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ECON 201 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Definition of Macroeconomics

A

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

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2
Q

How to measure how well a country is doing

A

GDP

Gross domestic product

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3
Q

GDP

A

Measures the total income of everyone in the economy–Measures the total expenditure on the economy’s output of goods and services

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4
Q

For an economy as a whole

A

income must equal expenditure

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5
Q

GDP is the market value of

A

all final goods and services
produced in a country
in a given period of time

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6
Q

GDP identity

A

Y = C + I + G + NX

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7
Q

y

A

GDP

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8
Q

c

A

consumption

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9
Q

I

A

investment

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10
Q

g

A

govt purchases

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11
Q

NX

A

net exports

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12
Q

consumption

A

Spending by households on goods(durable and non-durable goods) and services ( intangibles, education)
the exception of buying a new house

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13
Q

investment

A

Purchase of (capital) goods that will be used to produce other goods and services in the future

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14
Q

business capital

A

business structures, equipment, and intellectual property products

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15
Q

residential capital

A

landlord’s apartment building; a homeowner’s personal residence

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16
Q

govt purchases

A

Government consumption expenditure and gross investment
Spending on goods and services
By local, state, and federal governments
Does not include transfer payments

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17
Q

net exports

A

exports-imports

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18
Q

nominal GDP

A

Production of goods and services

Valued at current prices

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19
Q

real GDP

A

Production of goods and services
Valued at constant prices
Designate one year as the base year
Not affected by changes in prices

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20
Q

for the base year

A

nominal gdp=real gdp

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21
Q

gdp deflator

A

–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)

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22
Q

inflation

A

Economy’s overall price level is rising

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23
Q

inflation rate

A

Percentage change in some measure of the price level from one period to the next

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24
Q

inflation rate formula

A

gdp deflator in year 2-gdp deflator in year1/gdp deflator in year 1 *100

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25
Q

rich countries with higher gdp

A

better life expectancy, literacy, internet usage

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26
Q

poor countries with low gdp

A

worse life expectancy, literacy, internet usage

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27
Q

real gdp grows overtime

A

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

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28
Q

gdp can be interrupted by

A

recessions

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29
Q

recessions

A 
–Two consecutive quarters of falling GDP
–Real GDP declines
–Lower-income
–Rising unemployment
–Falling profits
–Increased bankruptcies
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30
Q

CPI

A

The measure of the overall level of prices

The measure of the overall cost of goods and services

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31
Q

calculating CPI

A 
fix the basket
find prices
compute the baskets cost
Chose a base year and compute the CPI
Compute the inflation rate
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32
Q

fix the basket

A

Which prices are most important to the typical consumer

Different weight

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33
Q

find prices

A

at each point in time

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34
Q

compute baskets cost

A

Same basket of goods

Isolate the effects of price changes

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35
Q

choose base year and compute cpi

A

Base year = benchmark
Price of basket of goods and services in current year
Divided by price of basket in base year
Times 100

36
Q

Core cpi

A

Measure of the overall cost of consumer goods and services excluding food and energy

37
Q

PPI

A

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

38
Q

problems in measuring cost of living

A

substitution bias
intro of new goods
unmeasured quality change

39
Q

sub bias

A

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

40
Q

intro of new goods

A

more variety of goods

41
Q

unmeasured quality change

A

changes in quality

42
Q

gdp deflator

A

Ratio of nominal GDP to real GDP

Reflects prices of all goods & services produced domestically

43
Q

CPI reflects

A

prices of goods & services bought by consumers

44
Q

gdp deflator compares

A

the price of currently produced goods and services

To the price of the same goods and services in the base year

45
Q

cpi compares

A

price of a fixed basket of goods and services

To the price of the basket in the base year

46
Q

A price index such as the CPI

A

Measures the price level and thus determines the size of the inflation correction

47
Q

cost of living varies

A

Not only over time –But also over geography

48
Q

regional price parities

A

Measure variation in the cost of living from state to state.

49
Q

regional differences explained by

A 
Prices of goods 
 small part
Prices of services 
larger part
Housing services 
persistently large
50
Q

indexation

A

Automatic correction by law or contract
Of a dollar amount
For the effects of inflation

51
Q

nominal interest rate

A

Interest rate as usually reported
Without a correction for the effects of inflation
always exceeds real interest rate

52
Q

real interest rate

A

Interest rate corrected for the effects of inflation

53
Q

real interest rate formula

A

Nominal interest rate – Inflation rate

54
Q

real and nominal interest rates dont always

A

move together

55
Q

periods of deflation

A

Real interest rate exceeds the nominal interest rate©

56
Q

real gdp per person

A

Living standard

Vary widely from country to country

57
Q

productivity

A

–Quantity of goods and services

–Produced from each unit of labor input

58
Q

why is productivity important?

A

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

59
Q

determinants of productivity

A

Physical capital per worker
Human capital per worker
Natural resources per worker
Technological knowledge

60
Q

physical capital

A

Stock of equipment and structures

Used to produce goods and services

61
Q

human capital

A

Knowledge and skills that workers acquire through education, training, and experience

62
Q

natural resources

A

Inputs into the production of goods and services

will eventually limit how much the world’s economies can grow

63
Q

technological knowledge

A

Society’s understanding of the best ways to produce goods and services

64
Q

prices of natural resources

A

Scarcity — reflected in market prices

Our ability to conserve these resources

65
Q

raise future productivity

A

Invest more current resources in the production of capital

Trade-off

66
Q

trade off

A

Devote fewer resources to produce goods and services for current consumption

67
Q

higher savings rate

A 
Fewer resources 
 used to make consumption goods
More resources 
to make capital goods
Capital stock increases
Rising productivity
More rapid growth in GDP
68
Q

diminishing returns

A

Benefit from an extra unit of an input

Declines as the quantity of the input increases

69
Q

catch up effect

A

Countries that start off poor

Tend to grow more rapidly than countries that start off rich

70
Q

investment from abroad

A

Another way for a country to invest in new capital
foreign direct investment
foreign portfolio investment

71
Q

investments benefits

A

Some flow back to the foreign capital owners–Increase the economy’s stock of capital
Higher productivity
Higher wages–State-of-the-art technologies

72
Q

Right investments in the health of the population

A

–Increase productivity

–Raise living standards

73
Q

Historical trends: long-run economic growth

A

–Improved health – from better nutrition’

–Taller workers – higher wages – better productivity

74
Q

poor countries are poor because

A

their populations are not healthy

75
Q

populations are not healthy because

A

they are poor and cannot afford better healthcare and nutrition

76
Q

virtuous cycle

A

–Policies that lead to more rapid economic growth
–Would naturally improve health outcomes
–Which in turn would further promote economic growth

77
Q

to foster economic growth

A

protect property rights

promote political stability

78
Q

lack of property rights

A

–Policies that lead to more rapid economic growth
–Would naturally improve health outcomes
–Which in turn would further promote economic growth

79
Q

political instability

A

–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

80
Q

inward-oriented policies

A

Avoid interaction with the rest of the world’
–Infant-industry argument (tariffs, Other trade restrictions)
–Adverse effect on economic growth

81
Q

Outward-oriented policies

A

–Integrate into the world economy
International trade in goods and services
Economic growth

82
Q

amt of trade is determined by

A

govt policy

geography

83
Q

Explain why an economy’s GDP must equal its expenditure

A

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.

84
Q

cpi equation

A

price basket current/price basket base year *100

85
Q

microeconomics

A

Study of how households and firms
Make
decisions & Interact in markets

ECON 201 (2 decks)

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