Exam 3 Flashcards
The comprehensive measure of the market value of all currently produced final goods and services within a country in a given period of time by domestic and foreign-supplied resources.
Gross Domestic Product (GDP)
Measuring overall economic activity by adding the expenditure on the output produced in the economy.
Expenditure or Output Approach
The sum of consumption, investment, government, and net export spending on the total amount of real output produced in an economy in a given period of time.
Equals the income generated from producing and selling that output.
Aggregate Expenditure
Measuring overall economic activity by adding the earnings or income generated by selling the output produced in the economy.
Earnings or Income Approach
E = Y
Aggregate Expenditures = Income Earned
Goods and services sold to their end-users.
Final Goods and Services
Goods and services that are used in the production of other gods and services.
Intermediate Goods and Services
A process of calculating the value of the final output in an economy by summing the value added in each stage of production.
(i.e., raw materials -> semifinished goods -> final products.)
Value-Added Approach
Are transactions of used cars included in the current year’s GDP?
No
Secondhand sale
Double counting
Are any financial security transactions, such as the buying and selling of stock and bonds, included in GDP?
No
Changes in claims of ownership.
Cancel each other out (buying vs. selling).
An estimated value for non market transactions, such as the rental value of owner-occupied housing, included in GDP.
Imputed Value
Payments that represent the transfer of income among individuals in the economy, but do not reflect the production of new goods and services.
Excluded from GDP.
Transfer Payments
Public transfer payments
Social Security
Welfare
Veteran’s Payments
Private transfer payment
Transfer among family members.
Why are public transfer payments recorded in government budgets, but excluded from GDP?
Do not represent payment for newly produced goods and services.
Reason GDP can increase.
Prices of goods and services increase, quantities held constant.
Quantities of goods and services increase, prices held constant.
Both prices and quantities increase (typical case).
The value of currently produced final goods and services measured in current year prices.
Nominal GDP
The value of currently produced goods and services measured in constant prices.
Real GDP
What is real GDP?
Nominal GDP adjusted for price level changes or inflation.
A measure of price changes in the economy that compares the price of each year’s output of goods and services to the price of that same output in a base year.
GDP Deflator
GDP Deflator =
(Nominal GDP/Real GDP) x 100
The periodic increases and decreases in overall economic activity reflected in production, employment, profits, and price.
Business Cycle
The rising phase of a business cycle, in which the direction of a series of economic indicators turns upward.
Expansion
The falling phase of a business cycle, in which the direction of a series of economic indicators turns upward.
Recession
The four major sectors of the economy that the expenditure or output approach focuses on spending on currently produced goods and services.
- Personal consumption expenditures, or consumption (C).
- Gross private domestic investment, or investment (I).
- Government consumption, expenditures and gross investment, or government (G)
- Net export spending (F), equals export spending (X) minus import spending (M).
The total amount of spending by consumers on durable goods, non durable goods, and services in a given time period.
Largest component of GDP.
Typically averaging 2/3 of total GDP.
Personal Consumer Function
Three categories of the personal consumption function.
Durable Goods
Non Durable Goods
Services
Commodities that typically last 3 or more years, such as automobiles, furniture, and household appliances.
Durable Goods
Commodities that last less than 3 years and may be consumed very quickly, such as food, clothing, and gasoline.
Non Durable Goods
Non commodity items, such as utilities, public transportation, private education, medical care, and recreation.
Cannot be stored and are consumed at the place and time of purchase.
Services
Why did the personal consumption expenditure growth slow down significantly from 1999 to 2009?
Slower growth in disposable personal income.
Increase in personal saving rate.
The total amount of spending on non residential structures, equipment, and software; residential structures; and business inventories in a given period of time.
Very specific meaning in the National Income and Product Accounts.
Gross Private Domestic Investment Spending
Included in gross private domestic investment spending.
- Business or non residential fixed investment.
- Residential fixed investment.
