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Macro Econ > Midterm 1 > Flashcards

Midterm 1 Flashcards

1
Q

What is GDP

A

The market value of all final goods and services produced in a country in a given time period

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2
Q

What are final goods vs intermediate goods

A

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

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3
Q

What does GDP measure in the circular flow

A

total expenditure on goods and services by households, other firms, governments, and other countries. and income earned by households from firms

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4
Q

what are factor markets

A

factor markets are where households provide land, labour, capital, and entrepreneurship to firms

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5
Q

what are goods markets

A

the markets where households, governments, other countries, and other firms purchase goods and services from firms

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6
Q

what are all the labels on the circular flow model

A

income is Y, consumption expenditure is C, government spending is G, investment is I, net exports is NX or X - M

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7
Q

What is the formula for the expenditure approach

A

C + I + G + NX

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8
Q

What is the formula for the income approach

A

wages for labour plus other factor income plus depreciation, plus indirect taxes minus subsidies

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9
Q

what is real GDP

A

the value of final goods and services produced in a year valued at base year prices

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10
Q

what is nominal GDP

A

the value of final goods and services produced in a year valued at current year prices

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11
Q

what is real GDP per person

A

real GDP divided by population that tells the value of goods and services that the average person in a country can enjoy

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12
Q

what is potential GDP

A

the value of real GDP when all factors are fully employed

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13
Q

what is the business cycle

A

the periodic but irregular up and down movement of total production and other measures of economic activity

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14
Q

what are the two problems when comparing GDP across countries

A

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

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15
Q

what are the 6 factors that affect the standard of living but are not included in GDP

A

household production, underground economic activity, health and life expectancy, leisure time, environmental quality, political freedom and social justice

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16
Q

what is the link between productivity and living standards

A

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

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17
Q

how do retained earnings fit into the circular flow model

A

retained earnings are part of households sector income as it is like income that is saved by households and lent back to firms

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18
Q

why is gross domestic product gross

A

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

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19
Q

what is the statistical discrepancy

A

the difference in GDP from the income and expenditure approach calculated as expenditure GDP minus income GDP

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20
Q

what are the two reasons economists use GDP

A

compare the standard of living over time
compare the standard of living between countries

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21
Q

what is the Lucas Wedge

A

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

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22
Q

what classifies a recession

A

usually defined as two consecutive quarters of decreasing real GDP(negative growth rate)

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23
Q

what are purchasing power parity prices

A

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

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24
Q

what is the UN’s HDI

A

the human development index that takes GDP, life expectancy, health, and education into account to measure the standard of living

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25
Q

why is unemployment a problem

A

it causes lost income, lost production, and lost human capital

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26
Q

how does the monthly labour force survey break down the population

A

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

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27
Q

what classifies someone as unemployed

A

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

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28
Q

what are the four labour market indicators

A

unemployment rate
employment rate
labour force participation rate
involuntary part time rate

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29
Q

what categories of unemployment are not considered in the official unemployment measure

A

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

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30
Q

what is frictional unemployment

A

arises from normal labour turnover such as labour force entry and exit, job creation and destruction, market turnover

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31
Q

what is structural unemployment

A

arises from changes in technology and foreign competition that changes the skills needed or location of jobs

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32
Q

what is cyclical unemployment

A

arises from business cycle fluctuations where unemployment is higher during troughs and lower during peaks

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33
Q

what is natural unemployment

A

unemployment that arises from frictional and structural change but not cyclical change

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34
Q

what is full employment

A

when unemployment rate is equal to the natural unemployment rate

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35
Q

what is the output gap

A

the difference between real and potential GDP

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36
Q

what is price level

A

the average level of prices and value of money

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37
Q

why do we watch the price level

A

to measure inflation and deflation
distinguish between real and money value of economic variables

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38
Q

why is unpredictable inflation or deflation a problem(3 things)

A

redistributes income and wealth
lowers real GDP and employment
diverts resources from production

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39
Q

what is CPI

A

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

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40
Q

what are the largest components of CPI

A

shelter, transport, food

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41
Q

what is the labour force survey

A

stats Canada asks 54,000 households questions about age and job status of household members in a previous week called the reference week

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42
Q

what is the mostly costly unemployment

A

long term unemployment from job loss is the most costly as the persons human capital is deteriorating the longer they are unemployed

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43
Q

what are the factors that affect the natural unemployment rate

A

age distribution of the population, scale of structural change, real wage rate, unemployment benefits

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44
Q

how does age distribution affect natural unemployment

A

countries with younger populations have more people entering the labour force meaning higher frictional unemployment

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45
Q

how does the scale of structural change affect unemployment

A

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

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46
Q

how does the real wage rate affect natural unemployment

A

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

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47
Q

how do unemployment benefits affect the natural wage rate

A

unemployment benefits decrease the opportunity cost of unemployment which increases unemployment

48
Q

how does inflation redistribute income

A

rapid inflation rises prices faster than wages rise meaning workers are less well off while employers are better off

49
Q

how does inflation redistribute wealth

A

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

50
Q

how does inflation lower real GDP and employment

A

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

51
Q

how does inflation diver resources from production

A

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

52
Q

what is the current base year for CPI

A

2002

53
Q

what year is the current CPI basket based on

A

2017

54
Q

what is new goods bias

A

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

55
Q

what is quality change bias

A

when the CPI counts rises in prices as inflation when they may be rises in quality

56
Q

what is commodity substitution bias

A

when prices for substitute goods change and consumers switch goods but the CPI measurement doesn’t take this into account

