Midterm THE ONE AND ONLY Flashcards
become economics.
define
Microeconomics
analyzes the behavior of individual actions
define
Macroeconomics
analyzes the overall functioning of the economy, all variables are aggregate by natue
define
Fallacy of Composition
just because something is true for the individual, that doesn’t mean it’s true for the whole
the whole is greater than the sum of its parts
define
Multiplier Effect
One initial action can cause a waterfall that leads to much bigger changes and problems
kinda like butterfly effect
define
Paradox of Thrift
reducing expenditure can be rational for individuals, but can lead to a bad outcome for the economy
define
Classical Theories of Economics
assumes economies are sef regulating
Define and discuss
Keynesian Economics
Problems will be solved on their own… in the long run. When spending falls, production cuts can lead to recession, but government policies can help fix this
define
Monetary Policy
indirect!
Changes the key interest rate which is controlled by the central bank
(this determines the cost of borrowing, which influences spending)
changing the amount of money in the economy does the same thing
define
Fiscal Policy
direct!
Direct government involvement in the market and adopting appropriate tax policies
- inc/dec in gov spending
- deciding ncome and sales tax
- paying subsidies to households
- theres another one but i dont understand my notes so it’s a cliffhanger
define
The Business Cycle
economies will trend upward and downward overtime
When was the Great Recession?
2008, housing crisis related
solved by reducing taxes and increasing spending
What year was the Great Depression?
and (canadian) unemployment rate…
1929, 20%
solution: let it run its course
define
Expansion/Recovery
economic activities showing signs of growth
define
contraction/recession
economic activities showing signs of downfall
now a task…
Draw and label a business cycle graph!
should include: peaks, troughs, expansion/recovery, and contraction/recession
t or f
True or False: we measure long run economic growth with nominal GDP
explain
False! we use Real GDP per capita, since it accounts for inflation
Trade Balance Formula
export - import
define
exports
the value of the goods and services that are sold to foreign buyers all together
exports = X
define
imports
the total value of goods and services purchased from foreigh sellers
imports = M
define
Trade Surplus
X > M
exports more than imports
define
Trade Deficit
X < M
imports more than exports
Are trade deficits bad?
not necessarily, what’s important is having a strong and stable currency
describe
A cause of trade surplus
low investment spending relative to savings
describe
a cause of trade deficit
high investment spending relative to savings
define
GDP
Gross Domestic Product
the market value of all final goods and services produced within the boundary of an economy within a specific time period
define
Market Value
the value based on market transactions
define
Final Good
goods fit for final consumption
ex. a book = final good, while its pages are not
define
Flow Variables
and examples!
variables that have a time dimension, measured per unit of time
GDP, demand, investment, income
define
Stock Variables
variables whose quanities are meaningfully measured at a specific point in time
capital, inventory, population, money in circulation
define
Value Added Approach
gdp
add all values of final goods and services produced
go into more detail about
Value Added Approach
government collects level of production for each individual firm, and figures out revenue from each intermediate good
the value added from each good: revenue - intermediate input
- these values can be added together to get the final value
- or just use the market price idc
firm revenue: cost of intermediate inputs + payments to factors of production
this one is hard to describe just go find a practice problem man
define
Income Approach
total values of outputs in the economy = income = GDP
Factor payments:
- wages for rent
- interest for savings
- rent earned by those leasing their assets
- dividends paid to share holders
Non-factor payments:
- indirect tax (sales tax to government)
- capital depreciation
discuss
Circular Flow Diagram
get ready for a doozy
based on the idea that our income, spending, and production output are all interdependent
- total spending is based on total income which is based on factors of production, production is based on how much can sell (its a circle)
- government takes and spends tax money from households
- household savings go to financial markets, firms and government borrows this money to invest
define
Total Expenditure Approach
add up all expenditures of goods and services produced and bought within the economy
C + I + G + NX
define
C
Expenditure Approach, C + I + G + NX
Consumption expenditure
- household purchases
- only new items
- rents included
- purchases of newly built homes not included
define
I
Expenditure Approach, C + I + G + NX
Investment Expenditure
- firms purchases (investments, factors of production)
- plants and equipment
- newly built residential and non residential structures
- inventory adjustment
define
G
Expenditure Approach, C + I + G + NX
Government Expenditure
- government purchases of goods and services
- government transfer payments (subsidies) not included
define
NX
Expenditure Approach, C + I + G + NX
Net Export
exports - imports
What variable is usually used for GDP?
