Midterm 1 Flashcards
World Economic Growth
economic growth took iff after 1800
living standards measured by real GDP per capita
Why are deflators useful?
we can use deflators to determine how much that person would be earning now based on the overall general rise in prices
what is the difference between real GDP growth rate overtime and the level of real GDP?
Real GDP is used to determine living standards, growth rate of GDP is an indicator of economic activity
Unemployment Rate
5.6%
Tiger Idea
a rich country that grows slowly can lose a lot of ground over time
Any country with a negative growth rate over an extended period is in trouble
three types of investment activity or capital spending
residential investment
plant and equipment
inventory accumulation
Real vs Nominal GDP
Real GDP is nominal GDP adjusted for inflation
Nominal GDP is bottom line for national accounts
Inflation rate is measured once a month
Objective is to measure changes in volume of economic activity
GDP has to be measured by value of transactions, and depends both on volume and prices
Real GDP Growth
+2.2% per year
REAL GDP growth over time
used as an indicator of economic activity
Primary Causes of Economic Growth and Prosperity
The inheritance of land, labour, and capital
PRODUCTIVITY, we need to increase productivity.
Example of productivity is snow removal (shovel, snow blower, bobcat, plow on truck)
Poor countries have low productivity (vice versa for rich countries)
Less productive workers are, less they can be paid (vice versa)
Productivity can be developed through education, experience and training (human capital)
PPP Theory Across Nations
a unit of any given currency should be able to buy the same quantity of goods in all countries
Comparing prices over region instead of time
Purchasing power (how far will your pay cheque go)
Physical Capital
something that is used to make something else (machinery)
Human Capital
knowledge, skills, and aptitude embodied in workers
Natural Resources
natural resources, Canada and Australia have a ton of it. Not necessary for prosperity, and not sufficient enough for prosperity
Output Markets
Price-type variable is P, the composite price level
quantity type variable is GDP
Aggregate output: final number
output market variables
Price-type: composite price level
quantity type: GDP
Net Domestic Production (NDP)
factor incomes + indirect taxes
National Accounting: Factors Income Approach
the focus is on income earning activity, not on spending activity. The question is “how was this dollar earned?”
Aggregate income broken down into: factor payments, indirect taxes, and depreciation
National Accounting: Expenditure Approach
everything is broken down as: consumption spending, investment spending, net export expending, and government spending
GDP = C + I + G + (X-imports)
Consumption spending sustains us (56%)
Investment spending is unstable
Government only refers to government purchases, and does not reflect transfer payments
Money Market Variables
Price-type: foreign exchange rate
Quantity-type: money supply
Money Market
Two price type variables: the foreign exchange rate and the interest rate
Two quantity type variables: the money supply and the quantity of loanable funds
Macroeconomic theory
has been changing over the past 90 years, the way of thinking is a pattern, model at the time is developed (and makes sense at the time) until it doesn’t, then a new model needs to be made due to recession!
List of Public Policy
Savings and investment: forgo endgame is producing more capital goods through investment spending to augment capital stock
Attract FDI (foreign direct investment): investment from foreign companies
Develop human capital (education and health): all types of education/training
Property rates and political stability: property rights are the ability of people to determine the use of the resources that they own. Firm has right to exploit property as it sees fit
Free trade: most economists believe that open economies are more productive than closed ones. Free trade and liberalism!
