Measuring the economy Flashcards
Define recession?
2 consecutive quaters of negative GDP growth
What is Okun’s Law?
Relationship between output and unemployment - when output growth is high, unemployment tended to fall
What is Okun’s coefficient? How is it interpreted?
The slope of the regression line when the change in unemployment is regressed against the growth in real GDP. If the slope is shallow then there is little unemployment response to recessions, suggesting the fall in incomes from recession would be evenly shared across society
What are the 3 ways to measure GDP?
- Production approach
- Income approach
- Expenditure approach
Explain production approach to measuring GDP?
= total value of goods and services produced by firms after subtracting the value of intermediate input goods and services
Explain income approach to measuring GDP?
= the sum of all incomes disbursed, including labour income, capital income, self-employment income and taxes
Explain expenditure approach to measuring GDP?
GDP = consumption + investment + government exp + net exports
What is the difference between nominal and real GDP?
Real GDP is nominal GDP adjusted for the changes in the prices of goods and services (inflation)
What is the problem with GDP measurement relating to sustainability?
Environment externalities and depletion of natural resources aren’t taken into account
What is inflation?
An increase in the general price level int he economy
What does the CPI measure?
General level of prices that consumers have to pay on a basket of goods that is chosen to reflect the spending of a typical household (including consumption taxes)
What does the GDP deflator measure?
Changes in prices in all domestically produced final goods and services
What are the problems of measuring inflation?
- Doesn’t account for change in quality
What is the difference between a stock vs flow variable? (use example)
Flow = income
Stock = wealth
What is GNI, how is it calculated?
GNI measures the economic activity of residents wherever they earn income.
GNI = GDP + earnings made abroad by residents - earnings of non-residents within the country
What are the problems of using GDP as a welfare measure?
- doesn’t include voluntary work or informal sector
- doesn’t account for sustainability/environment
- doesn’t account for equality
- doesn’t account for ethics
- hedonic pricing
- happiness
- work v leisure
- illegal activity
What are the components of GDP - define them?
Consumption - durable and non-durable goods and services purchased by households
Investment = business fixed investment, residential fixed investment, changes in business inventories
Government spending = goods and services purchased by government
Net exports = exports - imports (net expenditure from abroad on domestic goods and services
What is the output gap?
Percentage difference between actual output and the trend rate of output
What is the exchange rate?
The price of a unit of domestic currency in terms of foreign currency
What happens when the exchange rate appreciates?
It strengthens - you can get more of a foreign currency per one of the domestic currency
What happens when the exchange rate depreciates?
The currency weakens - you can now purchase fewer of the foreign currency per one unit of the domestic currency
What is the real exchange rate?
The ratio of the price of domestic goods to the price of foreign goods when expressed in the same currency
What will happen to real exchange rate in the short-run when there is a change in the nominal exchange rate?
The change in the real exchange rate will perfectly reflect the change in the real exchange rate
What is the effective nominal exchange rate? What is the effective real rate?
Product of the nominal rates for each trading partner weighted by their relative importance as a trading partner
For the effective real rate it is the same process for the price index of each partner
What happens to net exports when the real exchange rate appreciates?
Price of domestic goods increases relative to foreign goods - > relative price of imports decreases which increases demand for imports -> domestic economy may stop producing substitutes for imports -> net exports decreases
What happens to net exports when there is a depreciation in the real exchange rate?
Price of domestic goods falls relative to foreign goods -> relative price rises for imports pushing down demand for imports -> domestic economy may increase production of import substitutes -> increase in net exports
What is the balance of payments? What is it equal to?
A sum of the current account, the financial account, the capital account and net erors/omissions. Equal to 0
What is the primary current account?
Real exports - real imports
For there to be a surplus on the current account what must the real exchange rate be?
Relatively low
What is the inter-temporal budget constraint/solvency condition?
If a country runs a deficit in period 1, they must run a surplus in period 2 to pay off outstanding debt
What is the relationship between the net international investment position (NIIP) and the real exchange rate?
Inverse relationship
How is it possible for there to be large and persistent deficits?
They are financed by surplus nations - investing in deficit countries (buying foreign assets)
What is absolute purchasing power parity?
In the long-run prices of domestic and foreign goods are equalized, when expressed in the same currency due to arbitrage
What is relative purchasing power parity?
Changes in exchange rates reflect changes in domestic and foreign prices
What is the Harrod-Balassa-Samuelson Effect?
The price of non-tradable goods are higher in rich countries due to productivity differentials between richer and poorer nations
What are the characteristics of a recession?
falling GDP, rising unemployment, decline in real incomes
