Econ Week 2 Flashcards
GDP calculate
Total Sales- cost of intermediate inputs
Measures your contribution toward the item
Total Income
Total wages + Total profits
(capital gains and losses are not counted as new income)
Limitations of GDP
Prices are not values
Non-MKT activites including household prod are excluded
The shadow economy is missing
Environmental Degradation is not counted
Leisure doesn’t count
GDP ignores Distribution
Nominal GDP
It only measures price changing and doesn’t show how the economy is really doing.
Not useful for showing GDP overtime
Useful fro analyzing what GDP is right now
Adds up the mkt value of total prod. in a year using the current prices prevailing in that year
Real GDP
GDP is measured in constant prices. Excludes effects of price changes
-Its called real GDP because it measures real change in production
Allows us to isolate growth
Nominal calc
P x Q
Real calc
Pt + Pt-1/ 2 == P x Q
Relation of nominal to real
change in nominal= change in real _ change in prices
Strategy 1
Evaluate what it means per person
Reduce the number into more human terms
Strategy 2
Compare big numbers to the size of the economy
Scale big numbers by comparing them to the size of the total economy
Strategy 3
Compare big #’s to their own history
Strategy 4
Use the rule of 70 to evaluate long-run growth rates
Years it takes to dbl= 70/ annual growth rate
Early human history economic growth
-Nothing was being produced cause we were just trying to survive. This led to little innovate and economic growth
Economic boom
With the agricultural and industrial revolution, the economy boomed due to new innovations and ideas.
Production function
The methods by which inputs are transformed into output, which determines the total production that’s possible with a given set of ingredients
Labor
The sum of all hours worked across the economy
Human Capital
The accumulated knowledge and skills make a worker more productive.
Physical capital
The tools, machinery and structures that are input in the production process
A country’s output depends on
Labor input (L)
Human capital (H)
Physical Capital (K)
Y= F(L,H, K)
Labor factors
size of pop
working age fraction
share of people who choose to work
How many hours each puts in
Capital Stock
The total quantity of physical capital that can be used in the production of goods and services
Technological Progress
New Methods for using existing resources
Constant returns to scale
Increasing all inputs by some proportion will cause output to rise by the same proportion
Replication Argument
If you want to double to the output of your factory, double all inputs.
Insight 2: There are diminishing returns to capital
Law of Diminishing returns
As you add more and more workers you will at some point stop producing as much.
Catch up growth
The rapid growth that occurs when a relatively poor country invests in its physical capital
Solow Model
Is used to analyze economic growth
Depreciation
The decline in the capital due to wear and tear, obsolescence, accidental damage, and aging
Insight 4: The capital stock will grow as long as investment outpaces depreciation.
Rising Depreciation
If the fraction of machines that fail each year is fixed, then more machines will mean more breakdowns— Total Depreciation grows
Tech process is driven by
The speed at which new ideas are created
How many resources are devoted to generating new ideas
