Midterm 4 Flashcards
Gross Domestic Product
Market value of the final goods and services produced in the economy during a given time period
How do you determine the economies state
Comparing GDPs from over the years
What are the two ways to measure GDP
Expenditure approach
Income approach
What is Expenditure approach
expenditure approach measures the value of GDP by adding all expenditures to produce final goods and services
What are all the expenditures that needs to be added to find GDP under Expenditure approach
Consumption approach
Investment expenditures
Government Expenditures
Foreign Expenditures
Consumption Expenditures
Includes all expenditures made by household, endurable and non durable goods as well as services
Investment Expenditures
Investment in capital and Equipment
Investment in all construction
Investment in inventories
Gross Net Investment =?
Gross Investment - Depreciation
If In > 0 then?
The economy is expanding
If In < 0 then?
Declining Economy
If In = 0 then?
The economy is static
Government Expenditures
Building highways, parks, hospitals and payments for the services of labor
Foreign Expenditures
Net Exports (Xn) = Exports - Imports
Are stock and bond investments included in GDP
No
Income Approach in Measuring GDP +?
Wages + Net Income of farm and other unincorporated businesses including rent + Interest and Investment Interest + Profits
What are wages?
Payments by firms and private businesses as well as government for services of labor
Interests are what
Payments on capital and mortgages
Investment Income is what?
Money received that Canadians do abroad
What are the three types of profits
Distributed Profits
Business taxes
Undistributed Profits
NDP =?
Net Domestic Income + (Indirect Business Taxes - Subsides)
Real GDP is what
Nominal GDP that has been adjusted for inflation
Real GDP in a given year = ?
Nominal GDP in a given year / GDP price index in base year x 100
GDP price index in a given year = ?
Price of the Market basket in a given year / Price of the same Market basket in base year x 100
What isn’t included in GDP
Non marketed activities
Underground economy
Transfer Payments
Second hand sales
What happens in a Trough
High rate of unemployment
Low rate of economic growth
Weak confidence
A lot of unused capacity
Low demand in the economy
Low income
What is the only way to get out of a trough
The government must get involved along with the central bank
What happens during a recovery
Employment goes up
Economic growth will go up
Gradually confidence in the economy will be restored
Excess capacity will gradually disappear
Income will go up
Total demand will go up
What happens during a economic peak
Could be combined with inflation
Usually shortage of raw material
Skilled labor in key industry’s
What happens during a recession
Downturn in economic activities
Needs to last tow quarters to be considered recession
Recessions need government involvement
How are capital goods affected by economic shifts
They are affected are affected significantly because demand for those goods can be halted
How are non durable goods affected by economic shifts
They are not impacted significantly because demand for them are not able to be halted
What is unemployment
The unemployed are people over the age 15 actively looking for a job and can’t find one
How is unemployment rate determined
Statistic Canada does a random survey of about 60,000 households in Canada
Unemployment rate = ?
number of employed / labor force x 100
What is the labor force
employed + unemployed
What are the three types of unemployment
Frictional unemployment
Structural Unemployment
Cyclical Unemployment
What is Frictional Unemployment
People who are in between jobs or are looking for a new job (seasonal workers)
What is Structural Unemployment
Unemployment due to the changes of structure in the economy
What is Cyclical unemployment
Happens as a result of changes in the cycle of the economy
What is the percentage of employment that is needed for it to be considered full employment
93-94%
What are the costs of Unemployment
Economic Cost (GDP Gap)
Social Cost
What is GDP Gap
Difference between potential and actual GDP
What is Potential GDP
Total output that could potentially be produced if all resources were fully employed
What are the two types if Inflation
Demand Pull Inflation
Cost Push Inflation
Demand Pull Inflation
Increase in General Price level because of excessive total demand
Cost Push Inflation
Increase in cost of production which pushes prices up
What is the equation for Inflation rate in a given year
CPI in a given year - CPI in base year / CPI in base year x 100
What is the Redistributive effect of Inflation
% ^ in real income = % ^ in nominal Income - rate of inflation
Aggregate Expenditure = ?
C + I + G + Xn
If Disposable Income goes up what happens to consumption
Consumption goes up
Look at Consumption schedule graphs
Look at Consumption schedule graphs
What is APC
Average Propensity to Consume
What is APS
Average Propensity to Save
APS = ?
S / Y
MPC = ?
^C / ^Y
MPS = ?
^S / ^Y
What are some non income determinants of (C) and (S)
change in wealth
expectations
income tax
interest rates
Real Rate of Interest = ?
Nominal interest rate - Rate of inflation
Look at Investment Schedules
Look at Investment Schedules
Look at Expenditure - output approach schedules
Look at Expenditure - output approach schedules
Look at Leakage - Injection approach schedules
Look at Leakage - Injection approach schedules
What is Multiplier Effect
When a initial injection leads to more than porportion change in income and employment
Multiplier = ?
1 / 1- MPC or 1 / MPS or ^Y / ^ in Spending
