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ECO105 MACRO > chapter 6 > Flashcards

chapter 6 Flashcards

1
Q

Nominal GDP

A

the value at current price of all final products and services produced annually in a country → measured as a flow, AKA an amount per unit time

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2
Q

Value

A

The worth, in Canadian dollars, of all the products and services produced

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3
Q

Real GDP

A

value at constant price of all final products and services produced annually in a country

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4
Q

What does nominal GDP count

A

Nominal GDP for any year counts only the products and services produced in that year

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5
Q

What causes increases in nominal GDP

A

Price increases

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6
Q

Why is the value of intermediate products not included in nominal GDP

A

because it is already included in the value of the final products

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7
Q

Which type of GDP is better for judging living standards?

A

Real GDP

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8
Q

Real GDP per person

A

Real GDP divided by population

  • The best measure of a country’s ability to meet the material needs of its citizens
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9
Q

How to measure Real GDP

A

Calculated by adding up the value of all final products and services produced annually in a country

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10
Q

Value added

A

value of output minus the value of intermediate products and services bought from other businesses

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11
Q

Income (Y)

A

consumers earn income by selling inputs to businesses

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12
Q

Consumer spending

A

consumers use their income to buy products and services from businesses

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13
Q

Business Investment Spending (I)

A
  • When businesses build new factories or buy new machinery
  • Businesses are spending on products/services produced by other businesses
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14
Q

Government Spending

A

When governments build highways or hire the services of accounting firms, those are purchases of products and services in output markets

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15
Q

Rest of World (ROW) Exports and Imports

A

Other countries also spend money on Canadian products and services or produce products that are imported into Canada

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16
Q

Connection between aggregate income and aggregate spending in a formula

A

Y = C + I + G + (X - IM)

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17
Q

Why do we subtract imports in Y = C + I + G + (X - IM)

A

some consumption spending is on imports, and some business investment spending is on imported machinery

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18
Q

Consumer choices

A

consumers can choose to spend their income or save it

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19
Q

Disposable income

A

aggregate income minus taxes; income that consumers can spend or save

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20
Q

Net taxes

A

taxes minus transfer payments

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21
Q

Business choices

A
  • Businesses must invest in building factories and buying the equipment necessary to start production
  • Sometimes because of the time lag between when businesses build factories and when sales revenue start to flow in, businesses usually need to borrow money for investment spending
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22
Q

Government choices

A
  • Governments collect taxes, make transfer payments, and spend money to buy products and services in output markets
  • Governments also borrow money from the banking system, and can deposit or lend money to the banking system
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23
Q

ROW Choices

A
  • The rest of the world can choose to buy Canadian exports and sell their own products/services to us as Canadian imports
  • ROW can also choose to invest money in Canada or borrow money from Canada
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24
Q

Banks

A

take deposits from consumers, businesses, government, and ROW, and make loans to all of the players

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25
Q

Potential GDP

A
  • real GDP when all inputs (labor, capital, land, and entrepreneurship) are fully employed
  • outcome if Adam Smith’s invisible hand works perfectly
26
Q

Potential GDP per Person

A

potential GDP divided by the population

27
Q

Potential GDP and PPF

A
  • An economy that realizes its potential GDP is at a point on the PPF
  • Points inside the PPF represent unemployed inputs
  • consumer goods (horizontal axis) and capital goods (vertical axis)
28
Q

Economic growth

A

the expansion of the economy’s capacity to produce products and services

29
Q

What causes economic growth

A

increases in the quantity/quality of a country’s inputs (land, labor, capital, entrepreneurship)

30
Q

What does economic growth increase

A

potential GDP per person and shifts the macro PPF outward

31
Q

Factors that Contribute to Economic Growth

A
  1. Labour
  2. Capital
  3. Land and Other Natural Resources
  4. Entrepreneurship
32
Q

Human capital

A

increased earning potential from work experience, on-the-job training, and education

33
Q

Capital

A
  • the factories and equipment businesses use to produce products and services
  • more equipment to produce output increases the quantity of capital, which allows workers to produce more
34
Q

Land

A
  • Potential GDP increases with an increase in the quantity of land that can contribute to production
  • Technological change also contributes to increases in the quantity/productivity of land and resources
35
Q

Entrepreneurship

A

Entrepreneurs improve management techniques, corporate organization, and worker/management relations that increase productivity, which in turn increase potential GDP

36
Q

How does potential GDP increase?

A

by bringing new inputs into the circular flow of markets

37
Q

Economic growth rate

A

annual percentage change in real GDP per person

38
Q

Real GDP per person growth rate formula

A

((Real GDP/person this year) - (Real GDP/person last year)/Real GDP per person last year) x 100

39
Q

Rule of 70

A

number of years it takes for the initial investment to double is roughly 70 divided by annual percentage growth rate

40
Q

Productivity

A
  • measured as quantity of real GDP produced by an hour of labor
  • Key source of our improving standard of living
41
Q

What increases labor productivity?

A

Increases in the quantity/quality of inputs

42
Q

Two Ways to Increase GDP per Person:

A
  1. Put a larger fraction of the population to work → increase the labor force participation rate
  2. Increase productivity so that each worker produces more
43
Q

Creative destruction

A

competitive business innovations generate profits for winners, improving living standards for all, but destroy less productive/desirable products and production methods

44
Q

Business cycles

A

up and down fluctuations of real GDP around potential GDP

45
Q

Expansion

A

period during which real GDP increases

46
Q

Peak

A

maximum expansion, real GDP stars decreasing after the peak

47
Q

Contraction

A

any period during which real GDP decreases

48
Q

Trough

A

lowest point of the cycle

49
Q

Recession

A

two or more successive quarters of contraction of real GDP

50
Q

Recessionary gap

A

real GDP below potential GDP; vertical distance between potential GDP and real GDP

51
Q

Inflationary gap

A

real GDP above potential GDP, can cause inflation

52
Q

Output gap

A

real GDP minus potential GDP, positive for inflationary gaps

53
Q

Limitations of real GDP per person as measure of well-being:

A
  1. Non-market production
  2. Underground Economy
  3. Environmental Damage
  4. Leisure
  5. Political Freedoms and Social Justice
54
Q

Non-market production

A

many productive activities that contribute to our well-being happen outside of markets

55
Q

Underground Economy

A

illegal activities or legal activities that avoid taxes

56
Q

Environmental Damage

A
  • Productive economic activity produces undesirable negative externalities like pollution, climate change, and resource depletion
  • Costs of environmental damage are not included in GDP
  • Higher GDP is often associated with greater environmental damage
57
Q

Leisure

A

The more leisure time people take, the lower real GDP will be

58
Q

Political Freedoms and Social Justice

A

There is no necessary connection between higher real GDP per person and benefits of democracy and political freedom

59
Q

Human Development Index

A

weighs equally life expectancy, educational achievement, and income

60
Q

Top 5 Countries HDI

A

Norway, Australia, United States, Netherlands and Germany

ECO105 MACRO (9 decks)

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