Intro & Topic 1: Output and Prices Flashcards
1
Q
GDP (2)
A
- market value of the final goods and services produced in a country during a given period of time
- gdp considers cost of provisions
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2
Q
value added method (production method) (1)
A
- portion of the value of the final goods or service that firm creates in its stage of production
3
Q
expenditure method (2)
A
- assume unsold products as inventories and assume they are bought
- gdp measured as the sum of expenditure on domestic production
4
Q
consumption expenditure (1)
A
- spending by households on goods and services, either domestically or foreign produced
5
Q
private investment expenditure (1)
A
- spending by firms on final goods and services
6
Q
gross investment (1)
A
- total amount on purchases of new capital and on replacing depreciated capital
7
Q
government purchases (2)
A
- purchases by all levels of government of final goods and services
- does not include transfer payments (unemployment benefits)
8
Q
transfer payments (1)
A
- unemployment benefits
9
Q
net exports (1)
A
- exports minus imports
10
Q
the income method (2)
A
- Measures gdp by summing the incomes that firms pay households for the inputs they hire
- Includes business profits.
11
Q
real and nominal gdp (2, 2 examples)
A
- pick a year = base year
- use prices of that year to calculate the market value of final products
- first year price * quantity
- 2nd year price * quantity
Nominal GDP:
The current monetary value that is not adjusted for inflation.
Real GDP:
Takes into account effects of inflation.
Nominal wages have increased by 8% but inflation is 6.5%. Increase in real wages = 1.5%
Nominal interest rate is 3% while inflation rate 2%. Real interest rate is 1%.
12
Q
cpi (3)
A
- Consumer Price Index
- could overstates level of inflation
- > quality adjustment bias
- -> quality improvement over time in goods and services are difficult to adjust for
- > substitution bias
- -> higher prices in good X leads to more purchases of good Y if they are able to be substituted. This can mean the inflation could be overstated. Example is an increase in prices of apples compared to the decrease in prices of oranges.
13
Q
nominal interest rate (3)
A
- # of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent
- annual interest paid is 25 / 500, = 5%
- does not take inflation into consideration
14
Q
real interest rate (2)
A
- adjust for inflation
- real return from savings and real cost of borrowings
15
Q
deflation (2)
A
- fall in average price level
- increases real cost of borrowing money
- consumers reluctant to consume
- firms are reluctant to make investment
- increases burden of debts
