Econ 202 Beginning Flashcards
what is macroeconomics? (basic definition)
the study of the performance of the national economy
what is Real Gross Domestic Product? (basic overview)
a measurement of the total production of goods and services nationwide – theoretically equal to the aggregate income of a nation
what does “real” mean in this context?
accounts for inflation (the rate of increase in prices over a given time period)
how many phases does a business cycle have?
two: a recession and an expansion
what is a recession?
economic phase of persistent decline in production
what is an expansion (period)?
economic phase of persistent increase in production
what is a business cycle PEAK?
turning point from expansion into a recession – has to go down after reaching the peak
what is a business cycle TROUGH?
turning point from recession into expansion – like the physical object, a large cup (cup shape on graph)
what is the business cycle ORDER?
Expansion -> Peak -> Recession -> Trough
what is the labor market?
the aggregate activity of firms searching for workers and workers searching for firms — interactive relationship, how most of us interact with the macroeconomy – pushing forth production and affecting income
how is the labor market performance measured? (one way)
the unemployment rate
what is the unemployment rate?
the number of unemployed people as a percentage of the labor force
why is the unemployment rate never 0?
would mean that there is absolutely no movement externally or internally between jobs, the bee movie essentially
when was the great recession?
2008/2009 – caused by banks and mortgage lenders became increasingly predatory with their lending practices, housing crisis domino
when was the great depression?
1929-1938, caused by: the stock market crash of 1929; the collapse of world trade; government policies; bank failures and panics; and the collapse of the money supply
what is inflation?
increases in the overall level of prices, measured using the percentage increase in a price index over time
what is the most well known price index?
the Consumer Price Index (CPI)
what happens/what is it called when the price index falls?
deflation – prices fall essentially
what is observed in the price index during/following a recession?
inflation jumps up, inevitably leading to a peak and another recession – the business cycle
what is fiscal policy?
the use of the federal budget — by setting and changing tax rates, making transfer payments, and purchasing goods and services — to achieve macroeconomic objectives
what is monetary policy?
changes to the quantity of money and the level of interest rates in the national economy, the responsibility of the federal reserve
what does fiscal mean?
relating to government revenue, especially taxes
what does monetary mean?
relating to money or currency
how do you “aggregate” an economy?
add together economic quantities (prices, production, jobs) measured for individual economic units (firms, people) into an economy-wide total
why is aggregation (accurately) practically and conceptually difficult?
data collection and methodology
how is data collection difficult in aggregation?
mass amounts of macroeconomic data was not produced until modern times, this data is produced by governments, NGOS (nonprofits), and the private sector – moves markets, elections
what does GDP without a qualifier mean? (real or nominal)
refers to nominal
what is nominal GDP?
the market value of all final goods and services produced within a country in a given time period (WITHOUT accounting for inflation)
what does “produced within a country” mean under the definition of GDP?
GDP only measures domestic production, including foreign companies producing on US land, excluding US companies producing in foreign countries/factories
would GDP include the production of a US citizen working in Paris?
no (because it was not produced domestically, does not consider citizenship)
what is market value?
the price for which a good or service is sold in a market – allows us to add up “apples and oranges” by finding a common unit (price)
what does “final goods and services” mean under the definition of GDP?
final goods and services (key word final), distinguishes from intermediate g/s which is not included in GDP
what is a final good?
an item that is purchased by its final user – ex. a sandwich sold to a student
what is an intermediate good or service?
items that are produced by one firm, bought by another firm, and used as a component of a final good or service – ex. bread that was baked and then used as part of the sandwich
what is double counting?
counting both intermediate and final goods would mean counting the bread twice in the previous examples, and thus doubling its value incorrectly
what does in a given time period mean?
production is measured in calendar quarters or years, production that occurs outside of this period is not counted
would a used car that was recently sold count towards the current GDP?
no, because it was originally produced and sold a while ago, cannot double count it – not new production
which two ways is the GDP measured?
the expenditure approach, and the income approach
what is the expenditure approach?
measures total expenditures on final goods and services produced within a country in a given time period
what is the income approach?
measures total income received by factors of production operating within a country in a given time period
What is Personal Consumption Expenditures? (C)
the spending by domestic households (people) on consumer goods and services
ex. books, movies, food, dental visits, economics lectures, cars, clothes
how much does “C” make up of the expenditure approach/GDP in the US?
68% the most of the 5
What is Gross Private Domestic Investment? (I)
spending by domestic firms on new capital goods and additions to inventories – also includes expenditures on new homes
what are capital goods?
goods that are used to produce other goods and services, but are not completely used up in the production of these other goods
ex. tools, instruments, machines, buildings, housing
what are additions to inventories?
goods that are produced but are not sold to their final user inside of the period we are measuring GDP
how much of GDP does I represent?
18%
what is government expenditure on goods and services (G)?
purchases of goods and services by the domestic federal, state and local governments.
ex. office supplies, tanks, freeways
which kinds of government spending are not included in the GDP?
transfer payments and interest payments
how much of the GDP does G represent?
