Macroeconomic Aggregates Flashcards
Macroeconomics
1) Studies economy as a whole
2) Goal = explain changes that affect households, firms, markets
Gross domestic product
1) measures total income of nation
2) single best measure of society’s economic well being
What does GDP measure
1) total income of everyone in economy AND total expenditure on economy’s output of goods/services
2) INCOME MUST EQUAL EXPENDITURE
3) every transaction has buyer and seller
GDP definition that focuses on expenditure
1) GDP = market value of all final goods + services produced in country within given period
2) services –> must be transactions/in market NOT within family
3) final good = final product like computer vs microchip (intermediate good value included in final good)
4) produced = currently produced, so used cars won’t count
5) within country = if it’s produced domestically –> contributes to GDP BUT if it’s not –> doesn’t contribute
Statistical discrepancy
1) difference btwn GDP and GDI (gross domestic income)
Components of GDP
1) Y = C + I + G + NX
2) Y = GDP, C = consumption, I = investment, G = govt purchases NX = net exports
Consumption (C)
1) Spending by households on goods/services EXCEPT for purchases of new housing
2) includes durable goods (cars, appliances) + nondurable (food, clothing)
3) services includes intangible like haircuts, med care
Investment (I)
1) purchase of goods (capital goods) that used in future to produce more goods/services
2) business + residential + inventory capital
Government purchases (G)
1) measure spending on goods/services by federal, state, local governments
2) Transfer payments = social security or unemployment LIKE NEGATIVE TAXES –> not made in exchange of good/service
Net Exports (NX)
1) Exports - Imports
Real vs Nominal GDP
1) Real GDP = Value of goods/services produced this year if using last year’s prices
- Used to remove effect of price changes
2) Nominal = production of goods/services valued at current prices
GDP Deflator
1) Nominal/Real * 100
2) Inflation rate: (GDP_2 - GDP_1)/GDP_1 * 100
Problem with GDP
1) Larger GDP makes it easier to live better lives BUTTTT doesn’t measure health of kids or quality of education etc
2) Just means they can afford better not that they actually have better
Consumer Price Index
1) monitors changes in cost of living
2) Inflation –> CPI rises
3) deflation –> CPI falls
How is CPI Calculated
1) Fix basket = determine which prices most important to consumers
2) Find prices = Find prices of all goods/services at each point in time
3) Compute basket’s cost
4) Choose base year to compute index
(price in current year)/(price in base year) * 100
5) Compute inflation rate
(CPI_2 - CPI_1)/CPI_1 * 100
What are problems in measuring cost of living with CPI?
1) Substitution bias = not all prices change proportionately –> consumers substitute more expensive with relatively cheaper one BUTTT you can’t change the basket of goods so it’ll not be too accurate
2) Intro of new goods = new goods add variety which reduce cost of maintaining same level of economic well-being
3) unmeasured quality change = if quality of good reduces BUT price stays same –> getting lesser good for same value –> value of dollar falls
GDP Deflator vs CPI
1) GDP Deflator = reflects prices of goods/services produced DOMESTICALLY
2) CPI = prices of goods/services bought by consumers
ALSO
1) GDP Deflator looks at goods CURRENTLY PRODUCED while CPI looks at BASKET
Indexation
1) automatic correction by law of dollar amount for inflation effects
2) Social security –> indexation every year to compensate
Cost-of-Living allowance
1) automatically raises wage when CPI rises
Real vs Nominal Interest Rates
1) Real interest rate = nominal - inflation
