Macro 1 Flashcards
How to measure High sustained economic growth, stable prices and low unemployment?
High and sustained economic growth: Real GDP, Real GDP per Capita
Stable prices: Consumer Price index
Low Unemployment: Unemployment rate
What is the purpose of an economy?
Economic production
What is economic production?
participants make goods and services (g&s), that satisfy one another’s needs and wants
What are the difference between goods and services?
Goods: tangible objects, ownership can be transferred, e.g., T-shirt
Services: enjoyed while produced, inseparable from their production, e.g., hairdressing
What is economic growth?
rise in economic production per period
Why is economic growth desired? Give 3 reasons
improvements in living standards and well-being
Provides society with a sense of progress
Helps society avoid conflicts over distribution
What is the definition of GDP? and the meaning of each part?
Total monetary value of final goods and services produced in a country during a given time period
“Final”: sold to final user
“in a country”: geographical boundaries of countries (and embassy)
“in a given period” : GDP IS FLOW VARIABLE (measured across calender year)
What are the weights in gdp?
GDP is a weighted sum of g&s, with the monetary values as weights
What requires indirect measurement of monetary value to be counted in GDP?
Financial Serivces: spread(diff between interest earned on loans and interest paid on deposits)
Housing service: rent paid for similar houses
When are monetary values estimated by cost of production?
G&S produced by governments and non-profits
Specialized equipment produced for firms’ own use
What is the difference between stock and flow variable?
stock: Measured at a point in time
flow: Measured across a period
What are the 3 approaches to GDP calculation?
Expenditure
Value added
Factor Payments
What is the formula and purpose of expenditure appraoch?
C+I+G+X-M
expenditure approach shows imptance of expenditure component
Does consumption include purchase of new homes
NO
Does value of housing services included in consumption?
Yes
What is private investment?
g&s purchased by business firms as final users.
include expenditure on capital goods and change in inventories (NOT QTY OF INVENTORIES)
What are capital goods?
goods made to help produce other g&s
Machinery, equipment
Infrastructure, e.g., roads, buildings
Intellectual property products, e.g., software, databases, original literary works
What consist of inventories?
goods stored by firms for future use
Could be produced by the firm, or purchased from other firms
Could be finished products, or components
Does government expenditure include transfers to householdds? What does it include?
NO
Government consumption(pantry supply for govt) and government investment
Are C, I and G included in imports?
YES
What is the formula for each firm’s value added approach of GDP?
Value of Goods and Services - value of intermediate goods and services it used up
For gdp have to sum everything up
What is the income approach ?
sum of value added = sum of factor incomes
Wages, Interest, Rent, Profit
What is the formula for percentage change?
Growth rate = rate of change per unit time = (Current – Previous) / Previous
Why must we use Real GDP?
filter out the impact of price changes
What are the steps to use chain linked method?
For any two adjacent years (previous, current), compute growth rates via fixed-base method, using previous year prices
Then, choose a base year (a.k.a. reference year)
Use the growth rates to compute RGDP for all other years, with the reference year GDP as the anchor
What are the 2 problems of gdp?
Measurement problems
Problems with using GDP as an indicator of well-being
What are some measurements problem of GDP?
(changes in quality, higher quality should be counted as more production)
Underground economy: hard to obtain, affected by changes in data reporting and legality
What is inflation rate?
% change in price level per unit of time
Or if use cpi:
New cpi -old cpi / old cpi
What is the formula of CPI of current year, given cost of basket in current and base year?
CPI= 100 X (cost of basket in current year/ cost of basket in BASE year)
How to calculate the real value givevn the nominal value?
Real value= Nominal value x (100/CPI)
What is in basket of goods and services for EU worldwide cost of living index ?
160 items consumed by expatriate households
New york city as base city
What is the fisher equation?
Real interest rate= nominal - inflation rate
What are some problems of using CPI?
Substitution bias and outlet bias
Quality change bias (ok to pay more for higher quality products) and New goods bias (products tend to fall in price and improve quality IN EARLY YEARS)
What is substitution bias?
If price of good a increase faster than good b, then people buy less of good a and more good b. (Substitution)
Does cpi inflation rate understate actual inflation experience
FALSE
OVERSTATES ACTUAL INFLAITON EXPERIENCE (upward bias)
What is outlet bias
As prices increase, consumers shift purchases from more expensive mainstream stores to cheaper discount outlets and online retailers (online retailers less represented in statistical authorities)
What is the inflation goal?
inflation predictable, low, and positive
Inflation does not destroy average purchasing power. T/F
True. BUT CAN LEAD TO REDISTRIBUTION OF POWER
Why shoyld we keep inflation predictable?
reduces unintended redistribution of purchasing power
How to correct for inlation when it comes to loans?
indexed to inflation
make loan agreement where nominal interest rate is ir + cpi inflation rate
How is high inflation costly to society?
can distort relative price signals, causing misallocation of resources
seller changing price often means high menu cost
shoe leather costs from minimising money holdings
Why is deflation bad?
In anticipation of lower future prices, households and firms may postpone their purchases
loan defaults and bankruptcy increase, economic activity disrupted
What are the 3 types of unemploymenet and what?
frictional unn- in between jobs or entering labour market (made worse if gpvt proivide unn insurance)
structural unn- skill mismatch, geographic mismatch, labour market impediment(high min wage etc)
cyclical unn- flucturation in unn from change in production over business cycles
What is full employment?
zero cyclical unn
other types still present
What are the 2 labour utilisation indicators and formula
labour force participatiopn rate: labour force/able to work
employment rate: employed/able to work
What are U-4 to U-6 rate?
U-4: (unn +discouraged)/ (employed+ unn + discouraged)
U-5: (unn+ discourageed+ marginally attached)/ (employed+ unn + discouraged + marginally attached)
u-6: (unn+ discourageed+ marginally attached + INVOLUNTARY PART TIME)/ (employed+ unn + discouraged + marginally attached)
