Midterm 1 Flashcards
What is GDP
The market value of all final goods and services produced in a country in a given time period
What are final goods vs intermediate goods
final goods are finished goods sold to customers for their use, intermediate goods are goods and services sold to other business for them to use in the production of their own goods and services
What does GDP measure in the circular flow
total expenditure on goods and services by households, other firms, governments, and other countries. and income earned by households from firms
what are factor markets
factor markets are where households provide land, labour, capital, and entrepreneurship to firms
what are goods markets
the markets where households, governments, other countries, and other firms purchase goods and services from firms
what are all the labels on the circular flow model
income is Y, consumption expenditure is C, government spending is G, investment is I, net exports is NX or X - M
What is the formula for the expenditure approach
C + I + G + NX
What is the formula for the income approach
wages for labour plus other factor income plus depreciation, plus indirect taxes minus subsidies
what is real GDP
the value of final goods and services produced in a year valued at base year prices
what is nominal GDP
the value of final goods and services produced in a year valued at current year prices
what is real GDP per person
real GDP divided by population that tells the value of goods and services that the average person in a country can enjoy
what is potential GDP
the value of real GDP when all factors are fully employed
what is the business cycle
the periodic but irregular up and down movement of total production and other measures of economic activity
what are the two problems when comparing GDP across countries
the GDP of one country must be converted into the currency of the other
the goods and services in both countries need to be valued at the same prices
what are the 6 factors that affect the standard of living but are not included in GDP
household production, underground economic activity, health and life expectancy, leisure time, environmental quality, political freedom and social justice
what is the link between productivity and living standards
rising incomes and rising production go together because as people have more income to purchase more goods production must increase to meet the demand. income and production are two key elements of productivity and income is a key element of living standards
how do retained earnings fit into the circular flow model
retained earnings are part of households sector income as it is like income that is saved by households and lent back to firms
why is gross domestic product gross
because the investment that is included in the expenditure approach is gross investment as it does not account for the depreciation of capital assets. gross profit is included in the income approach making GDP a gross measure on both sides
what is the statistical discrepancy
the difference in GDP from the income and expenditure approach calculated as expenditure GDP minus income GDP
what are the two reasons economists use GDP
compare the standard of living over time
compare the standard of living between countries
what is the Lucas Wedge
the difference between what real GDP per person could have been using past growth rates and what it actually is. when productivity growth decreases significantly the Lucas Wedge grows significantly
what classifies a recession
usually defined as two consecutive quarters of decreasing real GDP(negative growth rate)
what are purchasing power parity prices
a ratio used to compare the prices of goods in different countries so GDP can be compared with goods priced the same even if they are actually different
what is the UN’s HDI
the human development index that takes GDP, life expectancy, health, and education into account to measure the standard of living
why is unemployment a problem
it causes lost income, lost production, and lost human capital
how does the monthly labour force survey break down the population
population is either working age(15+) or non working age, working age is either in the labour force or not, labour force is either employed or unemployed, employed is either full time, part time, or involuntary part time
what classifies someone as unemployed
on temp layoff with expectation of recall
without work but has made specific efforts to find work in the past four weeks
has a new job to start within four weeks
what are the four labour market indicators
unemployment rate
employment rate
labour force participation rate
involuntary part time rate
what categories of unemployment are not considered in the official unemployment measure
involuntary part time workers are employed but do not have the job they want so they could be considered unemployed
discouraged searchers have struggled to find work so have not made any efforts in the past four weeks but are still without work
long term future starts are people with jobs that start more than four weeks in the future so are classified as not in the labour force
what is frictional unemployment
arises from normal labour turnover such as labour force entry and exit, job creation and destruction, market turnover
what is structural unemployment
arises from changes in technology and foreign competition that changes the skills needed or location of jobs
what is cyclical unemployment
arises from business cycle fluctuations where unemployment is higher during troughs and lower during peaks
what is natural unemployment
unemployment that arises from frictional and structural change but not cyclical change
what is full employment
when unemployment rate is equal to the natural unemployment rate
what is the output gap
the difference between real and potential GDP
what is price level
the average level of prices and value of money
why do we watch the price level
to measure inflation and deflation
distinguish between real and money value of economic variables
