EC108 Test 1 Flashcards
What is the measure of aggregate output called?
Gross Domestic Product
3 ways of defining GDP
GDP is the value of final goods and services produced in the economy during a given period.
GDP is the sum of value added (value of production minus the value of the intermediate goods used) in the economy during a given period.
GDP is the sum of incomes in the economy during a given period.
What is Nominal GDP?
The sum of quantities of final goods produced times their current price.
Also called dollar GDP or GDP in current dollars.
What is Real GDP?
The sum of quantities of final goods times constant prices.
Also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation, or GDP in 2009 dollars.
4 reasons why measuring GDP is Difficult
The quality of products is changing over time. Use hedonic pricing to solve this, valuing different parts of computers in a given year.
Many new services are given for free
Measuring illegal production is difficult
Home production is normally excluded from GDP (only housing services are included)
Employment
The number of people who have a job
Unemployment
The number of people who do not have a job but are looking for one
A person is unemployed if they don’t have a job and have been looking for one in the last 4 weeks
Labour force
The sum of employment and unemployment
Those not looking for a job are not in the labour force
Unemployment rate
The ratio of the number of people who are unemployed to the number of people in the labour force
Unemployment rate = Unemployment/Labour force
Discouraged workers
Those who give up looking for a job and so are no longer counted as unemployed
Participation rate
Ratio of the labour force to the total population of working age
Inflation
A sustained rise the general price level
Inflation rate
The rate at which the general price level increases
Deflation
Sustained decline in the general price level (negative inflation rate)
GDP deflator
Nominal GDP / Real GDP
Consumer Price Index (CPI)
A measure of the cost of living (the cost of the consumption basket of a typical consumer)
What is GDP composed of?
Consumption, Investment, Govt Spending, Net exports, Inventory investment
What is inventory investment?
Difference between production and sales
Demand for goods equation
Z = C + I + G + X - IM
Endogenous variables
Variables depend on other variables in the model
Exogenous variables
Variables not explained within the model but are instead taken as given
If a bar is drawn above a symbol or letter, what does it represent?
Investment is taken as given
Are G and T exogenous or endogenous? Why?
Exogenous
Governments do not behave with the same regularity as consumers or firms.
We typically treat G and T as variables chosen by the govt and will not try to explain them with the model.
How to calculate equilibrium output?
Assume X = IM = 0 (Closed economy)
Replace C with C0 + C1(Y-T), Replace I with bar I.
Equilibrium in the goods markets requires Y=Z. This is an equilibrium condition. Replace Z with Y.
Rearrange for Y.
You’re done.