Exam 1 Flashcards
GDP
Gross Domestic Product, the dollar value of final output produced during a given period within the country’s borders
GNP
Gross National Product, dollar value of final output produced during a given period by domestic factors of production (not necessarily inside the country’s borders)
GNP = GDP + NFP
Value-added approach (or the product approach)
GDP is calculated as a sum of value added to goods and services in production across all production units in the economy
Income approach to GDP
sum of all incomes received by economic agents contributing to production
Expenditure approach
GDP = C + I + G + X - M or total spending on all final goods and services produced in the economy
best way to measure a country’s well being
real GDP/capita (across time or across country comparison)
Nominal GDP
current year quantities x current year prices
Real GDP
current year quantities x base year prices
What does GDP leave out?
- leaves out non-market activity and underground activity
- -home production
- -tax evasion motives
- -crime and illegal activities - doesn’t accurately measure the value of goods and services produced by the government
GDP doesn’t explain
- income inequality
- what goods are actual consumed by the people of the economy
- leisure time enjoyed
- future economic prospects
inequality economic benefit
the possibility to earn a lot of money stimulates effort and innovation, encourages investment in human capital (education, etc.)
inequality economic costs
due to high inequality, some people are very poor, they may not take full advantage of their skills because they are unable to receive education or have inferior health care, etc.
GNP growth rate
g= y/ ((y-1) -1)
measure of the growth rate
small x and g calculation
g= ln (GDP year) - ln (GDP year before)
two components of an economic time series
growth (or trend) component
business cycle component
when are we in a recession
- when real per capita GDP has been falling for two consecutive quarters
- GDP below trend line
GDP deviations from trend
- -happen on average every 10 years
- -persistent
- -typically stay within 5% from the trend
- -hard to predict
time series decomposed into two components
trend
deviations from the trend
typical driving forces of recessions
energy price increase --reduces supply, demand financial crisis --investors get cautious, --borrowing/lending is inhibited, --bank runs policies --reduced money supply --higher taxes
policies used in recessions
- combat the driving force if possible
- temporarily stimulate supply and/or demand
- -tax cuts
- -increased gov. spending
- -monetary easing (higher money supply)
74-75 recession
GDP fell 3%, max unemploy 9%
oil prices went up
expanded monetary policy
81-82 recession
GDP fell 2.9%, max unemploy 10.8%
monetary contraction
Raegan tax cuts
90-91 recession
GDP fell 1.5%, max unemploy 7.8%
monetary contraction
moderate tax increase
01 recession
GDP fell .6%, max unemploy 6.5%
stock market crash
expanded monetary policy, tax cuts
08 recession
GDP fell 7%, unemploy 8.2%
housing crisis, increased energy and raw material prices
expanded monetary policy, TARP, tax cuts, higher gov. spending
comovement
presence of some regularities in fluctuation of several economic variables
cyclical
positive correlation
when x increases y is also likely to increase, correlation coefficient between 0 and 1
negative correlation
when x is increases y is likely to decrease, correlation coefficient between 0 and -1
procyclical
positively correlated
countercyclical
negatively correlated
acyclical
not correlated
GDP and imports
positively correlated
imports are more volatile
GDP and comsumption
positively correlated
coincides with GDP
consumption is less volatile
leading variable
x helps to predict GDP
lagging variable
GDP helps to predict y
coincident
variable neither leads nor lags
GDP and investment
positively correlated
coincides with GDP
much more volatile than GDP
GDP and employment
positively correlated
lags GDP
less volatile
GDP and labor productivity
positively correlated
coincides with GDP
less volatile
GDP and gov. espenses
acyclical
cannot talk about leading/lagging
as volatile as GDP
GDP and price level
negatively correlated
coincide with GDP
less volatile
one period model
consumption, employment and labor productivity final goods market labor market economic agents --firms --consumers --government
simplifying assumptions
only one consumer-average only one producer-average only one good produced and sold only one way to spend time away from work (leisure) no money in the economy
utility function
more is preferred to less
consumers like diversity
consumption and leisure are normal goods
substitution > income effect
indifference curves
are decreasing
do not intersect
correspond to higher utility if they are further from the origin
are convex
endogenous
variable you can choose
exogenous
variable you cannot choose parameters
consumer’s optimal choice
marginal rate of substitution=w or
the slope of the budget line = the slope of the indifferent curve
pure positive income effect
budget line shifts upward in a parallel way (because normal good)
pure substitution effect
move along indifference curve, maintaining utility, but at a different slope
combination of substitution and income effects
shift to higher utility while the budget line moves up or down at a different slope, so not parallel