why is unpredictable inflation or deflation a problem(3 things)
redistributes income and wealth
lowers real GDP and employment
diverts resources from production
what is CPI
the consumer price index measures the prices paid by urban consumers for a basket of goods meant to represent what the average urban consumer purchases
what are the largest components of CPI
shelter, transport, food
what is the labour force survey
stats Canada asks 54,000 households questions about age and job status of household members in a previous week called the reference week
what is the mostly costly unemployment
long term unemployment from job loss is the most costly as the persons human capital is deteriorating the longer they are unemployed
what are the factors that affect the natural unemployment rate
age distribution of the population, scale of structural change, real wage rate, unemployment benefits
how does age distribution affect natural unemployment
countries with younger populations have more people entering the labour force meaning higher frictional unemployment
how does the scale of structural change affect unemployment
when there is a large rapid technological change many lose their jobs or need to develop new skills and there is large structural unemployment meaning higher natural unemployment
how does the real wage rate affect natural unemployment
when a minimum wage is set or firms are offering higher wages than the competitive equilibrium the supply of labour is higher than the demand for labour creating higher frictional unemployment
how do unemployment benefits affect the natural wage rate
unemployment benefits decrease the opportunity cost of unemployment which increases unemployment
how does inflation redistribute income
rapid inflation rises prices faster than wages rise meaning workers are less well off while employers are better off
how does inflation redistribute wealth
rapid inflation means the money borrowers pay back to lenders is worth less than the original principle and the interest earned does not compensate for the value lost on the principle
how does inflation lower real GDP and employment
initially firms higher profits lead to higher investment, production, and employment, but eventually the investment potential runs out so spending falls, real GDP falls, and unemployment rises
how does inflation diver resources from production
rapid inflation means people can earn more from speculating on rates than their actual trade meaning resources usually used in production are wasted as people choose to speculate on inflation instead of work
what is the current base year for CPI
2002
what year is the current CPI basket based on
2017
what is new goods bias
when new goods are introduced into the basket and need to be compared with old goods that are priced differently such as a computer vs a typewriter
what is quality change bias
when the CPI counts rises in prices as inflation when they may be rises in quality
what is commodity substitution bias
when prices for substitute goods change and consumers switch goods but the CPI measurement doesn’t take this into account
what is the magnitude of CPI bias
6% per year
what are the consequences of CPI bias
distorts private contracts and increases government outlays
many private agreements are linked to CPI meaning they may not be ideal due to bias
what is the GDP deflator
an index of prices of all goods included in GDP calculated as nominal GDP divided by real expressed as a percentage. measures things rarely bought by consumers making it too broad for standard of living calculations
what is the chained price index for consumption
an index of prices of all goods included in consumption expenditure in GDP. nominal consumption expenditure divided by real consumption expenditure expressed as a percentage
what is CPI trimmed
excludes the top and bottom 20% of items by price level change to decrease high volatility in the measure
what is median CPI
measures only the middle items by price change in the basket
what is common CPI
uses statistical methods to find the most common price changes in the basket
what is economic growth
the expansion of production posibilities
how are growth rates calcualted
(current year - previous year) / previous year all expressed as a percentage
what is the difference between real GDP growth and real GDP per person growth
real gdp growth shows how fast the overall economy is growing but real gdp per person growth shows how the standard of living is growing
what makes standard of living grow
the real gdp must grow faster than the population
what are the two reasons real gdp grows
the economy is returning to full employment
potential gdp is increasing
which reason for real gdp growth is considered economic expansion
potential gdp increasing
what is the rule of 70
the time it takes for a compounding variable to double is approximately 70 divided by the annual growth rate of the variable
what is the average long term real gdp growth in Canada
2%
what determines potential gdp
the factors of production determine and their productivity determine real gdp but labour is the only variable factor day to day so when labour is at full employment real gdp is the same as potential gdp
how is potential gdp determined
the aggregate production function
the aggregate labour market
what is the aggregate production funtion
the function showing the relationship between the quantity of labour employed and the real GDP
what is the aggregate labour market
the total demand and supply of labour in the economy
what is the demand for labour
the relationship between the quantity of labour demanded and the real wage rate
what is the supply of labour
the relationship between the quantity of labour supplied and the real wage rate
what is the quantity of labour demanded
the number of labour hours hired by all firms in an economy in a given period of time
what is the real wage rate
the money wage rate divided by the price level making it the quantity of goods and services that an hour of labour earns
