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Intro to economics > Measurements in the economy > Flashcards

Measurements in the economy Flashcards

1
Q

What is the Gross Domestic Product?

A

The value of economic activity (transactions/productions)
It is a nominal value: a measurement at that moment in time

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2
Q

What is the GDP equation and what are the variables?

A

GDP = C + I + G + NX
C: Consumption
I: Investment
G: Government spending
NX: Net exports (Exports (x) - Imports (m))

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3
Q

What are the three things that are never in GDP calculations?

A
  • Used goods (was calculated when it was new)
    • Intermediary goods (products needed to create a final product, like tires on a car: the int. product was calculated when they were used to create the final product)
    • Transfer payments (money that was transferred from one level of govt to another: taxes from fed govt to prov govt)
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4
Q

What is the income method of GDP?

A

NDP (Net Domestic Product)

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5
Q

What is the equation for NDP and what are the variables?

A

W + c + R + π + O + tf + i
W = wages
c = interest income
π = corporate profit
R = small business income
O = farm income
tf = (tax - subsidies)
i = interest income

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6
Q

What is a trade balance?

A

Difference between x and m

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7
Q

How do we call a trade balance that is positive?

A

Trade surplus

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8
Q

How do we call a trade balance that is negative?

A

Trade deficit

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9
Q

What does a trade surplus indicate?

A

A growing, healthy economy

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10
Q

What is GNP and what is its equation?

A

it is the Gross National Product
GNP = C + I + G + NX + A
A = People abroad

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11
Q

What is NNP and what is its equation?

A

it is the Net National Product.
NNP = GNP - D
D = Depreciation (cost of doing business - money spent to keep up with competition)

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12
Q

What is a RGDP?

A

It is the nominal GDP adjusted to inflation. It includes the deflator

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13
Q

What is inflation?

A

A general rise in prices

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14
Q

What are the two types of inflation and what do they mean?

A
  • Demand-pull: increase in aggregate demand
  • Cost-push: increase in aggregate supply
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15
Q

What is an acceptable annual inflation rate?

A

2-3%

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16
Q

What effect does high inflation have on consumers?

A

They lose purchasing power

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17
Q

What are the causes of Demand-pull inflation?

A
  • Increase in income
  • Increase in demand
  • Supply cannot keep up
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17
Q

What could be an employers response to inflation?

A

Indexing the employee’s salary

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18
Q

How do you fix high demand-pull inflation?

A

1- Increase taxes (takes a long time to do)
2- Increase interest rate (r) (interest = price of borrowing money)

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19
Q

How do you fix a high cost-push inlfation?

A

1- Subsidies/loans from govt (increase in G) (mostly used option)
2- Lower tariffs on intermediary goods

20
Q

What is the 72 rule?

A

72/%r to see how long investments double

21
Q

what is the 70 rule?

A

70/%growth GDP to see how long prices to double

22
Q

How do we measure the inflation for AD changes (measuring deflation) and what are they?

A

1- CPI: Consumer Price Index
- Number out of 100
- “Basket of goods”
- Most common products that people buy
- If it increases as years go by, prices increase, inflation
- Can be done month to month

2- GDP deflator
- Price index for all goods and services
- Number out of 100
- Annual index
23
Q

What is the equation for a deflator?

A

Deflator = Nominal GDP/Real GDP x 100

24
Q

What is a base year when calculating inflation?

A

A base year is the year where the value of a dollar is equal to one.

25
Q

What is the equation for future value and what are its variables?

A

FV = P(1+r)t

FV = Future value
P = Principal
r = interest rate
t = Number of times it was calculated

26
Q

What is the equation for inflation?

A

Inflation = (YR2 D - yR1D / YR1D) x 100

27
Q

What is the difference between fixed and variable interest?

A

Fixed = one interest rate for the duration of the loan
Variable = Interest rate changes during the loan

28
Q

How do we calculate real interest rates?

A

Real r = nominal r - inflation

29
Q

What is the problem with G?

A

Debts + Deficits

30
Q

What is the difference between debt and deficit?

A

Deficit = difference between revenue and spending
Debt = borrowed money to cover deficits

31
Q

What are the two ways to cover deficits?

A
  • Internal debt: borrowing from citizens (selling bonds)
    • External debt: borrowing from other countries (Japan, EU, China) (90% of debt comes from this)
32
Q

What is the equation for the debt-to-GDP ratio?

A

Debt/GDP x 100

33
Q

Is the Debt-to-GDP ratio valuable on its own?

A

No, it needs to be compared to other years in order to make sense of it

34
Q

What does the debt-to-GDP ratio tell us?

A

It is a measurement of the financial health of a country

35
Q

What are bonds?

A

loans on a certificate that are an investment for those who buy them.
They can also indicate the financial health of a country

36
Q

Why do governments sell bonds and what do they do to the country’s debt?

A

The governments sell bonds to solve demand-pull inflation (control AD)
This raises/creates internal debt

37
Q

What are the types of bonds?

A
  • Federal bond: issued by a national govt. e.g.: Canada savings bond (CSB), Treasury Bills (in USA). 5-30 years
    • Municipal bond or provincial bond: regional. e.g.: QSB. 5-30 years
    • Corporate bond: issued by corporations. e.g.: apple, IBM, Amazon. 5-20 years. Offer higher interest rate because they are always subjected to shut down
    • Zero coupon bond: can be traded on the bond market, kind of at a discount. Sold before the end of the bond term
38
Q

What does the interest rate of a country’s bond tell us?

A

Government bond’s interest rate depends on the financial health or the general state of the country. Subjected to how likely you are to get your money back

39
Q

How do we know which federal bonds are good to have

A

Bonds of the federal are rated bonds: rated for risk of default (risk of losing your money) (rated from an AAA down)
Ratings agencies are Moody’s, Standard & Poor’s, Fitch

40
Q

What is the business cycle theory?

A

A visual way to look at economic growth (Aggregate Economic Activity) over time

41
Q

What is a full cycle of the business cycle?

A

Full expansion and full contraction

42
Q

How many years are there typically between recessions?

A

12 years on average

43
Q

How do we call the part going up on the business cycle theory and what does it bring?

A

Growth/expansion : higher AD and higher inflation
at least 2 consecutive quarters (min. 6 months)

44
Q

How do we call the highest part on the business cycle theory and what does it bring?

A

A peak/ boom: lowest unemployment, highest AD and inflation.
It is usually short-lived

45
Q

How do we call the part going down on the business cycle theory and what does it bring?

A

contraction/recession: shrinking in growth, rising unemployment, lower AD, lower consumption, lower interest rates
Lasts 6 months to 2 years

46
Q

How do we call the lowest part on the business cycle theory and what does it bring?

A

Through/depression: lowest employment, bad economic times, lowest purchasing power

47
Q

What are the three ways to observe the direction of the change in the economic measurements and what do they mean?

A
  • Procyclical: with the cycle. Any indicator picked goes along with the direction of the cycle. (If the GDP goes up and we are in growth)
  • Acyclical: no relation.
  • Countercyclical: against the cycle. (if inflation goes up and we are in recession)
48
Q

What are the three ways to observe the timing of the change in the economic measurements and what do they mean?

A
  • Leading indicator: the change in the measurement happened before the movement on the cycle
    • Lagging indicator: the change in measurement happened after the cycle movement
    • Coincidental indicator: change in measurement happens at the same time as the cycle movement (unemployment rate is usually a coincidental indicator)

Intro to economics (3 decks)

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