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ECON 102 > Chapter 7: GDP and CCI: Tracking the Macroeconomy > Flashcards

Chapter 7: GDP and CCI: Tracking the Macroeconomy Flashcards

1
Q

The National Income and Product Account

A

keeps track of the flows of money between different sectors of the economy

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2
Q

How does the reliability of the accounts relate to development?

A

Typically, the more reliable the set of numbers known as the National Accounts, the more economically developed the country

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3
Q

What factors do the National Accounts keep track of?

A

Consumer spending, government purchases, business investment, and other flows of money between sectors

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4
Q

What is the underlying principle of the circular flow diagram?

A

the flows of money into an economic sector are equal to the flows of money out of the economic sector

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5
Q

What are the main groups in the updated circular flow?

A

households, firms, government, and the rest of the world

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6
Q

What are the main markets in the updated circular flow

A

factors, goods and services, financial

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7
Q

The inflows of money to the households

A

wages, rent, income, and profit from the factor markets (from the firms) and transfer payments from the government

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8
Q

The outflows of money from the households

A

consumer spending to the product market, taxes to the government, and savings to the financial markets (in the form of stocks, bonds, and securities invested in firms via the financial market)

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9
Q

The inflows of money to the government

A

borrowing from the financial markets and taxes from households

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10
Q

the outflows of money from the government

A

government spending on goods and services (the product market), transfer payments (households)

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11
Q

the inflows of money to firms

A

borrowing, stock issued by firms (to households, government, and world via the factor market), GDP (product market)

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12
Q

The outflows of money from firms

A

investment in the product market and wages, rent, interest, and profit (to households via the factor market)

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13
Q

The inflows of money to the rest of the world

A

foreign borrowing and selling of foreign stock in domestic markets (financial market), imports (product market)

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14
Q

The outflows of money from the rest of the world

A

lending from foreign entities and foreign purchases of domestic stock (financial markets), exports (product market)

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15
Q

Government borrowing

A

the total amount of funds borrowed by state, local, and federal governments in the financial markets

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16
Q

Government purchases of goods and services

A

the total expenditures on goods and services by state, local, and federal governments

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17
Q

Inventories

A

stocks of goods and raw materials held to facilitate business operations

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18
Q

Investment Spending

A

spending on productive physical capital, like machinery and construction of buildings, and on changes to inventories

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19
Q

Why are changes on inventories included in investment spending from firms to product markets?

A

Because, like spending on machinery, inventory changes affect the ability of firms to make future sales. Spending on additions to inventories is a form of investment spending by the firm, increasing future sales and vice versa.

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20
Q

Consumer Spending

A

Household spending on goods and services

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21
Q

How does the rest of the world engage in our economy?

A

commerce and investment via imports, exports, and foreign investment

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22
Q

Foreign investment

A

borrowing or lending by foreigners

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23
Q

Define GDP

A

Gross Domestic Product is the total value of all the final goods and services produced in an economy in a given year

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24
Q

What does “total value” mean in GDP?

A

We are necessarily integrating price and standardizing to dollar value

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25
Q

What are final goods and services?

A

we are not looking at middle-steps to avoid double-counting. We want to look at the final product already made up of all constituent components

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26
Q

The 3 Types of Goods and Services

A
  1. Non-market
  2. Intermediate
  3. Final
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27
Q

The 2 types of non-market goods and services

A
  1. Government: these are goods like tanks or ammunition which we value at production cost. It is difficult to find the actual value, since we typically find value of products by comparing them to other products
  2. Other non-market goods and ignored goods: things like house-care that are not initially counted until women enter the workforce, black market dealings (babysitting and drug-dealing)
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28
Q

Intermediate goods and services

A

used up in the production of final goods and services and not counted in GDP (counted within the final goods and services)

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29
Q

Final goods and services

A

Ultimately consumed by consumers and counted in GDP

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30
Q

Capital Goods

A

long-lived goods and services used in the production of other products (factories and shopping malls)

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31
Q

How do we factor in phones where the screen is made in China and the battery in California?