R&D: innovation means that the item has already been invented. Change usually rises productivity but can contravene the onset of diminishing capital
Inflation Rate
1.7% per year
Indexing
how much of a raise do you need to keep up with inflation CPI used to index pensions to make it fair
How good a measure of economic welfare is GDP? underestimate
actual economic welfare is higher than the official numbers indicate because:
The underground economy
Non-market activities (might be recorded, but it is not traded and not valued)
It does not reflect time allocated to leisure
This all means we may be better off than GDP states
How good a measure of economic welfare is GDP? overestimates
so the economic welfare is actually lower than the official numbers indicate because:
Economic bads: by-products of economic activity, especially pollution and congestion (the economic activity which generates the pollution is included in GDP, but the pollution is not accounted for)
the value of some activities which do not promote economic welfare are included in GDP, such as criminal justice, national defence, and environmental cleanup
Great Recession
in 2009 caused -3.5%
Lasted 9 months according to the technical definition of recession
Positive but uneven growth since then
Real GDP forecasted to be about +2% in 2018
GDP
Consumer Spending + Investment Spending + Government Spending
GDP per capita
is estimated to be about 80% of the US level
GDP deflator
has a much broader base, supposed to reflect the prices of all goods that are produced domestically. Covers everything (national defence included)
The annual rate of inflation from Dec. 2017-2018 = + 2.0%
The rate of inflation from November 2018 to Dec. 2018 = 0.07%
If that annual rate (+2.0%) were to continue for 10 years, this would translate into ((1+0.02) ^10-1) *100=22.1% (which is an approximation)
Annual price changes are compounded on each other, so you have to use formula
GDP (aggregate income):
NDP + depreciation
employment market variables
Price-type: average wage
Quantity-type: aggregate employment
Employment Market
Price type variable is the average wage
Quantity type variable is the aggregate employment
Economic Growth and Public Policy
public policy means what can the government do about it, if anything
Economic activity that generates pollution is included in GDP, BUT the pollution itself is not accounted for. Shortened life spans, negative effects on environment not accounted for as they do not have a dollar value. Also, the value of some activities which do not promote economic welfare are included in GDP (criminal justice, national defence, etc.)
Midterm QUestion lol
distinguish between CPI and the Core inflation rate:
: With core inflation we’re trying to get long term trends opposed to short term
CPI: measure that tracks changes in the cost of a basket of goods and services purchased by a typical Canadian household as calculated by Statistics Canada
core inflation is a measure of inflation that excludes goods with historically volatile prices.
Although they are essential purchases, food and energy are omitted when calculating core inflation because their prices tend to rise and fall more than most other prices
Direct Taxes
invitation from city, revenue Canada, etc. that says pay up or else
Determinants of Productivity
physical capital, human capital, natural resources, technological knowledge
Decreasing Marginal Returns
is a factor explaining economic growth
Capital formation leads to higher real GDP, but ADDITIONAL increments of capital yield declining yet still positive increments to real GDP. (the rate of GDP growth falls but still should be positive)
Example: prof experiences diminishing returns to training and exercise (at first make huge gains then it tapers out)
Current economic issue: CPI
The CPI probably overstates inflation. Higher the CPI, higher the pensions/wages (when they’re subject to indexing)
Statistics Canada does not take into account the changes in buying habits (from price changes in goods)
Consumer Price Index (CPI)
varies for provinces, major cities, etc. Only covers goods that consumers use
Base year is always 100
basket of goods weighted out and equal 100
tracks changes in the cost of living
Concept of two by twos:
input (factor) and output markets (goods and services)
Households and producers (firms, businesses)
Comparisons across countries:
A poor country that grows rapidly can gain a lot of ground on richer countries, this phenomenon is called “tigers” or tiger cases. Includes Japan (until 1990s, Ireland)
Catch-up effect:
related to diminishing returns
Some countries like south Korea grew very rapidly because they started from a very low capital stock, and had nowhere to go but up
Developing countries can grow rapidly at first, but not forever (due to law of diminishing returns)
Canadian economic growth per capita:
Industrial revolution skyrocketed population
Is economy growing or shrinking independent of population: % change in real GDP
Are living standards growing or shrinking: % change in real GDP per capita
Apogee: National Accounting
GDP, as calculated by the expenditure approach, should equal Y (aggregate income), as calculated by the factor income approach
GDP = Y, or gross domestic product = national income
aggregate income = aggregate expenditure
aggregate income is broken down into:
factor payments and indirect taxes
A price deflator (index)
is a time series of numbers that measures inflation. DEFLATE nominal quantities into real ones.
Array is two column matrix and deflator give a one-to-one correspondence between time and the level of prices
% change in nominal = % change real + inflation rate
REAL GDP = (Nominal GDP/deflator) *100
3 Primary markets of macroeconomics
Output markets: REAL economy: tangible, concrete goods and services that are ultimately consumable
Employment markets: Also, part of the real economy, unemployment rate, employment to population ratio, etc.
Money markets: Not part of the real economy, market for equities, bonds, financial instruments
Traded in the market
Not a part of real economy because it’s not tangible
These markets are inextricably linked!!! (linked to each other directly and effect each other)
