Introduction to Macroeconomics Flashcards
What is GDP?
Market value of all goods and services newly produced within a country in a given period of time at base year prices.
What are omitters from GDP?
Hidden markets (black markets), externalities (pollution), quality of life (health or leisure time)
Different ways to measure GDP
Value approach
Expenditure approach
Income approach
What is the value-added approach?
Value added is the value of a firm’s goods (end product) minus the value of the intermediate goods (input) it buys from other firms.
Revenue- cost of intermediate goods
What is the expenditure approach?
GDP (Y)= Consumption (C) + Investment (I) + Government expenditure (G) + Net Exports (NX)
What is Gross National Product?
Total income received by Canadians regardless of the geographic source of the income. Basically GDP + foreign investments
What is disposable income?
Income after tax
What is the difference between nominal GDP and real GDP?
Nominal GDP is the total value of goods and services at current year prices.
Real GDP is the total value of goods and services at base year prices.
Why do we have a base year prices?
Base year gives us something to compare to because of inflation.
What makes a recession and a depression?
A recession is two or more quarters of downturn, and a depression is more severe recession.
What is a recessionary gap and what is an inflationary gap?
A recessionary gap is when real (actual) GDP is lower than potential GDP. Whereas an inflationary gap is when actual GDP (Y) is higher than potential GDP (Y*).
What is the difference between real GDP and potential GDP?
Real GDP is the value of output an economy actually produced. Potential GDP is the value of output an economy could produce if all of its resources (labor and capital) are used at full capacity. (normal utilization rate)
What is important distinction between normal utilization rate (potential GDP) and maximum utilization rate (maximum GDP)?
The normal utilization rate is the rate at which is expected to be utilized (working 8 hours/day), while maximum utilization rate is the highest possible rate to be utilized at (working 24 hours/day).
Why should people be more focused on potential GDP rather than real GDP?
Potential GDP is the projection, which is more stable. Real GDP is the business cycle which has constant peaks and troughs.
What is included in the working age population?
Everyone aged 15 or older is in one of three categories: employed, unemployed and not in the labor force (students, elderly).
Equation for unemployment rate
Total number of people unemployed/ total labor force x100
Equation for labor force participation rate
labor force/ working-age population x 100
What is inflation?
Inflation refers to an increase in the overall price level.
Equation for inflation
New price level- old price level/ old price level
Equation for Consumer Price Index (CPI)
Fixed basket at current prices/ fixed basket at base year prices x 100
GDP deflator equation
nominal GDP/ real GDP x 100
What are the different government policies and what are they?
Monetary policy= Changes in money supply and interest rate.
Fiscal policy= Spending and taxation decisions made by federal and provincial governments.
What is the exchange rate, depreciation and appreciation?
Exchange rate is how many Canadian dollars it takes to buy one unit of foreign currency.
Depreciation= Costing more to buy foreign currency.
Appreciation= Costing less to buy foreign currency.
How to calculate % change in nominal GDP
% change in real GDP + change in price level (inflation)
How to calculate real GDP given both GDP deflator and nominal GDP
Real GDP= nominal/ GDP deflator x 100
What does it mean when GDP decreases?
Either prices of goods and services decreased, or the economy produced fewer goods and services.
What does fixed basket mean?
Multiplying the quantity of each item times its price (revenue).
How to calculate after-tax interest rate?
After-tax nominal interest rate - rate of inflation
What happens to the price of the Canadian dollar and net exports after the interest rate in Canada decreases?
When the interest rate in Canada decreases it means Canadian bonds are less attractive and people are exchanging Canadian dollars for foreign currency, depreciating the value of the Canadian dollar. As a result, goods and services in Canada cost less and are then more valuable to the rest of the world- exports increase. Also, because the Canadian dollar has depreciated importing from other countries is more costly and will be done less.
Equation for real interest rate
Nominal interest rate - inflation rate
What does countries standard of living reflect?
The goods and services individuals consume on average and is measured by real GDP per capita (per person).