A

We include only the parts made domestically (the battery), factoring out the foreign-made parts (the screen)

32
Q

What are the three ways of calculating GDP?

A
  1. Direct calculation by surveys
  2. Add up aggregate spending on domestically produced final goods and services (this includes the net exports)
  3. Sum the total factor income earned by households from firms in the economy
33
Q

Direct Calculation by surveys

A

Surveying all firms and adding up the total value of all the final goods and services produced

34
Q

How can we use aggregate spending on domestic products to calculate GDP?

A

Aggregate Spending on domestic products is the total sum of expenditures on domestically produced final goods and services. This is made up of consumer spending, government spending in the product market, business investment in the product market, and net exports (money gained from exports minus money lost from imports). The aggregate spending flows into the firms, so we use this as GDP

35
Q

How do we calculate the value added per firm?

A

Value of sales (to who the firm is selling) - the cost the intermediate goods used in production

36
Q

What do we know about initial firms and intermediate costs

A

There should be no intermediate costs for initial firms

37
Q

What is the relationship between the value of sales for a firm and the total expenditure by the firm?

A

value of sales is equal to total expenditure, but value added is NOT the same

38
Q

stocks

A

shares in the ownership of the company. They pay dividends, which become profit for households

39
Q

bonds

A

borrowing by firms in the form of IOUs that pay interest (money flows as borrowed from the financial markets to the firms and back from the firms to the financial markets when repaid. The interest on these loans flows into the factor market and to the households which initially owned the money)

40
Q

Goods Included in GDP

A

Domestically produced final goods and services including
1. Capital Goods
2. Construction of new structures
3. Changes to inventories
these three are all included in I in the GDP equation

41
Q

Goods not included in GDP

A
  1. Intermediate products
  2. inputs (not including capital goods)
  3. Used goods
  4. Financial assets like stocks and bonds
  5. Foreign-produced goods and services
42
Q

How can households add value to goods and services to make them final and count them in GDP

A

Imputing: for example, when you buy a household you formerly rented, statisticians make an estimate of what you would have paid if you continued to rent. Estimates of GDP take into account the value of housing that is occupied by owners as well as the value of rental housing

43
Q

How can governments add value to count in GDP?

A

Spending in the form of military, education, and other government services can increase GDP. These are services provided by G (government spending in the market for goods and services) and the equal flow of money into the government to fund these programs comes from the financial markets and households. Note that this only works in the value added method of calculating GDP, which focuses on the value of provided products, not spending on products (the aggregate spending approach)

44
Q

What is the most important use of GDP?

A

It is a measure of the size of the economy, providing us a scale against which to measure the economic performance of other years or to the performance of other countries

45
Q

GNP

A

the total value of all goods and services produced in a given year by labor and property supplied by the citizens of a country.

46
Q

Initially, economists preferred GNP but then switched to GDP. Why did they switch?

A

GDP was considered a better indicator of short-run movements in production because data on international flows of factor income is more unreliable

47
Q

What is one major drawback to comparing GDP over time? How do we fix this?

A

Part of GDP increase is due to inflation, so we must use Real GDP

48
Q

Which nations would benefit more from GNP than GDP?

A

Nations like Ireland which have many industries and workers from other nations and GDP is much less than GDP

49
Q

What is GDP useful for and not useful for?

A

It is good at comparing economies at a given time but not over time due to changing price levels

50
Q

In order to accurately measure an economy’s growth, we need to measure ___

A

aggregate output

51
Q

aggregate output

A

the economy’s total quantity of output of final goods and services. The measure used for the purpose of measuring growth is Real GDP

52
Q

Real GDP

A

the total value of all the final goods and services produced in an economy in a given year, calculated using the prices of a selected base year

53
Q

How does Real GDP stand as a measure of well-being? How can we make it more accurate?

