Introduction Flashcards
What is the study of macroeconomics focused on?
The economy as a whole.
What are some key questions macroeconomics seeks to answer?
- Why do some countries experience rapid income growth while others remain in poverty?
- Why do some countries have high inflation rates while others maintain stable prices?
- How can government policy reduce the frequency and severity of recessions and depressions?
How does the state of the economy affect political popularity?
Popularity rises when the economy performs well and falls when it does poorly.
What three macroeconomic variables are especially important?
- Real GDP
- Inflation rate
- Unemployment rate
What does real GDP measure?
The total income of everyone in the economy, adjusted for inflation.
What is the definition of inflation?
The process in which there is a continuous increase in the general price level.
What is disinflation?
A slowdown in the rate of inflation.
What is deflation?
A decrease in the general prices of goods and services within an economy.
What is a recession?
A mild period of falling real GDP.
What is a depression?
A severe period of falling real GDP.
What do economists use models for?
To understand the relationships among economic variables.
What are endogenous variables?
Variables that the model tries to explain.
What are exogenous variables?
Variables that a model takes as given.
What is the purpose of a model in economics?
To show how exogenous variables affect endogenous variables.
In the pizza market model, what do Qd and Qs represent?
- Qd: Quantity of pizza demanded
- Qs: Quantity of pizza supplied
What is the national income accounts identity?
Y = C + I + G + NX
What does GDP stand for?
Gross Domestic Product.
What is GDP a measure of?
The nation’s total income and total expenditure on its output of goods and services.
What are the four broad categories of spending in GDP?
- Consumption
- Investment
- Government Purchases
- Net Exports
What is consumption in the context of GDP?
Goods and services bought by households.
What is investment in the context of GDP?
Goods bought for future use.
What are government purchases in GDP?
Goods and services bought by national and local governments.
What are net exports?
The value of exports minus the value of imports.
What is the definition of GDP in terms of final sales?
The sum of final sales within a geographic location during a period of time.
What is the difference between final sales and intermediate sales?
Final sales are sold to consumers or firms that will ultimately use them, while intermediate sales are not.
What is the income method definition of GDP?
The sum of factor incomes earned from economic activities within a geographic location during a period of time.
What must GDP measures be converted into for comparison across countries?
A common currency.
What is a flow variable?
A variable defined over a time interval, such as GDP.
What is a stock variable?
A variable defined at a particular point in time.
What is the significance of GDP growth?
It serves as an important indicator of an economy’s health.
Fill in the blank: Economists believe that _______ is a good assumption for studying long-run issues.
price flexibility.
Fill in the blank: Economists believe that _______ is a better assumption for studying short-run issues.
price stickiness.
What is the definition of GDP according to the income method?
The sum of factor incomes earned from economic activities within a geographic location during a period of time.
GDP measures the total income generated by the economic activities in a specific area.
What are the two reasons why GDP can increase over time?
- More real economic activity
- Higher prices for the same economic activity
Understanding these reasons helps in analyzing economic growth.
Why is GDP per capita often used for comparison?
It divides the GDP measures by the population, allowing for better comparison among small countries with small GDPs.
This provides a clearer picture of individual wealth and living standards.
What type of transactions are excluded from GDP calculations?
Transactions in commodities such as old existing houses.
Only newly constructed houses are counted, while the value of agents’ fees in the sale of existing houses is included.
What activities are poorly measured in GDP calculations?
- Homemaking
- Volunteer work
- Activities that represent the use of resources to avoid ‘bads’
These activities often do not have a market value and are not easily quantified.
What is the underground economy?
The part of the economy that people hide from the government, often to evade taxation or because the activity is illegal.
Examples include domestic workers paid ‘off the books’ and the illegal drug trade.
What is the difference between real GDP and nominal GDP?
Real GDP is adjusted for inflation and measured using constant prices, while nominal GDP is measured at current prices without adjustment for inflation.
This distinction helps clarify the actual economic output versus inflationary effects.
How is nominal GDP calculated?
Nominal GDP = PmQm + PfQf, where Pm and Pf are prices, and Qm and Qf are quantities of goods sold.
