Midterm 1 (Chapters 19-22) Flashcards
5 key variables of Macroeconomics
YUPie: national income, unemployment, prices, interest rates, exchange rates
GDP
FINAL market value of everything produced in the economy during a fiscal year, no double counting of intermediate goods and no reused or resold goods
Spendthrift economy
Household spends ALL income at firms, firms pay income to household
Frugal economy
With saving and investment; Household saves some income at bank, bank loans money to firm for investment
Governed or closed economy
With taxes (forced savings) and government purchases but no international trade
Open economy
With international trade (imports and exports)
Net domestic product
Net domestic product= GDP - depreciation= factor payments or NDPFC (WRiP) + non-factor payments (IBT-Subsidies) - depreciation
Nominal GDP vs. Real GDP
Nominal GDP is based on current prices and quantities while Real GDP is based on base-year prices (constant) and current quantities
GDP vs. GNP
GDP is the income from outputs produced IN Canada and is a better measure of domestic economic activity while GNP is the income received BY Canadians and is a better measure of economic well-being of Canadians
Output gap (Y-Y*)
Actual national income - potential national income (Y at full employment)
Recessionary gap
When Y < Y*
Inflationary gap
When Y > Y*
Components of a business cycle
Y cycles around Y* (constant positive slope): Trough (recession or depression), Expansion (boom or recovery), Peak, Contraction
Who is considered unemployed?
Those willing and able to work but have no jobs
Who’s included in the labor force?
The unemployed and the employed
Unemployment rate
u= unemployed/labour force x 100
Employment rate
employed/working age population (including discouraged workers)
Types of unemployment
Frictional (turnover of jobs or entering the workforce), Structural (mismatch in skills offered and demanded), Cyclical (recessionary gap),
Non-accelerating inflation rate of unemployment (NAIRU)
Natural or normal rate of unemployment or unemployment rate at full employment (Y*) where frictional and structural are still present
Consumer price index (CPI)
Index of weighted average price of all G&S in the representative basket of all goods; (PxQ in current year/PxQ in base year) x 100
Nominal vs. Real interest rate
Nominal refers to the current cost of borrowing or what you pay back to the bank while Real refers to nominal i-rate discounted for inflation rate (diluted dollars)
External value vs. exchange rate
External value is the price/value of the domestic currency in terms of a foreign currency while Exchange Rate is the price of foreign currency or the no. of CAD required to purchase 1 unit of foreign currency
Appreciation vs. Depreciation
Appreciation means a rise in EV and a fall in ER while depreciation means a fall in EV and a rise in ER
GDP from value added approach
Firm’s revenue (factor payments) - payments for intermediate goods
GDP from expenditure
Consumption (on all durable and non-durable G&S) + Investment (not for present consumption) + Government purchases + Net exports
Types of investment
Prince Edward Islander: Plant and equipment, Inventory, Residential production
GDP from income
Factor payments or NDPFC + Non-factor payments (IBT-Subsidies) + Depreciation
Implicit GDP deflator
Nominal GDP/Real GDP x 100 = (Current P x Current Q/Base-year P x Current Q) x 100
Omissions from GDP
Illegal activities, underground economy, non-market activities, economic “bads” (e.g. negative externalities)
Production per capita GDP
GDP/population, measures the standard of living
Productivity
GDP/employment = GDP/no. of hours worked, measures the rate of technological change
Major assumptions for ASAD model
Demand determines output, assuming P is constant (zero inflation) and Y* is constant (no economic growth)
Consumption function
C = f(Y) where C= current desired expenditures and Y=Yd (for this model)= current actual disposable income; C= a + bYd
Savings function
S= Yd - C= -a + (1-b)Yd
Shifts in C-fn
Due to changes in WEI: wealth (direct), expectations (direct), interest rate (inverse)
Investment function
I = I bar (autonomous)
Shifts in I-fn
Due to changes in ICBC: interest rate (inverse), changes in sales (direct), business confidence (direct)
AE function (frugal economy)
AE= C + I= (a+bYd) + I bar, shifts due to changes in C and I
