Macro Midterm Flashcards
What does GDP measure?
GDP measures the value of production, which also
equals total expenditure on final goods and total
income
What is the circular flow?
the “theoretical” equality of income, expenditure, and the
value of production.
illustrates the flow of real resources and money payments in terms of the expenditures of
households, production of goods and services by business, and the incomes that result, earned in the economy.
Describe the circular flow
Simple model: income and expenditure flow throughout businesses and households. Businesses output goods and services to households, households provide the labour and capital to these businesses (red). Businesses pay households, and households pay income on goods and services (blue)
What does the simple model of the circular flow leave out?
It does not allow households to save (S) or businesses to
invest (I)
It leaves out government expenditures (G) and taxes (T), and
transactions between households and businesses with the
rest of the world
The more realistic circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world
What is the more complicated circular flow equation?
Y = C + I + G + X - M
If (G – NT) < 0
Then money is borrowed from the financial markets
If (G – NT) > 0
Then the government surplus flows to the markets
(directly or indirectly).
If (M – X) > 0
The trade deficit with the rest of the world is solved by
borrowing financial capital from the rest of the world.
How to calculate investment?
I = S + (NT – G) + (X-M)
How to calculate national saving?
NS = S + (NT – G)
What is income-based GDP?
Records the earnings generated by the production of goods and services
The income measure of GDP describes the supply side of
the economy
GDP = W + GCS (corporate profit)+ GMI(Gross mixed income) + TIN(Net indirect taxes)
What is expenditure-based GDP?
Is equal to expenditure on final
goods and services produced
Expenditure-based nominal GDP adds up the market value of all the
final goods and services bought in a given time, say
one year.
What is nominal GDP?
The value of goods and
services produced during a given year valued at the
prices that prevailed in that same year
measures the output of final goods and services at market prices in the economy, and the money incomes
earned by the factors of production.
What is real GDP?
The value of final goods and services
produced in a given year when valued at constant
prices.
Measures the value of goods and services produced in any given year using the prices of a base year
How to calculate GDP deflator?
GDP Deflator = Nominal GDP/Real GDP X 100
Economic growth vs rate of economic growth
Economic growth: an increase in real GDP
Rate of economic growth: the annual percentage change in real
GDP. More precisely it is the percentage change in the quantity of
goods and services produced from one year to the next.
Rate of growth of real GDP equation
Rate of growth of Real GDP = Real GDP in year 2 - Real GDP year 1/Real GDP year 1 X 100
What are the limitations of what GDP can measure?
Quality improvements tend to be neglected in calculating real GDP so the inflation rate is overstated and real GDP understated.
Real GDP does not include household production,omits the underground economy, illegal economic activity, health and life expectancy, leisure time, environmental damage is not deducted from real GDP, political freedom and social justice.
What is the CPI?
Compares the cost of a fixed basket of goods and
services bought by the typical household at a specific
time with the cost of that same basket of goods and
services in the base year.
Often referred to as the “cost of living”
How to calculate CPI inflation?
CPI(new) - CPI(old)/CPI(old) x 100
How to calculate CPI?
CPI/CPI(base) x 100
What is the natural rate of unemployment?
‘full employment’ unemployment
rate observed when the economy is in equilibrium at potential output
What is frictionally unemployed?
Frictional unemployment occurs because job matching isn’t always perfect.
What is the relationship between a worker’s real wage and nominal wage when there is no inflation?
Real wage and nominal wage are the same
Real variables are nominal variables adjusted for inflation. If there is no inflation, then the real and nominal variables are the same.
What is included in the natural rate of unemployment (NRU)
frictional unemployment and structural unemployment
How to calculate nominal GDP?
Nominal GDP = real gdp x deflator/100
How to calculate real GDP with base year?
To calculate Real GDP, we use base year prices and multiply them by current year quantities for all the goods and services produced in an economy.
The four phases of the business cycle in the correct order?
Trough, expansion, peak, and recession
How to calculate real change when given inflation?
CPI(new)-CPI(base)/CPI(base) x 100
And then! subtract inflation
What measure is the value of the final output produced within the geographic borders of a country?
Gross domestic product (GDP)
What is potential output?
what can be produced if the economy were operating at maximum sustainable employment,
Macroeconomics vs Microeconomics?
Macroeconomics studies the economy as a system in which linkages and feedbacks
among sectors determine national output, employment and prices, while microeconomics is the study of individual behaviour in
the context of scarcity
What is Mixed economy?
Goods and services are supplied both by private suppliers and government
What is Opportunity cost?
A choice is what must be sacrificed when a choice is made
What is Production possibility frontier?
Defines the combination of goods that can be produced using all of the resources
available.
What is Consumption possibility frontier?
the combination of goods that can be consumed as a result of a given
production choice
What is Aggregate demand?
The negative relationship between planned aggregate expenditure on final goods and services and
the price level, assuming all other conditions in the economy are constant
What is aggregate supply?
the positive relationship between outputs of goods and services and the price level, assuming factor
prices, capital stock, and technology are constant.
What is potential output?
the output the economy can produce on an ongoing basis with given labour, capital, and technology
without putting persistent upward pressure on prices or inflation rates
What is Growth in potential output?
Comes from growth in the labour force and growth in labour productivity coming from
improvements in technology as a result of investment in fixed and human capital
What are Business cycles?
The short-run fluctuations in real GDP and employment relative to Potential Output (GDP) and full
employment caused by short-run changes in aggregate demand and supply
What are Output gaps?
The differences between actual real GDP and potential GDP that occur during business cycles.
What are Inflationary
gaps and recessionary gaps?
The terms used to describe positive and negative output gaps based on the effects the
gaps have on factor prices
When does actual output adjust to potential output?
If factor input and final output prices are flexible and changes in prices
shift the aggregate supply curve to equilibrium with aggregate demand at YP.
What are fiscal and monetary policy
Tools governments and monetary authorities can use to stabilize real output and employment
or speed up the economy’s adjustment to output gaps.
What is our P’s and Q’s in macro?
Q= real GDP
P= price level
What happens to interest rates if price levels go up?
Interest rates go up (real GDP shrinks)
What is the assumption about GDP in the long-run?
It does not depend on prices (vertical line)
How does an AD shock effect the short-run?
Demand shock impact on rGDP impact on unemployment impact on price level
↑ AD ↑ rGDP ↓ UR ↑ PL
↓ AD ↓ rGDP ↑ UR ↓ PL
How does a SRAS shock effect the short-run?
Supply shock impact on rGDP impact on unemployment impact on price level
↑SRAS ↑rGDP ↓ UR ↓ PL
↓SRAS ↓rGDP ↑ UR ↑ PL
When do output increase?
In the short-run
Why is the employment rate preferred to the unemployment rate?
The health of an economy can be distorted by the unemployment rate, and the employment rate is more stable. Can make unemployment look lower, discouraged worker effect
What is the unemployment equation?
unemployed/#employed + #unemployed (labour force) x 100
What is the formula for output gaps?
actual output- potential output/potential output
What is the formula for population rate?
LF/population 15+ x 100
What is the formula for employment rate?
employed/population 15+ x 100
How to calculate PPP?
Cost of Good X in Currency 1 / Cost of Good X in Currency 2
