Macro Flashcards
Macroeconomics
study of economics as a whole
policy makers:
manage interest rates to intervene to try to better the economy
interest rate
the percentage charged by a lender to a borrower for the use of money
three main factors are used to assess the overall health and performance of an economy
real gdp/gdp per capita
inflation rate
labor force (unemployment rate)
endogenous variables:
dependant variables (determined in the model)
exogenous variable
independent variables (determined outside of the model)
classic theory of macro economics
states that prices are flexible and move immediately to adequate supplier demand at the moment
modern theory of macro economics
prices take a while to adapt
agents in the model
->households
->firms
->government (regulate laws)
->financial institutions
->rest of the world
GDP
gross domestic product (normally defined as Y)
total monetary or market value of all finished goods and services of a country produced in a specific time period
Gdp growth rate
GDP Growth Rate=
(GDP current period - GDP in previous period)/GDP in previous period x 100
Expenditure approach GDP
GDP=C+I+G+(NX)
C (Consumption): Total spending by households on goods and services durable goods, nondurable goods and services
I (Investment): Total spending on capital goods that will be used for future production.
G (Government Spending): Total government expenditures on goods and services.
NX (net export)=(exports - imports)
Income Approach GDP
Compensation of employees+Gross profits for incorporated and unincorporated firms+Interest and rents+Taxes on production and imports−Subsidies
This method calculates GDP by summing up all incomes earned in the production of goods and services.
Production (Output) Approach
GDP=Gross value of output−Value of intermediate consumption
This method calculates GDP by summing the value added at each stage of production across all industries.
Value Added: The value of a firm’s output minus the value of the inputs it purchases from other firms
GNI/GNP definition
Gross National Income/product
total amount of money earned by a nation’s people and business
it’s the gdp + the business or workers that are overseas
here nationality is important
GNI= GDP + income from abroad - income sent abroad
NNI
total income earned by a country’s residents and businesses, minus depreciation (also known as capital consumption).
show you that a country depreciation is high or not if NNI is so much lower than GNI that means something is wrong in the economy
if total spending rises from one year to the next it could be 2 sources
the economy is producing more output of resources and services
increase in prices
Nominal GDP ;
Nominal GDP is the total value of all final goods and services produced within a country’s borders in a given time period, measured using current prices during the period in which the goods and services are produced.
Real GDP :
when you find a base year you neeed to fix on the price for the other years in order to calculate real gdp
It is adjusted for inflation and give more accurate estimates of economic growth
Inflation
It is the rate at which services or goods rises in price
It is measured by the gdp deflator
(GDP deflator year 2- GDP def year 1)/GDP def year one x 100
GDP deflator
Nominal GDP / Real GDP x 100
CPI (consumer price index)
reflects changes in prices of consumer goods and services purchased by typical urban households
key indicator of inflation at the consumer level and is used to adjust wages, salaries, and pensions, as well as to set monetary policy.
Measures changes in the cost of living for consumers by tracking the prices of a fixed “basket” of goods and services typically purchased by households.
CPI=100×(Cost of basket in base period/Cost of basket in current period)
Real vs. Nominal Interest Rate:
Nominal Interest Rate (i): The interest rate unadjusted for inflation.
Real Interest Rate (r): Adjusted for inflation and represents the true cost of borrowing.
Formula: R= i−π (where π = is the inflation rate.)
PCE Deflator:
The Personal Consumption Expenditures (PCE) Deflator measures price changes in consumer goods and services, similar to CPI but with a variable basket, often preferred by the Federal Reserve.
Why the CPI may overstate inflation
Substitution bias:
The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen.
Introduction of new goods:
The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI because the CPI uses fixed weights.
Unmeasured changes in quality:
Quality improvements increase the value of the dollar but are often not fully measured.
