Chapter 4 - Overview of Economics (Done) Flashcards
What is the difference between microeconomics and macroeconomics?
- Microeconomics focuses on the behavior and decisions of individual units, such as households, firms, and markets. It studies how these entities interact and how prices and quantities of goods and services are determined.
- Macroeconomics looks at the economy as a whole. It examines aggregate indicators such as GDP, unemployment rates, and inflation. Macroeconomics also explores large-scale economic issues and policies that affect the entire economy.
What are some examples of microeconomic concerns?
- Pricing strategies of a single firm
- Consumer choice and demand for a specific product
- Production and cost functions of a business
- Market structures and competition (e.g., monopolies, oligopolies)
- Supply and demand for labor in a specific industry
What are some examples of macroeconomic concerns?
- National unemployment rates
- Inflation rates across the economy
- Gross Domestic Product (GDP) growth
- Fiscal and monetary policy impacts
- International trade balances and exchange rates
What two factors largely determine the price paid for any product?
- Supply: The quantity of a product that producers are willing and able to sell at various prices.
- Demand: The quantity of a product that consumers are willing and able to purchase at various prices.
Can you explain what an equilibrium price is?
The equilibrium price is the price at which the quantity of a product supplied equals the quantity demanded. It is the point where the supply and demand curves intersect. At this price, there is no surplus or shortage of the product, meaning the market is in balance.
What is the difference between an intermediate good and a final good?
- Intermediate goods are products that are used as inputs in the production of other goods or services. They are not sold to end consumers but to other businesses for further processing.
- Final goods are products that are sold to the end consumer and are not used in the production of other goods. They represent the end product in the production process.
Can you describe the income approach for measuring GDP?
The income approach calculates GDP by summing all incomes earned in the production of goods and services. This includes rents, wages, interest, and profits.
The formula is:
GDP = R + W + I + P
This approach essentially measures the total income earned by factors of production in an economy.
Can you describe the expenditure approach for measuring GDP?
The expenditure approach calculates GDP by summing all expenditures made in the economy. This includes consumption by households, government spending, investment by businesses, and net exports (exports minus imports).
The formula is:
GDP = C + G + I + (X-M)
C = Consumption expenditure
G = Government expenditure
I = Investment spending
(X-M) = Net exports
Can you describe the production approach for measuring GDP?
The production approach (or value-added approach) calculates GDP by adding up the value added at each stage of production. Value added is the difference between the value of outputs and the value of intermediate inputs.
Can you identify each component of the following formula: GDP = C + I + G + (X - M)?
- C – Total spending by households on goods and services.
- G – Expenditures by the government on goods and services.
- I – Spending on capital goods that will be used for future production.
- X – Goods and services produced domestically and sold abroad.
- M – Goods and services produced abroad and purchased domestically.
- (X-M) – The difference between exports and imports.
What is the difference between nominal and real GDP? Which measure gives a more accurate reading of production and why?
- Nominal GDP measures the value of all finished goods and services produced within a country’s borders in a specific time period using current prices. It does not account for inflation or deflation.
- Real GDP adjusts for changes in price level (inflation or deflation) and provides a more accurate measure of an economy’s true growth by using constant prices from a base year.
- Real GDP gives a more accurate reading of production because it reflects the actual quantity of goods and services produced, independent of changes in price levels.
Can you name the five phases of the business cycle and describe the characteristics of each?
- Expansion: Period of economic growth where GDP increases, unemployment declines, and consumer confidence rises.
- Peak: The highest point of economic activity before a downturn. Growth slows and inflation may rise.
- Contraction (Recession): Economic activity declines, GDP decreases, unemployment rises, and consumer confidence drops.
- Trough: The lowest point of economic activity. The economy bottoms out before starting to recover.
- Recovery: The phase where economic activity begins to rise again, leading back to expansion. GDP starts to increase, and unemployment decreases.
What are some examples of leading, coincident and lagging indicators?
- Leading indicators: Predict future economic activity (e.g., stock market returns, building permits, consumer confidence index).
- Coincident indicators: Reflect the current state of the economy (e.g., GDP, employment levels, retail sales).
- Lagging indicators: Confirm trends in economic activity after they have occurred (e.g., unemployment rate, inflation rate, business investment).
Describe how Statistics Canada judges a recession.
A recession is typically defined as a significant decline in economic activity spread across the economy, lasting more than a few months. Statistics Canada judges a recession based on indicators such as GDP, employment, industrial production, and retail sales. A common benchmark is two consecutive quarters of negative GDP growth.
What does the participation rate represent?
The participation rate represents the percentage of the working-age population that is either employed or actively seeking employment. It is an important indicator of the active labor force in the economy.
