Macro Quiz 2 Flashcards
What does GDP measure
total income of everyone in the economy and the total expenditure on the economy’s output of goods and service
True or False: income must equal expenditure
True
How to compute GDP
adding up all the expenditure by households or by adding up all the income
Gross Domestic Product
market value of all final goods and services produced within a country in a given period
What does GDP exclude?
illegal drugs, vegetables grown at home
Intermediate good
excluded from GDP since already included in price of final goods, ex. microchip needed for computer
Goods and services
included in GDP
Produced
GDP includes goods and services currently produced, but not transactions involving items produced in the past
Can GDP account for goods from another country?
GDP measures the value of production with in the geographic confines of a country, items are included in a nation’s GDP if they are produced domestically, regardless of the nationality of the producer
What period is GDP accounting for?
Value of production that takes place within a specific interval of time, usually a year or a quarter (three months), measures flow of income, as well as its flow of expenditures
Seasonal Adjustment
Government statisticians adjust the quarterly data to take out the seasonal cycle ex. Christmas
Gross domestic income
GDP and GDI come up with almost the same number, the difference is called statistical discrepancy
GDP equation
Y = C + I + G + NX
Investment
purchase of goods (capital goods) that will be used in the future to produce more goods and services
Consumption
spending by households on goods and services except for purchases of new housing
Government purchases
measure spending on goods and services by federal, state, and local governments
Net exports
equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports)
Real GDP
uses constant base-year prices to value the economy’s production
Nominal GDP
uses current prices to value the economy’s production of goods and services
GDP Deflator
GDP deflator = nominal GDP/real GDP x 100, measures the current price level relative to the price level in the base year
Inflation
describe situation in which the economy’s overall price level is rising, Inflation rate = (GDP deflator in year 2-GDP deflator in year 1) x 100
Graphically, what do shaded vertical bars represent?
recessions
CPI
consumer price index, used to monitor changes in the cost of living, measures the overall cost of goods and services bought by a typical consumer
Who computes the CPI?
Bureau of Labor Statistics (BLS)
CPI equation
CPI = (price of basket of goods/services in current year)/(price of basket in base year) x 100
Produce price index
measures the prices of output of domestic producers
Problem 1 w/ CPI: Substitution bias
consumers substitute toward goods that become relatively less expensive e
Problem 2 w/ CPI: Introduction of new goods
when a new good is introduced, consumers have more variety from which to choose, which in turn reduces the cost of maintaining the same level of economic well-being
Problem 3 w/ CPI: unmeasured quality change
quality of good deteriorates from one year to the next while its price remains the same, you are getting a lesser good for the same amount of money, so the value of a dollar falls
Difference between GDP deflator and CPI
GDP: reflect price of goods and services produced domestically, currently produced goods and services with the price of those goods and services in the base year
CPI: reflects price of goods and services bought by consumers, fixed basket of goods and services with the price of the basket in base year
Equation for turning dollar figures from year T into today’s dollars
amount in today’s dollars = amount in year T dollars x (price level today/price level in year T)
Indexed for inflation
price indexes are used to correct for the effects of inflation when comparing dollar figures from different times
COLA
cost-of-living allowance
Real interest rate equation
corrected for inflation, real interest rate = nominal interest rate - inflation rate
CPI Equation
(cost current year/cost base year) x 100
Inflation Rate
((CPIcurrent - CPIbase)/CPIbase) x 100
Nominal GDP equation
sum (P x Q)
GDP Deflator
(nominal GDP / real GDP) x 100
Amount in today’s dollars
amount in year T dollars x (price level today/price level in year T)
