(Done) Day 1,2: Measuring the economy, long-run growth Flashcards
What’s free market?
- Buyers and sellers interact freely (with little gov’t intervention)
- No central planning: production and distribution are the result of individual choices, no “coordination from above” aka the gov’t.
- economy coordinated through prices
What’s microeconomics?
Focuses on the study of the individual: people, firms, or markets
What’s macroeconomics?
- aggregate level
- Studying the collections of people and firms and how their interactions through markets determine the overall economic activity in a country/region
What’s the difference between long-run and short-run?
long-runs usually greater than 6months/1 year
What’s macro policy?
used to stabilize the economy and prices, and increase employment/growth
examples of macro topics?
economy-wide topics: GDP, growth rate, unemployment rate, etc.
What’re macro research steps?
- Gather the economic facts/data you want to explain/explore
- develop model to explain those facts
- compare model’s predictions with original facts
- use the model to make policy/run experiments (change parameters)
What should a successful model do?
A successful model should make general and quantitative predictions: 1. predict differences between firms/countries
2. AND by how much (numerically)
- explain relationships between macro topics
What’s a model?
- simplify reality by making assumptions
2. identify the most relevant drivers of the economic facts you’re exploring
Are models realistic?
NEVER! The whole point of a model is to simplify reality and identify the most relevant drivers of the economic facts you’re exploring
What’re models in econ made up of?
Models in econ consist of a set of math equations that summarize the main interactions we care about, and a set of unknowns (the endogenous variables). You solve the model by solving the equations for the values of the unknowns.
What’s a parameter?
variable that’s fixed over time unless you change it yourself (doesn’t change by itself over time)
input to the model
What’s exogenous variable?
- input to model that’s allowed to change/vary over time, variations occur naturally
- Driving the model and the results
What’s endogenous variable?
output, result of model
What’s national income accounting?
measuring GDP
What’s the national income accounting equation?
total production (of goods/services) = total income = total spending
What’s GDP?
GD{ is the value of goods/services produced in a country
- within its borders
- for final use
What do u need to count GDP?
- unit of account
- common assessment method
- avoid double counting
what’s unit of account?
a standard monetary unit of measurement of value/cost of goods, services, or assets.
how to avoid double counting GDP?
To avoid double counting, GDP counts only the final output of goods and services, not the production of intermediate goods used as inputs to make final goods (eg raw materials).
What’s added value used for?
Use added value to calculate an individual person/firm’s contribution to GDP! Use the sum of an economy’s value added for total GDP.
What’s added value?
Use added value to calculate an individual person/firm’s contribution to GDP! Use the sum of an economy’s value added for total GDP.
Formula for added value?
value created/added value is = value of final goods/services sales - value of intermediate products (see above).
What does value added include?
wages, interest, depreciation, rent, taxes, and profit (usually splits into just profits + wages in most basic scenarios)
What’s productivity?
How good you are at producing added value per hour
productivity formula?
Productivity = Added value / Hours
What’s trade surplus/trade deficit?
- Positive/trade surplus: imports are less than exports
2. Negative/trade deficit: imports are greater than exports
What’s wrong with GDP?
- not happiness
- doesn’t measure welfare
- fiscal optimization by large companies
3 GDP measures?
production (added value), income, and expenditure
3 GDP measures formulas?
GDP = Σ Added Value = C+I+G+(Exp-Imp) = profits+wages+taxes
Finals: total production = total expenditure/consumption = total income
What’s the added value GDP measure?
GDP = sum of the added values of all sectors/every firm at each stage of production
What’s the expenditure GDP measure?
measure all consumption of FINAL goods/services
What’s the expenditure measure formula?
GDP/Y = C + I + G + X ( = exports - imports)
What’re inventories?
g/s produced this year but not sold.
What’s net exports?
exports - imports
Why isn’t imports in GDP?
GDP of a country is defined as the sum of values of goods and services produced in a country within its borders.
Since imports are not produced within the borders of a country, thus, it is not calculated in the GDP of that country.
What’re IPP Intellectual property products?
Includes R&D spending and expenditures on durable intangible goods (software, movies, etc.).