This formula reflects the total market value of all final goods and services produced in a given period.
What does the GDP deflator measure?
The ratio of nominal GDP to real GDP, reflecting the overall level of prices in the economy.
It helps separate price changes from quantity changes in economic output.
What is personal disposable income?
The amount households actually receive to spend or save after taxes and other deductions.
This figure is crucial for understanding the economic well-being of individuals.
What does Net Domestic Product (NDP) represent?
The total value of production minus the value of the amount of capital used up in producing that output.
NDP provides a clearer picture of available income after accounting for depreciation.
What are indirect business taxes?
Taxes such as sales taxes and Value-Added-Tax (VAT) that create a wedge between the price consumers pay and the income firms receive.
These taxes are collected by sellers on behalf of the government.
What are the five categories into which national income is divided?
- Compensation to employees
- Proprietors income
- Rental income
- Corporate profits
- Net interest
This categorization helps analyze how income is distributed among different factors of production.
What is Gross National Product (GNP)?
The value of final goods and services produced by domestically owned factors of production within a given period.
GNP accounts for income earned by nationals abroad and excludes income earned by foreigners domestically.
How do you calculate personal income from national income?
By adjusting national income for corporate profits not paid out, government transfers, and household interest earnings.
These adjustments provide a more accurate measure of income available to households.
Fill in the blank: The GDP deflator is used to ______ nominal GDP to yield real GDP.
deflate
This process removes the effects of inflation from nominal GDP.
True or False: All economic activities are reflected in GDP calculations.
False
Many activities, such as informal work or volunteer efforts, are not captured in GDP.
What does GNP stand for?
Gross National Product
GNP is the value of final goods and services produced by domestically owned factors of production within a given period.
How is GNP calculated?
GNP = GDP + net factor incomes
Net factor incomes are the incomes from abroad minus the incomes to abroad.
What does it indicate if GNP exceeds GDP?
More income is earned by the country’s factors of production abroad than is earned by foreign factors in the country.
What is a GDP deflator?
A measure used to calculate inflation by comparing nominal GDP to real GDP.
What is a price index?
An average of prices with fixed weights based on a selected basket of goods.
What is the Consumer Price Index (CPI)?
A measure based on a basket of goods consumed by a representative individual.
What does the unemployment rate represent?
The percentage of the labor force that is unemployed.
How is the labor force defined?
The sum of the employed and unemployed.
What is the formula for calculating the unemployment rate?
(Number of unemployed / Labor force) × 100.
What is Okun’s Law?
The negative relationship between unemployment and real GDP.
What does Okun’s law suggest about real GDP growth when the unemployment rate remains the same?
Real GDP grows by about 3 percent.
If the unemployment rate rises by 1 percentage point, how does it affect GDP growth according to Okun’s law?
Real GDP growth typically falls by 2 percent.
What is the labor-force participation rate?
The percentage of the adult population that is in the labor force.
What is the current unemployment rate in the example given?
4.0%
This is calculated from the provided labor force data.
What is the labor force in the example provided?
140.9 million.
What is the significance of the base year in CPI?
It allows for comparison of current prices to prices in the base year.
What are endogenous variables in macroeconomics?
Variables that are determined within the model.
What are exogenous variables in macroeconomics?
Variables that are determined outside the model.
What is market clearing?
The situation where supply equals demand.
What is meant by flexible prices?
Prices that can adjust to changes in supply and demand.
What is the classical model in macroeconomics?
A framework that emphasizes the self-regulating nature of markets.
What does Say’s Law state?
Supply creates its own demand.
What is the quantity theory of money?
A theory that links the quantity of money in an economy to the level of prices of goods and services.
What is the Cambridge cash balance approach?
An alternative version of the quantity theory of money which emphasizes the demand for money.
What are the effects of youth unemployment?
Economic instability, increased poverty, and social issues.
What should a report on youth unemployment in Zambia include?
Current state of youth unemployment, its effects, actions by economic policy bodies, and recommendations.
What is the deadline for the youth unemployment report?
30th August 2023.
What is the importance of referencing in the report?
To provide credibility and support for the claims made.