17%
what are transfer payments?
cash transfers from governments to households and firms such as social security benefits, unemployment compensation, and subsidies
what are net exports of goods and services? (X-M)
the value of exports minus the value of imports
what are exports? (X)
sales of goods and services by the domestic economy to the rest of the world
what are imports? (M)
purchases of goods and services by the domestic economy from the rest of the world
how much of the GDP does X-M represent?
-3% of GDP
What happens when X-M is negative?
trade deficit
what happens when X-M is positive?
trade surplus
what is the formula for GDP?
C+I+G+(X-M)
why are imports subtracted?
because C, I, and G included purchases of goods from foreign economies – which should not be included in GDP, so are netted out by subtracting imports
what is depreciation?
the decrease in the existing stock of capital goods that results from wear, tear, and obsolescence
what is net private domestic investment?
gross private domestic investment - depreciation
what is net domestic product?
GDP - depreciation
what will happen to Stock of Existing Capital goods if Net Private Domestic Investment > 0?
itll rise
what is the income approach?
GDP is also equivalent to the aggregate income earned by factors of production operating within a country during a given time period
why is GDP equivalent to aggregate income?
goods and services are produced using factors of production, each of these factors is paid income for its role in production
the total market value of the goods and services produced is then divided among these different sources of income
what are some examples of factors of production?
labor, capital equipment, land, entreprenuership
what are the four categories of income?
compensation of employees, corporate profits, proprietors income, rental income
what is compensation of employees?
payment for labor services
53% of GDP
which category of the income approach accounts for the most GDP percentage?
compensation of employees — 53%
what is proprietors income?
income of the non-incorporated self-employed
7% of GDP
what are corporate profits?
profits earned by corporations
10% of GDP
what is rental income?
payment for the use of land and other rented resources
4% of GDP
for which two reasons can nominal GDP rise?
increases in the quantity of goods and services produced
increases in the price of those goods and services
quantity and price
why does real gross domestic product exist? what problem does it solve?
nominal GDP reflects both price and production changes, real GDP solves this by accounts for inflation
what is real GDP?
measures the market value of production in all years using a fixed set of market values from some common year, called the base year
how does the choice of base year influence the percentage increase?
the farther away from the base year, the larger the difference between real and nominal GDP (more time = more price changes)
what happens if the year you are interested in is also the base year?
real and nominal GDP are the same – base year is denoted by a 100
what is chain weighting?
computes the percentage increase in real GDP using an average of the percentage increase calculated using adjacent base years – a “rolling” base year
which organization uses the income and expenditure approach? where is the information published?
the Bureau of Economic Analysis (BEA) to measure nominal and real GDP – published in National Income and Product Accounts (NIPA)
what are some of the problems/inaccuracies of GDP? what does it fail to capture?
household production (ex. stay at home parents, building a desk for yourself, mowing the lawn) — anything that could be contracted out and tracked by the GDP in the exchange of g/s and money, but is not reported/tracked
markets that are not observed or that are a part of the “underground economy” (ex. illegal activity, unreported payments to avoid income taxes)
what is the connection between GDP and standard of living?
GDP is often used to inform on the standard of living
what is standard of living?
refers to a comprehensive state of economic well being, including things such as income levels, quality of housing and food, medical care, educational opportunities, transportation, communications, and other measures
how does GDP inform standard of living?
using real GDP per person (real GDP/population of the nation)
finds average income of the nation’s citizens
is real GDP per person a good measure of a nation’s standard of living?
lots of issues with it:
- mismeasurement
- national resource depletion (real GDP can show/present maximum productivity as positive, not sustainable over time)
- production of pollution
- health and life expectancy
- leisure time
- income distribution
- political freedom
what is the consumer price index computed from/by?
the Bureau of Labor Statistics (BLS)
what is the consumer price index?
measures the overall cost of goods and services in the current year relative to the cost of those goods/services in the base year
what is the consumer price index “basket”?
CPI defines a “basket” of consumer goods/services that is meant to be representative of what the average urban household purchases
a list of consumer goods/services and the relative importance attached to each of them
what is the relative importance of each item in the CPI basket meant to mirror?
the budget of the average urban household
how often and where are the prices of each good in the basket collected?
around 80,000 goods that are priced, in 30 metropolitan areas, every month
what is the formula for CPI?
(total cost of basket in current prices/total cost of basket in base year prices) *100
whats another alternative to CPI?
the GDP Deflator
what is the GDP deflator?
based on the goods and services that are actually produced in the current year – the “basket” of g/s for the GDP deflator is the g/s that make up current year GDP
what is the formula for GDP Deflator?
GDP D = (nominal GDP/real GDP)*100
what is the inflation rate?
the percentage change in the price level from one year to the next
what is the formula for the inflation rate?