Equilibrium level of national income (Ye)
AE=Y, AE cuts 45° line
Stability vs. Equilibrium
Stability: if you’re not there, you’re going back; Equilibrium: if you’re there, you’re staying there
Inventory adjustment model
If E>Y, inventories fall and production increases; If E
Garden hose theory in spendthrift economy
Y=E=C=(a+bY)
Garden hose theory in frugal economy
Y=E=C+I=(a+bY)+I bar
Bathtub theory in spendthrift economy
0=W=J=0
Bathtub theory in frugal economy
-a + (1-b)Y=S=W=J=I bar
Simple multiplier (frugal economy)
k= △Ye/△AE (autonomous)= 1/1-z where z=MPSpend=MPC
Government purchases
(G=G bar)= Government spending - transfer payments + government investment
Net tax revenues
Yd= Y-net taxes where net taxes= T-TP; T=tY (proportional income tax)
Government budget or public savings function
money in (T or govt. revenues)-money out (G) to the government
Budget surplus, deficit, and balanced budget
T>G; T
Net export function (NX)
money in (autonomous X)-money out (induced M) to the circular flow where M=mY and m=MPM
BOT, surplus, deficit
X=M, X>M, X
Shifts in NX-fn
Due to changes in FIRPER: foreign income (direct effect to X which causes parallel shift in NX), Canadian international relative prices (inverse effect to X and direct effect to M which causes rotation), Exchange rate (same as CDN international relative price)
Simple multiplier (open economy)
k= △Ye/△AE= (1/1-z) where z=MPSpend=b(1-t)-m
Garden hose theory in governed economy
Y=E=(C+I+G)=(a+bY) + I bar + G bar
Garden hose theory in open economy
Y=E=(C+I+G+NetX)
Bathtub theory in governed economy
(-a+(1-b)Y)+tY=S+T=W=J=I bar + G bar
Bathtub theory in open economy
S(Y)+t(Y)+m(Y)=W=J=I+G+X
Balanced budget multiplier
△Ybb=△G=△T=1, Y goes up by $1; △Ye=△G*k; △Ye=△T(k-1)
Fiscal policy
Govt. changes T and/or G to change Ye; G affects AE directly, T affects AE through Yd and C
Stabilization policy
maintain Y around Y*
Expansionary policy
In a recessionary gap, increase G and/or decrease T to increase Ye
Contractionary policy
In an inflationary gap, decrease G and/or increase T to decrease Ye
Rate of inflation
(CPI current-CPI base)/CPI base x 100
Potential output (Y*)
Level of output economy would produce if all resources (land, labor, capital, technology and entrepreneurship) were fully employed i.e. maximum output at normal utilization rate of all inputs
Price level (P)
average level of all prices in the economy expressed as an index number
Purchasing power
amount of goods and services that can be purchased with a unit of money
Interest rate
Price paid per dollar borrowed per period of time, expressed either as a proportion or as a percentage
Intermediate goods vs. final goods
Outputs of some firms used as inputs and others; Outputs not used as inputs by other firms (in the period of time considered)
Non-factor payments
Indirect taxes (net of subsidies): IBT are taxes on the production and sale of G&S claimed by the government while subsides act as negative taxes, payments from the government to firms
Depreciation
The reduction in value of an asset - added in GDP to account for the portion of current output that replaces the worn out physical capital (replacement investment)
Movements in CPI vs. Movements in GDP deflator
CPI measures the change in the average price of consumer goods while GDP deflator reflects the change in the average price of goods produced in Canada
Desired aggregate expenditure
Sum of desired or planned spending on domestic output by households, firms, governments, and foreigners
Desired expenditure
What consumers and firms would like to purchase, given their real-world constraints of income and market prices
Autonomous (exogenous) expenditures
Elements of expenditure that do not change systematically with national income
Induced (endogenous) expenditures
Any component of expenditure that is systematically related to national income
Disposable income (YD)
household income - taxes = Y-Net taxes = Y-(T-TP)
Saving
disposable income not spent on consumption
Marginal Propensity to Consume (MPC)
Additional inclination to spend out of an additional dollar; MPC= △C/△Y; 0 <= MPC <= 1
Two conditions of the major assumption of the simple macro model
Demand determines output, P is constant: (1) Firms have excess capacity (2) Firms have monopoly power “price setter,” changing output before price
