Exam 1 Flashcards
Definition of Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
How to measure how well a country is doing
GDP
Gross domestic product
GDP
Measures the total income of everyone in the economy–Measures the total expenditure on the economy’s output of goods and services
For an economy as a whole
income must equal expenditure
GDP is the market value of
all final goods and services
produced in a country
in a given period of time
GDP identity
Y = C + I + G + NX
y
GDP
c
consumption
I
investment
g
govt purchases
NX
net exports
consumption
Spending by households on goods(durable and non-durable goods) and services ( intangibles, education)
the exception of buying a new house
investment
Purchase of (capital) goods that will be used to produce other goods and services in the future
business capital
business structures, equipment, and intellectual property products
residential capital
landlord’s apartment building; a homeowner’s personal residence
govt purchases
Government consumption expenditure and gross investment
Spending on goods and services
By local, state, and federal governments
Does not include transfer payments
net exports
exports-imports
nominal GDP
Production of goods and services
Valued at current prices
real GDP
Production of goods and services
Valued at constant prices
Designate one year as the base year
Not affected by changes in prices
for the base year
nominal gdp=real gdp
gdp deflator
–Ratio of nominal GDP to real GDP times 100
Measures the current level of prices relative to the level of prices in the base year
Can be used to take inflation out of nominal GDP (“deflate” nominal GDP)
inflation
Economy’s overall price level is rising
inflation rate
Percentage change in some measure of the price level from one period to the next
inflation rate formula
gdp deflator in year 2-gdp deflator in year1/gdp deflator in year 1 *100
rich countries with higher gdp
better life expectancy, literacy, internet usage
poor countries with low gdp
worse life expectancy, literacy, internet usage
real gdp grows overtime
The real GDP of the U.S. economy in 2015 was more than four times its 1965 level
Growth – average 3% per year since 1965
gdp can be interrupted by
recessions
recessions
–Two consecutive quarters of falling GDP –Real GDP declines –Lower-income –Rising unemployment –Falling profits –Increased bankruptcies
CPI
The measure of the overall level of prices
The measure of the overall cost of goods and services
calculating CPI
fix the basket find prices compute the baskets cost Chose a base year and compute the CPI Compute the inflation rate
fix the basket
Which prices are most important to the typical consumer
Different weight
find prices
at each point in time
compute baskets cost
Same basket of goods
Isolate the effects of price changes
choose base year and compute cpi
Base year = benchmark
Price of basket of goods and services in current year
Divided by price of basket in base year
Times 100
Core cpi
Measure of the overall cost of consumer goods and services excluding food and energy
PPI
producer price index
Measure of the cost of a basket of goods and services bought by firms
Changes in PPI are often thought to be useful in predicting changes in CPI
problems in measuring cost of living
substitution bias
intro of new goods
unmeasured quality change
sub bias
Measure of the cost of a basket of goods and services bought by firms
Changes in PPI are often thought to be useful in predicting changes in CPI
intro of new goods
more variety of goods
unmeasured quality change
changes in quality
gdp deflator
Ratio of nominal GDP to real GDP
Reflects prices of all goods & services produced domestically
CPI reflects
prices of goods & services bought by consumers
gdp deflator compares
the price of currently produced goods and services
To the price of the same goods and services in the base year
cpi compares
price of a fixed basket of goods and services
To the price of the basket in the base year
A price index such as the CPI
Measures the price level and thus determines the size of the inflation correction
cost of living varies
Not only over time –But also over geography
regional price parities
Measure variation in the cost of living from state to state.
regional differences explained by
Prices of goods small part Prices of services larger part Housing services persistently large
indexation
Automatic correction by law or contract
Of a dollar amount
For the effects of inflation
nominal interest rate
Interest rate as usually reported
Without a correction for the effects of inflation
always exceeds real interest rate
real interest rate
Interest rate corrected for the effects of inflation
real interest rate formula
Nominal interest rate – Inflation rate
real and nominal interest rates dont always
move together
periods of deflation
Real interest rate exceeds the nominal interest rate©
real gdp per person
Living standard
Vary widely from country to country
productivity
–Quantity of goods and services
–Produced from each unit of labor input
why is productivity important?
Key determinant of living standards
Growth in productivity is the key determinant of growth in living standards
An economy’s income is the economy’s output
determinants of productivity
Physical capital per worker
Human capital per worker
Natural resources per worker
Technological knowledge
physical capital
Stock of equipment and structures
Used to produce goods and services
human capital
Knowledge and skills that workers acquire through education, training, and experience
natural resources
Inputs into the production of goods and services
will eventually limit how much the world’s economies can grow
technological knowledge
Society’s understanding of the best ways to produce goods and services
prices of natural resources
Scarcity — reflected in market prices
Our ability to conserve these resources
raise future productivity
Invest more current resources in the production of capital
Trade-off
trade off
Devote fewer resources to produce goods and services for current consumption
higher savings rate
Fewer resources used to make consumption goods More resources to make capital goods Capital stock increases Rising productivity More rapid growth in GDP
diminishing returns
Benefit from an extra unit of an input
Declines as the quantity of the input increases
catch up effect
Countries that start off poor
Tend to grow more rapidly than countries that start off rich
investment from abroad
Another way for a country to invest in new capital
foreign direct investment
foreign portfolio investment
investments benefits
Some flow back to the foreign capital owners–Increase the economy’s stock of capital
Higher productivity
Higher wages–State-of-the-art technologies
Right investments in the health of the population
–Increase productivity
–Raise living standards
Historical trends: long-run economic growth
–Improved health – from better nutrition’
–Taller workers – higher wages – better productivity
poor countries are poor because
their populations are not healthy
populations are not healthy because
they are poor and cannot afford better healthcare and nutrition
virtuous cycle
–Policies that lead to more rapid economic growth
–Would naturally improve health outcomes
–Which in turn would further promote economic growth
to foster economic growth
protect property rights
promote political stability
lack of property rights
–Policies that lead to more rapid economic growth
–Would naturally improve health outcomes
–Which in turn would further promote economic growth
political instability
–A threat to property rights
–Revolutions and coups
–The revolutionary government might confiscate the capital of some businesses
–Domestic residents – less incentive to save, invest and start new businesses
–Foreigners – less incentive to invest
inward-oriented policies
Avoid interaction with the rest of the world’
–Infant-industry argument (tariffs, Other trade restrictions)
–Adverse effect on economic growth
Outward-oriented policies
–Integrate into the world economy
International trade in goods and services
Economic growth
amt of trade is determined by
govt policy
geography
Explain why an economy’s GDP must equal its expenditure
An economy’s GDP must be equal to that of its expenditure because every transaction has a buyer and a seller. Therefore expenditure by buyers must equal the income of the sellers.
cpi equation
price basket current/price basket base year *100
microeconomics
Study of how households and firms
Make
decisions & Interact in markets