Y
define
Nominal GDP
measuring GDP with current prices using the three approaches
can inc/dec even if the quanities didn’t - purely measures price changes
define
Real GDP
the total value of goods and services within a given year, calculated as if the prices had remained constant from some base year
real GDP will only change if the quanities change
describe
how to calculate Real GDP
The total value of final goods and services produced in the economy during a given year, calculated using the prices of a second base year
Example:
find the real GDP of 2017 with 2007 as a base year
2007 GDP: 80 * $40 + 90 * $11 + 15 * $90
2017 real GDP: 100 * $40 + 80 * $11 + 20 * $90
different quantities, same prices!
Growth Rate Formula
A(1 + g)^t = B
A: earlier year
B: latter year
g: average annual growth rate when t>1
t: time between years
how to:
Calculate Chained Dollar Real GDP
3 steps!
- calculate average growth rate for every pair of consecutive years
- choose a base year, calculate its GDP
- use growth rates to calculate real GDP from the base year
Does an increase in real GDP equate to a better standard of living?
not necessarily, if GDP growth outpaces population growth, then avg QoL may be changed
Real GDP per Capita
real GDP / population
whats the relationship
Z = X / Y
%ΔZ = %ΔX - %ΔY
Can money buy happiness?
- richer countries have higher well-being on average
- money matters less the richer you get
- money isn’t everything
Why does measuring inflation matter?
it monitors standard of living and overal price lvl
define
Market Basket
typical goods and services purchased by households in the economy
define
Cost of Living
sum of all PQ in typical household (?)
Calculate Price Index
- choose a base year
- (cost of living / base yr cost of living) * 100
What does the consumer price index do?
monitors the cost of living!
Calculate Consumer Price Index
(Cost of mkt basket in a given yr / cost of mkt basket in base yr) * 100
Calculate Inflation
((CPI1 - CPI2) / CPI1) * 100
describe
Industrial Producer Price Index
IPPI
- measures goods bought by producers
- inflation based on commodities/raw materials
- an early indicator of inflation as primary commodities (ex. ores) experience price changes faster than goods and services
GDP Deflator Calculation
(Nominal GDP in a given yr / real GDP same yr) * 100
What does GDP deflator do
monitors economy-wide price changes
a deppressed economy is a result of…
inadequate spending!
What two variables trend similarly to GDP?
industrial production index and employment
define
The Business Cycle
the alternations between recession and expansion
unemployment rate has a ____ relationship with GDP
inverse!
define
long run growth per capita
sustained upward trend in output per person
key to higher wages and higher standard of living
when the economy is depressed inflation….
tends to fall
when the economy is booming, inflation…
tends to rise
define
Price Stability
when the prices change at an overall slow rate
a key goal of macro
define
Open Economy
an economy that has trade open with other countries
define
National accounts
a method of calculating consumer spending, business sales, investements, government purchases, etc
list
The Four Flows of Funds
- Government purchases of goods and services
- consumer spending
- investment spending
- exports
define
factor income
income earned by the factors of production
define
non-factor payments
income earned by the government (as a result of production of goods and services)
define
aggregate output
the total quantity of goods and services that an economy produces
define
Chained Dollars
a method of calculating real GDP that splits the difference between growth rates calculated using early base years and the growth rate calculated using a late base year
define
aggregate price level
a single number to define the overall price levels of final goods in the economy
define
market basket
a hypothetical consumption bundle of consumer purchases of goods and services
A price index for a base year is always…
100
True or false: the three measures of inflation (CPI, IPPI, and GDP deflator) tend to fluxuate similarly
vrai
true
formula for
employment rate
(# of ppl employed/# of people in the working age population) x 100
define
working age population
ppeople ages 15 and older
list
criteria to be unemployed
- does NOT have a parttime or fulltime job
- looked for jobs in the last 4 weeks
- is available for work
formula for
labor force
employed + unemployed
formula for
labor force pariticipation rate
(number of people in the labor force / number of peopole in the working age) x 100
formula for
unemployment rate
(unemployed / labor force ) x 100
define
Discouraged Worker
a person whose given up on searching for a job
not counted as part of the labor force
define
marginally attached workers
workers who are hopeful but waiting, not working and also not searching for a job
not in the labor force
define
underemployed workers
visible: part-time workers who want a full time job
invisible: workers who are dissasitisfied with their job
counted as employed
list
four places that unemployment can vary
- regions
- demographics
- ethnicities
- gender
define
jobless growth
growth is below average, so unemployment rises
define
Frictional Unemployment
unemployment due to job search, such as waiting for a job that fits your skillset
define
Structural Unemployment
unemployment that results when there are more people seeking jobs in a particular labor market than there are jobs avaliable at the current wage rate
define
Cyclical Unemployment
unemployment caused by recession
enough capacity, but not enough demand for output
formula for
Natural Rate of Unemployment
frictional + structural
list
Three Ways to Change Unemployment
- characteristics of workers in the labor force
- changes in labor market institutions
- changes in government policies
define
inflation
rate of chnage in the overall price level
define
disinflation
process of bringing the inflation rate down
define
Deflation
fall in overall price level
How often is the labor force survery?
