Exam 1 Flashcards
Positive statement
Describes what is happening, explaining why what will happen
Normative statement
What should happen which involves value judgment
3 ways to calculate GDP
Total spending, total income, market value of all goodsa and services
Define GDP
Market value of all final goods and services produced within a country in a year
Market value
Everything produced is summed in the unit of a dollar
If a Japanese company has hq in the US does it count as US GDP?
yes
Nominal GDP
GDP measured in current prices
Real GDP
GDP measured in baseline prices
GDP deflator formula
(Nominal GDP/real GDP)*100
Total ouput GDP formula
Total Output= Consumption+Investment+Government Spending+ Net Exports
Define Consumption
Final goods and service, rent does count, also durable (long-lasting goods)
Define Investment
Spending on new capital assets that increase the economy’s productive capacity
Define Government purchases
The government buys goods and services, transfer payments don’t count
Define value-added
The amount by which your company increases the value of an item
Deine total sales
Cost of intermediate goods and services
Total income formula of GDP
total wages + total profits
Define labor share
share of total income that goes to workers as wages, salaries, and benefits
Define capital share
Share of income that goes to owners of capital
GDP Limitations
Prices are not values, Nonmarket activities are excluded, Shadow economy is missing, environmental degradation isn’t counted
Are stocks and bonds included in GDP?
No
What does a production function describe?
The methods by which inputs are transformed into outputs
Production function
Y= f(L,H,K)
When will a country produce more output?
If…
- it employs more labor
- workers become highly skilled
- accumulates more physical capital
Define labor productivity
Output per hour
Define Capital stock
the amount of physical capital
Constant returns to scale
If the production function increases all inputs by some proportion the output will rise by some proportion
Define Law of diminishing returns
When one input is held constant, increases in all the other inputs at some point will yield smaller and smaller increases in outputs
Catch-up growth
Rapid growth that occurs when a relatively poor country invests in capital
What happens when depreciation is equal to investment?
Capital stock stops growing
Define the rule of 70
How many years it takes for something to double
The rule of 70 formula
70/avg% growth rate
Define depreciation
Amount of capital that wears out each period
When does capital grow?
Capital grows when saving is higher than depreciation
Define cutting-edge growth
Advancements in technology, US growth
Define steady state
When capital does not grow
Define working-age population
Those 16 or older who are not in the military or institutionalized
Define Employed
People in the working-age population who are employed
Define unemployed
People in the working-age population without jobs who are trying to get jobs
Labor force formula
Labor force= Employed +Unemployed
Define labor force participation rate
the percentage of the working-age population that is either employed or unemployed
Labor force participation rate formula
((Employed + Unemployed)/ working-age population)*100
Define the unemployment rate
The percentage of the labor force that is unemployed
Employment rate formula
(Unemployed/labor force)*100
Define the equilibrium unemployment rate
the long-run employment rate to which the economy tends to return to
What does it mean if someone is marginally attached to the labor force?
Aren’t currently searching for a job but have searched in the last year (not counted as unemployed or in the labor force)
Define discouraged workers
Don’t believe there is a job for them in the labor force
Define Underemployed
Those who want a full-time job but aren’t getting full-time hours, or job isn’t adequately using their skills
Define frictional unemployment
Occurs because it takes time for workers to find jobs and employer to find workers.
Define structural unemployment
Occurs when there are structural barriers that prevent wages from falling to the point where labor demand and labor supply are in equilibrium
Define cyclical unemployment
Occurs when there is a temporary downturn in the economy
What happens when the government financially supports those who are unemployed
Unemployment is likely to last longer
Define prevailing wage
Wage that exists above the equilibrium wage
Define Efficiency wage
A wage above the market wage that is paid to encourage greater work productivity
Causes of structural unemployment
- Unions
- Job protections regulations
- Minimum wage laws
Define Hysteresis
high unemployment leads to a higher equilibrium unemployment rate
What are the social costs of unemployment?
- It’s disruptive
- Long-term is associated w/ worse outcomes
- Children whose parents experience unemployment suffer
- Government receives lower tax rates
Define Inflation
Generalized rise in the overall level of prices, rise in the cost of living, a decline in the purchasing power of money
Define the consumer price index (CPI)
Measure of the average prices people pay overtime for the goods and services they buy in their everyday lives
Define inflation rate
the percentage change in the price of a fixed basket of goods, annual percentage increase in the average price level
Inflation rate formula
((Price level this year - price level last year)/price level last year)*100
Define relative price adjustment
Price of an individual good rises or falls relative to other prices as demand and supply ebbs and flows
Challenges of measuring the true cost of living
- tracks the changing price of a fixed basket
- CPI overstates changes in the cost of living
- Quality improvements, New products make you better off, substitution bias
Define chained CPI
An inflation measure that is designed to update the basket of goods each month to correct for substitution bias
Formula for the value of today’s dollars
Another time’s dollars* (Price level today/ Price level in another time)
Formula to determine real value in dollars
Nominal value in year t dollars* (price level in base year/Price level in year t)
What does nominal interest rate measure?
The return in dollars– stated interest rate w/o being corrected for inflation
What does real interest rate measure?
What you can buy with those dollars, adjusted for inflation
Real interest rate formula
Nominal interest rate - inflation
Define money illusion
The mistaken tendency to focus on nominal dollar amounts– can lead you to be fooled by inflation
Define nominal wage rigidity
Employers try to get by w/o ever cutting wages
Define money
an asset that is regularly used in transactions
- medium of exchange
- unit of account
- store of value
Define hyperinflation and give an example
extremely high inflation (Venezuela)
How does inflation redistribute?
When inflation is lower lenders gain at the expense of borrowers and vice versa
Define inflation fallacy
Mistaken belief that inflation destroys purchasing power
Define Personal consumption expenditure deflator
- Basket items you do not pay for directly, medical care paid by government or employer
- Used by federal reserve to measure inflation
Define Production Price Index
- Measure sthe price of inputs in the production process
- Used by businesses
Define Core inflation
The basket excludes energy and food
Define menu costs for sellers
- The cost of adjusting your prices
Example: printing new menus at a restaurant
Define shoe leather costs for buyers
- Time and effort occurred because you do not wan tot hold cash
Example: Visit your bank often or spend money before it loses its value
Costs of Unexpected inflation
- Inflation confuses the signal that price sends
- Inflation redistributes
Define consumption
Household spending on final goods and services
Define the Marginal Propensity to Consume (MPC)
fraction of each extra dollar of income that households spend on consumption
Formula for saving
saving= Income - consumption
Define dissaving
when consumption exceeds income
Define net wealth
Stock of wealth, the amount by which your assets exceed debt
Define Interdependence principle
The choices available to you in the future depend on the choices you make today
Define consumption smoothing
reallocating your spending
Define permanent income
best estimate of your long-term average income
Define permanent income hypothesis
people choose how to consume based on their permanent income
MPC temporary formula
Change in consumption/temporary change in income
MPC permanent formula
Change in consumption/permanent change in income
define hand-to-mouth consumers
live paycheck to paycheck
Define disposable income
income after taxes
When do you move along the consumption function
A change in income
Slope of a consumption function
Change in consumption/change in income
The rational rule for consumers
when deciding how much to consume today, will need to compare the marginal benefit of consuming more today versus tomorrow
Credit constraint
people can’t borrow
Why do people save?
- Income and needs change over life cycle
- Bequest
- Precautionary saving
