chp 2

Question 1

What is CPI?

Answer 1

The Consumer Price Index, it traces the price of a fixed market basket of goods over time. EQ: Updated cost/Base period cost

Question 2

What is GDP?

Answer 2

Gross Domestic Product is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. GDP measures all economic activity within the country which includes foreign owned companies operating in Canada.

Question 3

What is the formula for calculating GDP?

Answer 3

GDP is equal to income which is equal to expenditure in a country. Y=GDP C= Consumption I= Investment G= Government purchases NX= Net Exports

Y= C+I+G+NX

Question 4

What is the difference between nominal and real GDP?

Answer 4

Nominal GDP measures the value of goods and services at current prices. Real GDP uses the prices of a base year so prices are consistent. Nominal GDP would be current price x current quantity, while Real GDP would be base year price x current quantity.

Question 5

What is the GDP Inflator?

Answer 5

Nominal GDP/Real GDP

Question 6

What is chain weighted real gdp?

Answer 6

Over time, relative price change, so base year should be updated constantly, in essence, chain-weighted real GDP updates the base year every year so it is more accurate than constant-price GDP,

Question 7

What is the Unemployment Rate?

Answer 7

Percentage of the labor force that is unemployed (unemployed/labor force)- % of people who want to work that don’t have jobs

Question 8

What are the different types of unemployment?

Answer 8

Some unemployment occurs because of friction (natural destruction and creation of jobs) in labour market, or structural (due to location/technological changes) But some is cyclical, which occurs when overall level of economic activity is insufficient to employ all those wanting work.

Question 9

Differences between GDP deflator and CPI?

Answer 9

Prices of capital goods:
 included in GDP deflator (if produced domestically)
 excluded from CPI (only uses goods that are bought y consumers)
Prices of imported consumer goods:
 included in CPI
 excluded from GDP deflator
The basket of goods:
 CPI: fixed, only measures prices and won’t take into account changes in production of a good.
 GDP deflator: changes every year

CPI is a laspeyres index (fixed basket) and tends to overstate inflation while the GDP Inflator is a Paasche Index (changing basket) that understates inflation. The average between the two is called the Fisher index.

Question 10

Why might the CPI overstate inflation?

Answer 10

 Substitution bias:
The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen.
 Introduction of new goods:
The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights.
 Unmeasured changes in quality:
Quality improvements increase the value of the dollar but are often not fully measured.

Question 11

What is a stock?

Answer 11

A quantity measured at a point in time (US capital stock was $10 trillion Jan 1 2013)

Question 12

What is a flow?

Answer 12

A quantity measure per unit of time (US investment was $2 trillion during 2013)

Question 13

What is the labour force participation rate?

Answer 13

the fraction of the adult population that “participates” in the labor force, i.e. is working or looking for work (Labor force/ Working Age Population)