- Changes in business inventories, goods that are produced, but not sold in a given year.
Spending on the structures, equipment, and software that provide the industrial capacity to produce goods and services for all sectors of the economy.
Business Fixed Investment
Spending on newly constructed housing units, major alterations of and replacements to existing structures, and brokers’ commissions.
Residential Fixed Investment
Changes in the amount of goods produced, but not sold in a given year.
Changes in Business Inventories
The total amount of spending by federal, state, and local governments on consumption outlays for goods and services and for depreciation charges for existing structures and equipment and on investment capital outlays for newly acquired structures and equipment in a given period of time.
Government Consumption Expenditures and Gross Investment
Two categories of government consumption expenditures and gross investment.
- Consumption
2. Investment
Current outlays for goods and services and depreciation charges on existing structures and equipment.
Consumption
Capital outlays for newly acquired structures and equipment.
Investment
The total amount of spending on exports minus the total amount of spending on imports on a given period of time.
Net Export Spending
The total amount of spending on goods and services currently produced in one country and sold abroad to residents of other countries in a given period of time.
Export Spending
The total amount of spending on goods and services currently produced in other countries and sold to residents of a given country in a given period of time.
Import Spending
Income that is generated from the sale of the goods and services that are produced in the economy and that is paid to the individuals and businesses who supply the inputs or factors of production.
National Income
Categories of national income.
- Compensation of Employees
- Proprietors’ Income
- Rental Income
- Corporate Profits
- Net Interest
The wages and salaries and the fringe benefits paid by employers to employees.
Largest component of national income.
Compensation of Employees
The income of unincorporated businesses, such as medical practices, law firms, small farms, and retail stores.
Proprietors’ Income
The income households receive from the rental of their property.
Rental Income
The excess of revenues over costs fro the incorporated business sector of the economy.
Corporate Profits
The interest private businesses pay to households for lending money to the firms minus the interest businesses receive plus interest earned from foreigners.
Net Interest
Income received by households that forms the basis for personal consumption expenditures.
Personal Income
Personal household income after all taxes have been paid.
Disposable Income
The portion of households’ income that is not spent on consumption goods and services.
Saving
The price of one good in relation to the price of another good.
Microeconomic focus
Relative Prices
A measure of the overall level of prices in the economy using various indices to measure the prices of all goods and services.
Macroeconomic focus
Absolute Price Level
A sustained increase in the price level over time.
Inflation
A sustained decrease in the price level over time.
Deflation
Price level indices
- GDP Deflator
- Consumer Price Index
- Producer Price Index
A measure of the combined price consumers pay for a fixed market basket of goods and services in a given period relative to the combined price of an identical basket of goods and services in a base period.
Consumer Price Index (CPI)
Those individuals 16 years of age and over who are working in a job or actively seeing employment.
Labor Force
Persons 16 years of age and over who did any work as a employee, worked in their own business, profession, or farm, or worked without pay at least 15 hours in a family business or farm.
Employed
Persons 16 years of age and over who do not currently have a job, but who are actively seeking employment.
Unemployment
Persons 16 years of age and over who are not currently seeking work because they believe that jobs in their area or line of work are unavailable or that they would not qualify for existing job openings.
Discouraged Workers
Types of unemployment
Frictional
Structural
Cyclical
Considered to be normal.
Workers are between jobs or looking for new jobs and better paying jobs.
Frictional Unemployment
Changes in consumer demand or changes in technology create a mismatch between jobs and location of jobs and the skills of workers.
You or the product/service you are involved with have become obsolete or have a lower demand.
Improve with investment in human capital.
Structural Unemployment
Investment in human capital
Educate workers
Improve skills and talent
Health
Worker mobility
Decreased spending causes a decline in aggregate demand, thus a decrease in number of jobs, thus a slow down in business cycle.
Cyclical Unemployment
Ways to improve cyclical unemployment.
