crime, mental illness, etc. It can also lead to loss of income which can create human hardship and loss of output which can create economic issues
What is productivity?
It is a measure of the amount of output that the economy produces per unit of input
What is the labour productivity (as shown by its equation)?
Real GDP / level of employment (or total hours worked)
What occurs when labour productivity increases?
It can increase the standard of living over time
What is the productivity equation?
Output / unit of input
What is the price level?
It is the average level of all prices in the economy expressed as an index number (CPI)
What is inflation?
The rise in average price level
How can you calculate the rate of inflation?
By calculating the percent change in the price index: Rate of Inflation = [new CPI - old CPI] / old CPI x 100
How do you calculate the expenditure of a certain year?
By adding the total price of all the products (price 1 x quantity 1 + price 2 x quantity 2…)
What is the consumer price index equation?
CPIt = (Ct/C0) x 100
CPIt = consumer price index in current period
Ct = cost of market basket in current period
C0 = cost of market basket in base period
What does the purchasing power of money mean?
It means the amount of goods and services we can purchase with a unit money
What does inflation do?
It rises prices and reduces the purchasing power of money. It also reduces the real value of any sum fixed in nominal (dollar) terms
Why is inflation anticipated by households and firms?
Because it allows them to adjust many nominal prices and wages to maintain their original values
What does unanticipated inflation lead to?
It leads to more changes in the real value of prices and wages
Is inflation fully anticipated?
It is rarely fully anticipated
What is the interest rate?
The interest rate is the price paid per dollar borrowed per period of time, expressed either as a proportion (e.g., 0.06) or as a percentage (e.g., 6 percent)
Why do interest rates matter?
Because it compares the effects on savers to that of borrowers and has an impact on investment plans
What is the nominal interest rate equation?
Price paid / money borrowed per period of time
or
real interest rate + inflation
What is the real interest rate equation?
nominal rate - rate of inflation
What is the exchange rate?
It is the number of units of domestic currency required to purchase 1 unit of foreign currency
What is foreign currency?
It is money that can be purchased through the use of exchange rates
What describes the foreign-exchange market?
It is a market where different national currencies are traded
What is depreciation?
It is the rise in the exchange rate meaning that it takes more Canadian dollars needed to purchase 1 unit of currency
(This is the depreciation of the Canadian dollar)
What is Appreciation?
It is the fall in the exchange rate meaning that it takes fewer Canadian dollars to purchase 1 unit of foreign currency
(appreciation of the Canadian dollar)
What are imports?
They are G&S bought from other countries
What are exports?
They are G&S sold to other countries
What are Net Exports?
They are the difference between exports and imports (also called the trade balance)
What is Long-Term Economic Growth?
They are the long-term trends of rising total output and output per person have meant rising average living standards. Long-term growth receives less attention in the media but has more importance for a society’s living standards from generation to generation
What are Short-Term Fluctuations?
Short-term fluctuations lead economists to study business cycles. Why? because the business cycle is able to represent the short-term fluctuations more clearly in graphical form
What is fiscal policy?
It is a policy that causes changes in spending and taxing
