Macro Perspective Flashcards
What are the goals of macroeconomics?
Economic Growth
Low Unemployment
Low Inflation
What is the framework an economist can use to analyze the Macroeconomy?
Aggregate Demand and Supply
Keynesian Model
Neoclassical Model
What are the policy tools governments can use to manage the macroeconomy?
Monetary Policy
Fiscal Policy
How is economic growth measured, why is it important to understand, and what is the goal growth rate?
Percentage change in real GDP
Economic growth determines the prevailing standard of living in a country
growth rate between 2-4% is ideal
How is unemployment measured, and why is it good to keep it low, how low is low?
Measured by the unemployment rate.
Total employed / total workforce
When a country has unemployment it is wasting its labor resource to produce goods
Under 5% is considered low
What is inflation, why do we care, and what is the goal for inflation rates?
Inflation is the overall increase in price levels measured by the CPI
If many people face prices rising faster than their wages there will be widespread unhappiness as the standard of living declines
low inflation is 1-2%
What is nominal GDP, and what does it measure?
the value of all final goods and services produced within a country in a given year.
It is used to measure the overall size of a nations economy
What are the four main components of Demand GDP
C - Consumption, Consumer Spending
I - Investment, Business Spending (this is where jobs are created)
G - Government Spending
Nx - Net Exports
How do the components of Demand GDP account for total GDP?
Consumption - 60% - 70%
Investment - 15 - 20%
Government Spending - 20%
What are the five Supply side GDP components?
Durable Goods
Nondurable Goods
Services
Structures
Change in inventories
What is GNP, and how is it calculated?
Gross National Product
GDP - wages made domestically by foreign workers
What is NNP, and how is it calculated?
Net National Product
GNP - depreciation of physical capital
What does GDP not tell us about the economy?
It tells us how large the economy is as a whole, however, it does not tell us the overall well being of the laborers inside the country
What is a GDP deflator, and how does it help to understand an economy’s growth?
GDP deflator is a price index measuring the average prices of all goods and services within an economy
In order to see how much the GDP has actually risen, we need to remove inflation from nominal GDP
What is Real GDP, and how do you calculate it?
Real GDP compares the growth of GDP in terms of a base years prices. It removes inflation to see how much the economy has grown.
Real GDP = Nominal GDP / (price index/100)
How do you calculate the % change in nominal GDP?
% change in nominal = % change in P + % change in Q
What is the difference between a recession and a depression?
Recession - a significant decline in Real GDP
Depression - a lengthy and deep recession
What is the business cycle, and what are the movements within a business cycle?
The business cycle is the movement of the economy in and out of a recession and rarely a depression.
Peak - is the highest point of an economy before it contracts and moves into a recession
Trough - is the lowest point of a recession before moving into an expansion
On average, how often does the US see a recession, and how long do they typically last?
Since WW2 the US has experienced a recession every six years.
They tend to last roughly 11 months
If the US sees a recession every 6 years, how long do the expansions last?
Since recessions happen every 6 years, and typically last 11 months, there is roughly 5 years of expansion before we will se the next recession
How do you compare GDP’s of two different countries, and what is the formula?
You must convert to a common denominator using an exchange rate
GDPa in b’s $ = GDPa / Exchange Rate
How do you calculate GDP per capita?
Total GDP / Total Population
The central African Republic has a GDP of 1.1 Trillion CFA francs and a population of 4.8 million. The current exchange rate is 286 CFA francs per US Dollar. Calculate the GDP per capita in US dollars.
First get the foreign currency into US dollars
1.1 Trillion / 286 francs per dollar = 3.8 billion US dollars
Now take the GDP in US dollars by the total population
3.8 billion / 4.8 million = $801 = GDP per capita
Does a rise in GDP overstate or understate the rise in the standard of living in the US?
Because GDP does not capture leisure, health, environmental factors, new technology, or increases in varieties, the actual rise in standard of living in the US has exceeded the rise in GDP.