What’s gov’t spending?
Gov’t spending: all the money the gov’t spends, that includes purchases of goods and services, but also includes “transfer payments” (transfers don’t count in GDP: eg taxes, programs such as social security/medicare/welfare, and interest on gov’t debt, because nothing new is purchased/created.)
What’re gov’t purchases?
gov’t purchases of goods and services that are produced in the economy only
What’s the income measure of GDP?
GDP = sum of incomes and revenues (of producers/firms, consumers, and the gov’t)
What’s the factor of production?
Element needed for production, but not consumed/transformed by production
Example: the field the farmer uses/baking oven, seeds are NOT a factor of production bc it’s gone.
Benefits of higher GDP for poor countries?
when you make more things in a country, people have more resources (food, healthcare, etc.), which directly impacts life expectancy/happiness
- better health
- more child education
- more women’s rights
- less slavery
minor costs of GDP growth?
- Environmental problems (eg pollution)
- Increased income inequality
- Technological advances may lead to certain jobs/industries disappearing
Why do we need GDP growth in rich countries?
- growing social security/retirement needs
- reduces unemployment
- rising incomes increase satisfaction
What’s the problem with comparing GDP across countries with exchange rate?
- vary a lot over time
2. don’t take purchasing power/price levels into account
How do you compare GDP across countries?
use the Purchasing power parity (PPP) exchange rate: the exchange rate between different currencies that tells you an amount in one currency has the exact same purchasing power (can buy the exact same number/type of things) as another.
What’s the price level?
the average of current prices across the entire spectrum of goods and services produced in the economy.
What’s nominal GDP?
Calculating today’s GDP using prices in a certain place/time. Weakness is that it takes into account BOTH market values and real quantities produced, so can’t compare them
What’s real GDP?
The actual quantity of goods and services produced, determines the purchasing power after adjusting for price changes in a given year with PPP.
What do quantity indexes do?
Calculates the real GDP growth rate: change in real GDP
What’s Laspeyres/Paasche index?
- Laspeyres: Calculating the change in real GDP with the initial prices
- Paasche: Calculating the change in real GDP with final prices
What’s Fisher index/chain weighting?
average of laspeyres and paasche index real GDP growth rates!
What do price indexes do?
calculate the inflation rate
What’s the rule of 70?
If the income grows at a rate of g% per year (average annual growth rate is g), then the number of years it takes income to double is 70/g
What to use rule of 70 for?
Use this to calculate the average annual growth rate (the rate at which a value grows per year) and to determine the growth rate from a ratio scale
What’s ratio scale?
A plot where equally spaced tick marks on the vertical axis are labeled consecutively with numbers that exhibit a constant ratio (constant multiple, eg 1, 5, 25, 125, etc.).
what do u use ratio scale for?
Allows you to quickly read growth rates from a graph: Used to tell if average growth rate is increasing, decreasing or constant
how to interpret ratio scales?
Slope = growth rate
ower slope means lower growth
Sustained increases in GDP which increased standards of living are a ____ phenomenon
Sustained increases in GDP which increased standards of living are a RECENT phenomenon
What’s the great divergence?
only started seeing increased differences in per capita GDP recently (past 3 centuries)
Why did countries have such different per capital GDP?
Small differences in growth rates tend to accumulate over time.
When did per capital growth accelerate?
after WW2, rebuilding caused high growth/technological catchup
What’s convergence?
the hypothesis that poorer economies’ per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income
Reasoning for convergence?
- Easier for poorer countries to grow fast, bc they can replicate the production methods, tech, and institutions of developed countries. (Rich countries wanting to grow can’t imitate bc no one else is doing better, so they have to innovate themselves).
- Poorer countries experience less diminishing returns (ex. capital)
What type of growth is convergence?
convergence is TRANSITORY growth! Catchup growth only occurs until poor countries catch up economically and technologically.
Does data support convergence theory?
- supports OECD developed countries, not developing countries
- poorer countries don’t necessarily grow faster, convergence isn’t a fact
Why didn’t Africa conquer the world?
Africa’s vertical, and climate varies based on latitude, so harder to grow crops, free up time to innovate, and cause economic growth