monthly
define
quit rate
the fraction of workers voluntairily leaving their jobs in any given month
intepret unemployment rate as…
an indicator of overall labor market conditions
AN indication of the most unemployment being frictional is…
low unemployment rate and short average waiting time for unemployed
Government programs such as ——— and ———- can reduce natural unemployment
job training, subsidies
list
factors that influence structural unemployment
- minimum wage
- unions
- efficiency wages
- side effects of government policies
- mismatch between employees and employers
formula for
real wage
wage rate / price level
formula for
real income
nominal income / price level
define
shoe-leather costs
increased cost of trnsactions when people are running around and trying to avoid holding money
define
menu costs
the real cost of changing a listed price
define
unit-of-account costs
costs arising from the way inglation makes mone a less reliable unit of measurement
define
interest rate
the return a lender recieves for allowing borrowers the use of their savings for one year, calculated as a percentage of the amount borrowed
define
nominal interest rate
the interest rate defined in dollars
formula/definee
real interest rate
nominal interest rate - inflation
winners and losers
actual inflation > expected inflation
borrowers: gain
lenders: lose
reason: the real value of repayment is lower than expected
winners and losers
actual inflation < expected inflation
borrowers: lose
Lenders: gain
reason: real value of the repayment is higher than expected
define
core inflation
a measure that excludes volalile food and energy prices
How is long run economic growth measured?
real GDP per capita!
formula
%Δ real GDP per capita
%Δ real GDP - %Δ population
define + formula
rule of 70
number of years for x to double = 70 / average growth rate
the most important factor of LREG is…
productivity
define
productivity
labor productivity: real GDP / number of workers
output produced per worker
another
real GDP with productivity
real GDP = productivity x average hours per worker x proportion of population that works x population
list
three things that promote productivity
- inc in physical capital
- inc in human capital
- technological process
define
production function
a description that relates quantity of capital, labor, and tech to output
ex. we need specific inputs and tech and labor to make a slice of cake
formula of
production function
Y = A x f(K, L, H)
K
porduction function
physical capital in the economy
L
production function
labor or total amount of labor hours in production
H
production functio
human capital; could be measured by average years of schooling in LF or other similar means
A
production function
technology, aka total factor productivity
Y
produ
real GDP
Why real GDP per capita?
it isolates the effects of changes within the population
define
physical capital
manufactured resources such as buildings and machines
makes workers more productive
define
human capital
the improvement in labor caused by the education and knowledge embodied in the workforce
makes more productive workers
define
technological process
an advance in the technical means of the production of a good or service
define
positive marginal productvity of physical capital
the amount by which productivity is increased by a small increase in physical capital used
productivity is higher, all else the same when…
- more physical capital is used
- human capital increases
- technology improves
formula for
per worker production function
Y/L = A x f( (K/L) , (H/L) )
Y/L = y
Y / L
per worker production function
real output (GDP) per worker
K / L
per worker production function
real physical capital per worker
H / L
per worker production function
human capital per worker
A
per worker production function
total factor productivity
define
diminishing marginal returns
an increase in one input while keeping other inputs fixed will cause the increase in out out to get smaller and smaller
leads to a concave graph
define
growth accounting
estimates the contribution of each major factor int he per worker function to economic growth
formula for
CObb-Doulass production function
Y = K^(1/3) x L^(1/3) x H^(1/3) x A
When all exponents equal 1…
constant returns to scale
%Δy =
growth accounting output per worker
%ΔA + (1/3)%Δ(K/L) + (2/3)%Δ(H/L)
list
6 channels that government policy can promote economic growth through
that’s one backwards way of saying it…
- government subsidies to infrastructure
- government subsidies to education
- government subsidies to R&D (research and development)
- maintaining a well-functioning financial system
- protection of property rights
- political stability and good governance
define
property rights
legal rights held by owners of valuables to dispose of those valuables as they choose
define
intellectual property rights
rights of inventors to accrue the rewards of their inventions
define
convergence hypothesis
differences in real GDP per capita tend to narrow overtime because countries that start with lower real GDP per capita tend to have higher growth rates
Does money buy happiness?
- richer countries onaverage have higher well-being
- money matters less the richer you get
- money isn’t everything
environmental kuznets curve
environment will eventually improve :)
an increase in inventory will lead to…
increase in investment spending and an increase in GDP