57
Q

what is the magnitude of CPI bias

A

6% per year

58
Q

what are the consequences of CPI bias

A

distorts private contracts and increases government outlays
many private agreements are linked to CPI meaning they may not be ideal due to bias

59
Q

what is the GDP deflator

A

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

60
Q

what is the chained price index for consumption

A

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

61
Q

what is CPI trimmed

A

excludes the top and bottom 20% of items by price level change to decrease high volatility in the measure

62
Q

what is median CPI

A

measures only the middle items by price change in the basket

63
Q

what is common CPI

A

uses statistical methods to find the most common price changes in the basket

64
Q

what is economic growth

A

the expansion of production posibilities

65
Q

how are growth rates calcualted

A

(current year - previous year) / previous year all expressed as a percentage

66
Q

what is the difference between real GDP growth and real GDP per person growth

A

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

67
Q

what makes standard of living grow

A

the real gdp must grow faster than the population

68
Q

what are the two reasons real gdp grows

A

the economy is returning to full employment
potential gdp is increasing

69
Q

which reason for real gdp growth is considered economic expansion

A

potential gdp increasing

70
Q

what is the rule of 70

A

the time it takes for a compounding variable to double is approximately 70 divided by the annual growth rate of the variable

71
Q

what is the average long term real gdp growth in Canada

A

2%

72
Q

what determines potential gdp

A

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

73
Q

how is potential gdp determined

A

the aggregate production function
the aggregate labour market

74
Q

what is the aggregate production funtion

A

the function showing the relationship between the quantity of labour employed and the real GDP

75
Q

what is the aggregate labour market

A

the total demand and supply of labour in the economy

76
Q

what is the demand for labour

A

the relationship between the quantity of labour demanded and the real wage rate

77
Q

what is the supply of labour

A

the relationship between the quantity of labour supplied and the real wage rate

78
Q

what is the quantity of labour demanded

A

the number of labour hours hired by all firms in an economy in a given period of time

79
Q

what is the real wage rate

A

the money wage rate divided by the price level making it the quantity of goods and services that an hour of labour earns

80
Q

why does the real wage rate matter to firms

A

it tells the firms how much they need to sell to earn the money needed to pay for labour

81
Q

why does the real wage rate matter to households

A

because they want to know what they can buy with their earnings not just the money amount

82
Q

what is the law of diminishing returns in the context of labour and real GDP

A

each additional unit of labour hires contributes a smaller increase in real GDP than the previous unit

83
Q

what is equilibrium in the labour market and what does it mean

A

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

84
Q

what two factors make potential GDP grow

A

growth in the supply of labour
growth in the productivity of labour

85
Q

how’s does growth in the supply of labour increase potential GDP

A

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

86
Q

how is the quantity of labour calculated

A

average hours worked per week multiplied by workers employed

87
Q

what is the calculation for the number of workers employed

A

the employment rate multiplied by the working age population divided by 100

88
Q

what makes the quantity of labour change

A

changes in average hours per worker
changes in the employment rate
changes in the working age population

89
Q

what is labour productivity

A

the quantity of real gdp produced by an hour of labour. real gdp divided by aggregate labour hours

90
Q

how does increasing labour productivity increase potential GDP

A

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

91
Q

what is the fundamental precondition for labour productivity growth

A

the incentive system created by firms, markets, property rights, and money

92
Q

what are the three factors that influence the pace of labour productivity growth

A

physical capital
human capital
technology

93
Q

how does physical capital growth increase productivity

A

as workers have more access to physical capital they can do their jobs more efficiently increasing their output

94
Q

how does human capital growth increase productivity

A

as new discoveries are made workers can adapt these new findings to work more efficiently and increase their output

95
Q

how does technology growth increase productivity

A

new technologies are typically more productive than previous versions which increases the productivity of the capital itself increasing output

96
Q

what is capital

A

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

97
Q

what is financial capital

A

the funds used to purchase capital

98
Q

what is gross and net investment

A

gross investment is the total amount spent on new capital and net investment is gross investment minus depreciation

99
Q

what is savings

A

the money not paid in taxes and not spent on consumption. increases wealth

100
Q

how do wealth and savings grow real GDP

A

they must be converted into investment and capital

101
Q

what are the three markets where savings are supplied and demanded

A

bond markets
loan markets
stock market

102
Q

what are the key Canadian financial institution

A

banks, trust and loan companies, credit unions and caisses popularies, mutual funds, pension funds, insurance companies

103
Q

what is insolvency and iliquidity

A

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

104
Q

what is household income spent on

A

consumption, taxes, savings

105
Q

what are the sources of funds for investment

A

household saving, government surplus, borrowing from the rest of the world

106
Q

what is the real interest rate and the formula for it

A

the nominal interest rate adjusted for inflation and it is the nominal interest rate minus the inflation rate

107
Q

what is the quantity of loanable funds demanded

A

the total quantity of funds demanded to finance investment, government deficit, and international investment or lending during a given period

108
Q

what factors determine investment and the demand for loanable funds

A

the real interest rate and expected profit

109
Q

how does the real interest rate and expected profit affect investment

A

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

110
Q

what is the quantity of loanable funds supplied

A

the total funds available from private saving, the government surplus, and International borrowing during a given period

111
Q

what factors affect the amount of income saved vs supplied in the loanable funds market

A

the real interest rate, disposable income, expected future income, wealth, default risk

112
Q

what factors change the supply of loanable funds

A

disposable income, expected future income, wealth, default risk

113
Q

how does the government affect the loanable funds market

A

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

114
Q

what is the crowding out affect

A

says that a government running a deficit will cause the real interest rate to increase causing investment to decrease

115
Q

what is the Ricardo-Barro affect

A

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

Macro Econ (3 decks)

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