why does the real wage rate matter to firms
it tells the firms how much they need to sell to earn the money needed to pay for labour
why does the real wage rate matter to households
because they want to know what they can buy with their earnings not just the money amount
what is the law of diminishing returns in the context of labour and real GDP
each additional unit of labour hires contributes a smaller increase in real GDP than the previous unit
what is equilibrium in the labour market and what does it mean
when the quantity of labour demanded and supplied is the same the labour market is at equilibrium meaning there is no shortage or surplus of labour. This means that labour is at full employment and real gdp is equal to potential gdp
what two factors make potential GDP grow
growth in the supply of labour
growth in the productivity of labour
how’s does growth in the supply of labour increase potential GDP
a growth in the supply of labour shifts the supply curve rightward which decreases the real wage rate and increases the quantity of labour supplied at equilibrium, or full employment, which is reflected in the aggregate production function showing an increase in potential GDP
how is the quantity of labour calculated
average hours worked per week multiplied by workers employed
what is the calculation for the number of workers employed
the employment rate multiplied by the working age population divided by 100
what makes the quantity of labour change
changes in average hours per worker
changes in the employment rate
changes in the working age population
what is labour productivity
the quantity of real gdp produced by an hour of labour. real gdp divided by aggregate labour hours
how does increasing labour productivity increase potential GDP
higher labour productivity means firms are willing to hire more labour meaning the demand for labour shifts rightward causing an increase in the equilibrium quantity of labour and the real wage rate. this brings increases in potential gdp from increased output per unit of labour and increased units of labour
what is the fundamental precondition for labour productivity growth
the incentive system created by firms, markets, property rights, and money
what are the three factors that influence the pace of labour productivity growth
physical capital
human capital
technology
how does physical capital growth increase productivity
as workers have more access to physical capital they can do their jobs more efficiently increasing their output
how does human capital growth increase productivity
as new discoveries are made workers can adapt these new findings to work more efficiently and increase their output
how does technology growth increase productivity
new technologies are typically more productive than previous versions which increases the productivity of the capital itself increasing output
what is capital
a factor of production. the tools, machines, instruments, buildings, and other items that have been produced in the past and are now used to produce goods and services
what is financial capital
the funds used to purchase capital
what is gross and net investment
gross investment is the total amount spent on new capital and net investment is gross investment minus depreciation
what is savings
the money not paid in taxes and not spent on consumption. increases wealth
how do wealth and savings grow real GDP
they must be converted into investment and capital
what are the three markets where savings are supplied and demanded
bond markets
loan markets
stock market
what are the key Canadian financial institution
banks, trust and loan companies, credit unions and caisses popularies, mutual funds, pension funds, insurance companies
what is insolvency and iliquidity
insolvency is when a financial institution has a negative net worth and liquidity is when a financial institution has a positive net worth but not enough cash or liquid assets to meet obligations
what is household income spent on
consumption, taxes, savings
what are the sources of funds for investment
household saving, government surplus, borrowing from the rest of the world
what is the real interest rate and the formula for it
the nominal interest rate adjusted for inflation and it is the nominal interest rate minus the inflation rate
what is the quantity of loanable funds demanded
the total quantity of funds demanded to finance investment, government deficit, and international investment or lending during a given period
what factors determine investment and the demand for loanable funds
the real interest rate and expected profit
how does the real interest rate and expected profit affect investment
firms invest to increase profit so if the interest rate is higher firms will invest less as it is harder for an investment to increase profit
what is the quantity of loanable funds supplied
the total funds available from private saving, the government surplus, and International borrowing during a given period
what factors affect the amount of income saved vs supplied in the loanable funds market
the real interest rate, disposable income, expected future income, wealth, default risk
what factors change the supply of loanable funds
disposable income, expected future income, wealth, default risk
how does the government affect the loanable funds market
when the government is in surplus their is increased supply of loanable funds and investment
when the government is in deficit there is increased demand for loanable funds and investment is reduced
what is the crowding out affect
says that a government running a deficit will cause the real interest rate to increase causing investment to decrease
what is the Ricardo-Barro affect
says that when the government is in a deficit there is no effect on the real interest rate because tax payer recognize the likely increase in taxes and increase personal savings meaning the supply and demand for loanable funds increase the same amount keeping the real interest rate the same