((price level this year - price level last year)/price level last year)*100
what can real GDP be though of as? (in terms of nominal GDP)
nominal GDP “deflated” to account for changes in the price level
what is a the formula that uses real variables to account for inflation? (variables only)
real variable = (nominal variable/price level)*100
why do we care about inflation? is it a problem?
if high inflation was predictable it wouldn’t have much effect – all prices in the economy would rise by a predictable amount, no worse or better off
but it is unpredictable!!
what two costs does inflation impose on the economy?
1) it arbitrarily creates winners and losers in the economy/ contracted prices and wages may end up being far more or less in real terms than was negotiated — creates arbitrary redistributions of wealth, and is a source of additional risk for workers and firms
2) it creates an incentive for people to spend time trying to “beat” inflation; which is a waste of resources, and is worst in very high inflation periods or “hyperinflations”
when real GDP rises in all 4 quarters, what phase of the business cycle was this year in?
an expansion
the unemployment rate generally rises during:
a recession
what is the relationship between real GDP and the unemployment rate?
inverse
in the US, the average inflation rate was highest in:
the 1970’s — caused the elimination of the Gold Standard
what is an example of monetary policy?
changing the level of interest rates in the economy
monetary policy is “indirect”
is monetary policy direct or indirect?
indirect
is fiscal policy direct or indirect?
direct – ex. changing gov. spending and tax rates
consumer price inflation (CPI) in the US over the last 200 years was:
on average close to 0, during the 70’s the Gold Standard was eliminated
if this year’s price level exceeds last year’s:
the inflation rate has been positive
the unemployment rate is best described as:
the proportion of the population that wants a job, but cannot find one (actively looking)
to measure GDP using the expenditure approach you must measure:
exports! (its an expenditure)
GDP does not include:
intermediate goods, transfer and interest payments
what purchase is not included in personal consumption expenditure?
purchase of a new home – gains value over time, its an investment!!
what is an example of gross private domestic investment?
the purchase of a new taxi cab
a capital good, used for business – factor of production (not for personal use)
In the definition of GDP, “market value” refers to:
valuing production according to the market price
If Nike, an American corporation, produces sneakers in Thailand this would:
add to Thailand’s GDP but not to US GDP
Which of the following expenditures is for an intermediate good?
General Motors buys new tires to put on the cars it’s building (multiple choice)
The largest component of GDP in the expenditure approach is:
personal consumption expenditures
According to the BEA, in the second quarter of 2012 federal government spending on goods and services changed by -0.1 percent. This decrease could have been caused by a decrease in spending on:
national defense (multiple choice)
Which one of the following transactions in a particular year is included in gross domestic product for that year?
The government pays a computer services company that assisted in the delivery of Social Security payments to retirees. (multiple choice)
An example of “investment” in computing real GDP using the expenditure approach is the purchase of:
a new set of tools by an auto mechanic, for use in repairing cars. (multiple choice)
If depreciation is less than gross investment, then net investment is:
positive
Last year in the country of Nerf imports equaled exports. Nerf’s GDP was $500 million, its consumer expenditure was $380 million, and its investment was $20 million. Nerf’s government expenditure on goods and services were ________.
$100 million
what is the largest income component of GDP?
compensation of employees
in years with inflation, what happens to nominal and real GDP?
nominal GDP increases faster than real GDP
what are two factors that directly change the stock of capital goods?
depreciation and investment
what does the “government expenditure” category exclude?
transfer payments and interest payments
real GDP for a specific year:
could be larger/smaller than nominal — depends on data and distance from base year
which component of GDP has been negative recently?
net exports
which values are important in reading a information table?
government expenditures, gross private domestic expenditure, net exports, personal consumption expenditures
what are some reasons that real GDP could be inaccurate?
omits measures of income distribution, leisure time, underground economy, undervalues household production (all of the above from the multiple choice)
which of the following is not a factor of production?
land – financial assets – capital equipment – labor
financial assets
capital equipment and land are both capital goods and contribute to production
gross domestic investment:
includes the purchase of new capital goods
an expansion ends when the economy:
hits a peak and then enters a recession
a loaf of bread purchased by the student is best described as:
a final good
which of the following expenditures associated with the production of a new SUV will be included in GDP?
the purchase of new tools to manufacture the engine
Gross private domestic investment refers in part to the purchase of:
new capital goods
if consumption expenditures are $500 million, net investment is $100 million, depreciation is $5 million, imports are $50 million, exports are $55 million, government purchases of g/s is $220 million, and government transfer payments are $20 million, then GDP is:
first identify the categories:
500 (C)
+ (100 +5) (I)
+ 220 (G)
+ (55-50) NX
= $830 million
what are the four types of income in the income approach?
employee compensation, rent, corporate profits, proprietors income
when does nominal GDP increase?
when the prices of g/s increases (and when quantity increases?)
if the CPI this year is 120, this means that:
prices are 20% higher than base year
if the basket is $300 in the base year, and the basket is $375 later, then the CPI for the later year is:
(375/300) = 1.25 x 100 –> CPI = 125
whats the difference between inflation and expansion?
expansion and recession have to take place over two quarters (at least), whereas inflation can occur at any point/momentarily