Monetary and fiscal policies
Changes in taxes and spending by the executive and legislative branches of a country’s national government that can be used to either stimulate or restrain the economy.
Fiscal Policy
Policies adopted by a country’s central bank that influences interest rates and credit conditions, which in turn, influences consumer and business spending.
Monetary Policy
Monetary vs. Fiscal Policy
Monetary = changes in money supply and interest rates by Fed. Fiscal = changes in taxes and government spending by executive and legislative branches.
Federal Reserve policy to increase the rate of growth of real GDP by increasing the amount of bank reserves in the system and lowering the federal funds and other interest rates.
Expansionary Monetary Policy
Federal Reserve policy to decrease the rate of growth of real GDP by decreasing the amount of bank reserves in the system and raising the federal funds and other other interest rates.
Contractionary Monetary Policy
GDP =
C + I + G + (X - M)
The functional relationship in macroeconomics that assumes that household consumption spending depends primarily on the level of disposable income (net of taxes) in the economy, all other variables held constant.
Consumption Function
The additional consumption spending generated by an additional amount of real income.
Assumed to take a valued less than 1.
Marginal Propensity to Consume (MPC)
MPC =
Change in consumption expenditure / Change in disposable income
OR
Change in consumption expenditure / Change in (Personal income - Personal Tax)
Disposable Income =
Personal income - Personal tax
The additional household saving generated by an additional; amount of real income.
Marginal Propensity to Save (MPS)
MPS =
1 - MPC
The multiple change in income and output that results from a change in autonomous expenditure.
Multiplier
Multiplier =
1 / (1-MPC)
Macro issues McDonalds faced in 2012.
- Slow US economy recovery.
- Uncertain global economy.
- Young customers hurt by recession.
- Financial crisis in Europe.
- Slowing Chinese economy.
Micro issues McDonalds faced in 2012.
- Pricing of menu items.
- New strategies.
- Price discount/coupons.
- Hiring mystery shoppers.
- Posting calories in menus.
- Remodeling stores and drive thrus.
Demonstrates how much output could be produced with available resources and current technology.
Production Possibility Curve
Why the economy needs to grow?
- Output has to keep increasing if an economy is to stay healthy.
- Population is increasing
- Technology is advancing
- PP curve must keep shifting outward
3 major gauges to measure the macro health of US economy.
- Output (Real GDP) Growth
- Unemployment
- Inflation
Advantages of monetary policy
Flexible
Free to some extent from political pressure.
Disadvantages of monetary policy
Not as effective in stemming recessions as in checking inflation.
Evaluate whether the purchase of a new automobile for private, nonbusiness use is considered to be investment (I) in calculating GDP?
No
Considered consumption spending (C).
Evaluate whether the purchase of a new house is considered to be investment (I) in calculating GDP.
Yes
An investment and construction purchase.
Evaluate whether the purchase of a corporate bond is considered to be investment (I) in calculating GDP.
No
Considered transfer of ownership of existing assets.
Explain whether transfer payments, such as Social Security and unemployment compensation, are counted as government spending in calculating GDP.
No
Represent transfer of income, not production of new goods and services.
Is it true that the value of US imports is added to exports when calculating US GDP because imports reflect spending by Americans? Explain.
No
Imports are subtracted from exports.
Imports are not produced in the US.
Describe the effect of the currency exchange rate on export and import spending.
Exchange rate increases, imports increase because imports become cheap and exports become expensive.
Exchange rate decreases, exports increase because exports become cheap and imports become expensive.
What are the 3 tools the Federal Reserve uses to change the money supply and interest rates in the economy? Which of these tools is most important and why?
Open market operations
Reserve requirements
Discount rate
Open market operations is most important.
Influences the amount of reserves in banking system.
Influences federal fund rate banks charge to each other.
Most flexible and used on daily basis.
Give examples of oligopolistic behavior among the rivals in the fast-food industry.
Matched price cuts
Matched cooking styles
Menu innovations
