macro ch24 & 25 Flashcards
what does GDP measure?
total production/income/consumption of everyone in the economy.
what are the 3 basic methods used to measure GDP
the output method – we add up the value of all the goods and
services produced in the economy.
o the income method – we add up what is earned by people
and firms in the economy → wages, rents, profits, etc.
o the spending method – we add up what all the components of
the economy (people, firms, gov’t) spend on goods + services.
For the economy as a whole does income equals expenditure? Why or why not?
it DOES because every dollar a buyer spends is a dollar of income for the seller.
what are some factors of production?
inputs like labor, land, capital, and
natural resources.
what are factor payments
payments for the factors of production (e.g., wages, rent, interest).
what is GDP?
what is excluded from it?
the (1) market value of (2) all final goods & services produced
(3) within a country (4) in a given period of time.
-goods and services you produced for YOURSELF have NO market value
-intermediate goods to avoid miscalculation
what is the difference between final goods and intermediate goods?
final goods: a good that is ultimately consumed, rather than used in the production of another good.
intermediate goods: used as components or ingredients in the
production of other goods.
what is the difference between tangible and intangible goods
tangible goods → stuff you can touch, like iPads, kayaks, beer
* intangible goods → stuff you can’t touch, like haircuts, dry cleaning, Buckethead concert tickets, cell phone service.
both apart of GDP
what is GNP
(gross national product) – measures activity by US
persons, no matter where they take place.
how often is GDP measured?
quarterly ( every 3 months)
what are the components of GDP
Y (income) = (C)onsumption + (I)nvestment + (G)overnment expenditures + NX
C= spending by people
I= spending by firms (not purchasing stocks and bonds)
G=spending by the government (excludes transfer payments, such as Social Security or
unemployment insurance benefits)
NX= exports-imports (typically always negative)
what is the special rule for housing
for homeowners, consumption includes the imputed rental value of the house [what you could rent it for], but not the purchase price or mortgage payments.
how does inventory work and what is it
it is components of
final goods; final goods that
are complete and ready to be sold but not sold yet
if production > sales, inventories increase
if production < sales, inventories decrease
what is mercantilism
the belief that countries are more
prosperous when they export more than they import.
what type of GDP is corrected for inflation
Real GDP
how do you calculate percentage changes
new-old/old
what do the changes in real and nominal GDP reflect
Real: only changes in the amounts being produced.
Nominal: changes in both prices and
quantities.
what are the 3 ways to measure inflation
- GDP deflator (100*Nominal GDP/Real GDP)
- CPI (consumer price index)
- PCE (Personal consumption expenditures price index) - feds prefer this
what does CPI measure
measures change in the typical costs faced by the typical consumer (that is, it only assesses some costs of some people)
How do we calculate CPI and
then the inflation rate?
- Find the “basket” – the collection of things a typical
consumer buys regularly. - Find the prices of the goods and services in the basket.
- Compute the total cost of the goods and services in the
basket. - Choose a base year and compute the index. (100 x
cost of basket in current year/
cost of basket in base year) - Compute the inflation rate. (100 x new CPI - old CPI/ old CPI)
What’s in the CPI “basket”
all goods and
services that people TYPICALLY
purchase for consumption. they don’t care about stuff that
people don’t buy regularly
what is substitution bias
when some prices rise faster than others and consumers substitute toward goods that become relatively cheaper
PCE fixes this
what is unmeasured quality change
when firms are constantly improving the quality of their products, making it hard to make meaningful price comparisons over time.
what is introduction of new goods
it increases variety and allows
consumers to find products that more closely meet their needs.
the same number of dollars buys more happiness= utility increases
in effect, a dollar becomes more valuable → each dollar spent delivers more utility.
which 3 problems causes CPI to overstate the increases in the cost of living
substitution bias
introduction of new goods
& unmeasured quality change
How is the CPI different from the GDP deflator?
Imported consumer goods:
included in CPI
excluded from GDP deflator
The basket:
CPI uses fixed basket
GDP deflator uses basket of
currently produced goods & services
This matters if different prices are changing by different amounts.
Capital goods:
excluded from CPI
included in GDP deflator (if produced domestically)
how do you compare dollar figures from different times
Amount in today’s dollars=
Amount in year T dollars *
Price level (CPI) today/Price level (CPI) in year T
what is indexing
it is correcting variables for inflation
A dollar amount is indexed for inflation if it is automatically
corrected for inflation by law or in a contract.
