exam #1 Flashcards
Gross domestic product measures…
income =
Total income of everyone in the economy
And the total expenditure on the economies output of goods and services
Income = expenditure
Dollars buyer spends goes in sellers pocket
Households…
Own factors of production
Sell or rent to firms for income
Firms…
buy or hire factors of production
Use them to produce goods and services
BEA
Bureau of economic analysis
Durable goods and example
Items that last a long time
Microwave
Non-durable goods and example
Products consumed quickly, have a short lifespan
Bacon, bread
are Social security payments included in GDP?
Not included in GDP because they don’t reflect the economies production
How is GDP affected if a citizen buys a TV made in Korea by a Korean firm?
the import of the korean TV reduces net exports (exports-imports) U.S. net imports decrease so U.S. GDP is unaffected because this wasn’t produced in the U.S.
A US citizen buys a tea kettle manufactured in china by a company owned and operated by a U.S. Citizen. Which components of the US GDP is this transaction accounted for?
Consumption and imports
If GDP deflator is less than 100%
Prices are lower that year
The government:
Collects taxes and buys goods and services
The financial system
Matches savers’ supply of funds with borrowers demand for loans
GDP is all ________ goods… within ..
all final goods (vs intermediate goods) and services produced within a country in a period of time
Intermediate goods…
Are used as components in production
Components of GDP (total spending)
4 components:
Consumption
Investment
Government purchases
Net exports(ex-im)
Consumption
Total spending by household
Durable, non durable goods
Spending on education or medical care
Home owners include “imputed rental valve”, not a current good
Investment
Total spending on goods used in the future to produce more goods
Capital equipment (machinery, tools)
Structures (factories, houses)
Inventories (goods produced, not sold)
NOT STOCKS OR BONDS
Government purchases
All spending on goods and services purchased by the government at Federal, state and local levels
Excludes)
Transfer payments like unemployment
NOT PURCHASES OF GOODS AND SERVICES
Net exports
Nx = exports - imports
Exports are foreign spending on economies goods and services
Imports are the portions of C, I, G produced abroad
GDP =
C+ I + g+nx
Why do we have real vs. Nominal GDP?
Inflation can distort economic variables like GDP
Nominal GDP
Values output using current prices
Not corrected for inflation
Real GDP
values output using the prices of a base year
Is corrected for inflation
Change in nominal
Reflects both price and quantity
Change in real GDP is the same amount
Of GDP that would change if prices were constant
GDP deflator measures
The overall level of prices
GDP deflator =
Nominal GDP / real GDP x 100
Inflation rate =
GDP deflator2 - GDP deflator1 / GDP deflator1 x 100
Real GDP per capita is
the main indicator of the average persons living standards
Not exact
CPI (base year) =
cost of basket in current year / cost of basket in base year x 100
Compute the inflation rate of CPI:
Inflation rate = CPI this year - CPI last year / CPI last year x100
Substitution bias
The CPI misses substitution towards cheaper goods because of a fixed basket
Introduction of new goods
Customers find new products that meet their needs
Unmeasured quality change
Improvement quality of goods in the value of each dollar
Inflation: amount in todays dollars =
Amount in year ( t ) dollars (ex min wage is 1.25) x price level today (ex CPI is 277.3 today)/ price level in year (t) (ex CPI was 24.6 in 1963)
Nominal interest rate
Not corrected for inflation
Rate of growth in dollar value for a deposit or debt
Real interest rate
Corrected for inflation
Rate of growth in the purchasing power of a deposit or debt
Real interest rate =
(Nominal interest rate) - (inflation rate)
Productivity =
Y / L
Y= real GDP = quantity of output produced
L = quantity of labor
K measures
Physical capital
Physical capital per worker:
K/ L
H =
Human capital
Human capital per worker =
H/ L
N =
Natural resources
natural capital per worker =
N / L
Technology knowledge
Societies understanding of the best ways to produce goods and services
Boosts productivity
The production function
Y= A x F ( L, K, H, N ) = Y/L = A x F ( L/L, K/L, H/L, N/L )
A= level of technology
F ( )= the function that shows how inputs are combined to produce an output
Real GDP per capita =
real GDP / Population
Growth rate for GDP per capita =
new GDP per capita - old GDP per capita/ old GDP per capita x100
Saving and investing can boost
Reducing consumption =
Productivity by increasing k, which requires investment
increasing savings
The catch up effect
The property whereby poor countries grow more rapidly (exponentially) than rich ones
To raise k/ L: foreign direct investment:
A capital investment (factory…) that is owned and operated by a foreign country
To raise k/ L: foreign portfolio investment:
A capital investment (factory) financed with foreign money but operated by domestic residents
Foreign investments (direct and portfolio) are particularly beneficial for
Poor countries who can learn their innovations and technologies
Government can increase productivity by promoting
Education and health care investment in H (human capital
“trade can…
Make everyone better off”
Inward-oriented policies
Tariffs, limits on investment from abroad, aim to raise living standards by avoiding interaction with other countries
Generally failed to create growth
Outward-oriented policies
Elimination of restriction on trade/ foreign investments promote integration with the world economy
Have often succeeded
What’s the main reason for living standards to rise?
Technological advancements
Knowledge is a public good because…
Ideas can be shared, increasing productivity
How can population affect living standards?
Stretching natural resources
Higher labor ^L, N/L \/
Dilutes capital stock (\/ K/L )
Promoting tech progress
Hybrid and electric cars are examples of when population increase doesn’t always deplete resources
Private saving : =
The portion of households income that is not yet used for consumption or paying taxes
= Y - T- C
Y= GDP
T= Revenue
C= consumption
Public saving : =
Tax revenue less government spending
= T - G
T= revenue
G= government purchases
National saving : =
Portion of national income that is not used for consumption or government purchases
S = Y - T - C + T- G = Y - C - G
Government budget surplus
An excess of tax revenue ( T ) over government spending (G)
public saving = T-G
Government budget deficit
A shortfall of tax revenue (T) from government spending (G)
<public> = G - T
</public>
Examples of private saving
Buying corporate bonds
Shares from a friend
accumulation in savings or checking
Examples of investment
General Motors spends $250 mil to build a new factory in Michigan
NOT purchase of stocks or bonds
Supply - demand model
Helps understand how the financial system coordinates saving and investment, government policies, interest rates
Assumption: one financial market
Supply of funds:
Demand for funds:
Savings
Investment
Crowding out
In a budget deficit when the government borrows they compete with everyone else in the economy who wants to borrow the limited amount of money,
This increases interest rates and decreases private spending
In the base years for GDP and CPI its
Always 100
GNP is
Gross National product: the total goods and Services produced by a country’s citizens and businesses in a given year
Very close to GDP but includes production by country’s citizens abroad while GDP does not
What is CPI?
A statistical estimate of the level of prices of goods and services bought for consumption purposes by households