A

It is fairly innaccurate and it only values market transactions. We can make it more accurate by dividing it by the total population, or Real GDP per Capita (average aggregate output per person), which is positively associated with several measures of well-being

54
Q

What are 4 things not factored by Real GDP

A
  1. environmental quality and resource depletion
  2. leisure
  3. intangible things people value
  4. the effects of income inequality
55
Q

What are three well-being measures positively associated with Real GDPC?

A
  1. Material standard of living (more goods and services)
  2. Health and life expectancy
  3. Education
56
Q

What is Nominal GDP?

A

The value of GDP calculated using the prices current in the year in which output is produced – it is good for comparing economies at a given time

57
Q

What is chain-linking?

A

is the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year.

58
Q

Real GDPC is useful in

A

comparing labor productivity between countries and identifying what a country could potentially do with its PPC

59
Q

The Aggregate Price Level

A

the measure of the overall level of prices in the economy

60
Q

A market basket

A

a hypothetical set of consumer purchases of goods and services

61
Q

A price index

A

measures the cost of purchasing a given market basket in a given year, where the cost is normalized so that it is equal to 100 in the selected base year. is the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100.

62
Q

Why do we prefer to use average price changes?

A

Simplicity

63
Q

Why do we prefer to use a market basket in developing the price index?

A

To measure the average price changes for consumer goods and services, we track the changes in the cost of the market basket.

64
Q

We are given prices for barley, emmer, and spelt over 2 years. Explain how we can use a price index to find the price change in wheat over the 2 years

A

Instead of taking the cumbersome route of reciting three separate numbers to track the change in price of wheat, we create a market basket, finding the average amount of each barley, emmer, and spelt that a consumer purchases in a given year, or our base year. We then multiply quantity consumed by price in both the base year and second year to determine the price of the market basket in each year. To determine the price index, we take the price of the market basket in each year and divide it by the price in the base year. The base year price index will be 100. The second year price index will be different, and we use the difference between them to determine the average change in the price of wheat

65
Q

what is the price index formula?

A

(market basket price in given year)/(market basket price in base year) *100

66
Q

What is the inflation rate formula?

A

((Year 2 price index) – (Year 1 Price Index))/(Year 1 Price Index) *100

67
Q

Consumer Price Index

A

measures the cost of the market basket of a typical urban American family

68
Q

What is the Inflation Rate

A

is the percent change per year in a price index— typically the consumer price index

69
Q

What is the CPI intended for?

A

while it measure the costs of the market basket of a typical urban american family, it is used to show how the costs of all purchases by the typical family have changed over time with changing price levels

70
Q

What bases do we use in creating the American CPI?

A
  1. Typical family of four
  2. Living in a typical American city
  3. Base period of 1982-1984 (Average CPI of 100 at this time)
71
Q

In order to increase our accuracy of the inflation rate, which two factors do we discount from the CPI when calculating inflation rates?

A

energy and food due to relative volatility

72
Q

Different countries have different CPIs. Which factor is dominant in developing nations’ CPIs

A

Food

73
Q

The Producer Price Index

A

measures changes in the prices of goods purchased by producers.
This mostly contains raw commodities like steel, electricity, and coal.

74
Q

Why is the PPI regarded as an early warning sign for inflationary changes?

A

Commodity producers compared to the rest of the economy are quick in changing prices in response to perceived change in the overall demand for their goods. This means that PPI often reacts to inflationary and deflationary pressures faster than CPI, so it’s regarded ad an early warning sign for changes in the inflation rate

75
Q

GDP Deflator

A

for a given year is 100 times the ratio of nominal GDP to real GDP in that year. (nominal/real) GDP *100. or example if in 2017, the real GDP stays constant and the nominal doubles, the GDP deflator will be 200, indicating the aggregate price level doubled

76
Q

The PPI, CPI, and GDP Deflator each produce different inflation rates (although the last is not an index). What is the most important point about these different rates?

A

They have been moving closer over time and show how different parts of the economy are affected by economic events

77
Q

How do you use the GDP Deflator to find inflation rates?

A

using the formula ((current GDP

deflator – GDP deflator in the previous year)/(GDP deflator in the previous year)) × 100,

ECON 102 (5 decks)

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