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ECON 102 > Module 5 > Flashcards

Module 5 Flashcards

1
Q

why can statistical discrepancy not be a good measure in the true error of computing the GDP

A
  • both the income and expenditure approach could be underestimated (lower than what it actually is)
  • then you wouldn’t be able to see it in the discrepancy error
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2
Q

what are the 2 main sources of error that you need to be aware of

A
  1. From the difficulty of measuring the value of non-market goods produced
  2. Ability of GDP to measure the standard of living
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3
Q

what is the error from the difficulty of measuring the value of non-market goods produced

A
  • Non-market goods are those produced in the underground economy and those goods and services that are produced without being sold on a market
  • The underground economy includes illegal activities, or legal activities that aren’t reported so taxes can be evaded
  • Goods and services that aren’t sold in markets are things like fixing our houses, cooking, etc.
  • Statistics Canada can estimate the size of the underground economy, but its difficult tot estimate household production
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4
Q

what is the error of the ability of GDP to measure the standard of living

A
  • Ex. even if the quality of education or the health care system is an important factor that contributes to the well-being of an economy, its not taken into account in the GDP
  • Same thing for the quality of the environment (air, water, etc.), the level of income inequality, etc.
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5
Q

what is the purpose of quantity indexes

A

to measure the change in the value of a basket of goods at constant prices

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6
Q

what does the passche quantity index do

A

fix the prices to the current period

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7
Q

what is the real value/value at constant prices

A

when the value of a set of goods for different periods is computed using the prices of the same period

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8
Q

what does the passche quantity index do

A

uses the prices of the base period

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9
Q

how much is one period for monthly data

A

1 month

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9
Q

why is there an issue with the Laspeyres and Paasche quantity indexes

A
  • they are both based on the value of a basket of goods using prices from a distant period
  • Ex. the 1990 Paasche quantity index is the value of the goods purchased in 1980 at the price of 1990
  • Since the quality and specificity of goods change rapidly, it makes no sense to value them using prices from distant periods
  • Ex. computers in 1990 were very slow compared with the ones we have today
  • The price for a personal computer could be over $4k
  • Should we use that price to value today’s computer?
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9
Q

what is the solution the issue with the Laspeyres and Paasche quantity indexes

A
  • The first solution was to keep changing the base year, but when to change it?
  • Now the solution is to never use prices and quantities that are separated by more than 1 period
  • 1 period is determined by the frequency of the data
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10
Q

how much is one period if the frequency of the data (observation) is 5 years

A

5 years

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10
Q

how much is one period for quarterly data

A

1 quarter

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11
Q

what are price indexes in comparison to quantity indexes

A

they are like quantity indexes, but the quantities are held fixed instead of prices

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11
Q

what does the paasche price index do

A

hold the current basket of goods fixed

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11
Q

what is the fisher quantity index theory

A

the theory that the ideal index should be between the Paasche and the Laspeyres

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11
Q

what does a higher price index mean

A

it means that a given basket of goods cost more

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11
Q

what is the objective of price indexes

A

to measure the change in value of a fixed basket of goods

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12
Q

what is real GDP

A
  • makes production/output/quantity remain constant even when prices are changing
  • so an increase in real GDP is an increase in production not price
12
Q

what does the laspeyres price index do

A

has the basket of goods from the base period that is fixed

13
Q

what does the value of real GDP depend on

A
  • the base year
  • ex. the value of 1994 real GDP with the base year of 1992 is 739.5, but the value of the same year with the base year of 1990 is 714
13
Q

how are nominal variables measured

A

they are measured based on current prices

13
Q

what is nominal GDP measuring

A

measuring economic activity at current price

13
Q

what happens to nominal GDP when prices increase

A

nominal GDP will also increase even if production is the same

14
Q

what kind of index is CPI

A
  • laspeyres type of price index
  • but the price reference period isn’t the same as the basket reference period
14
Q

what is a way to obtain real GDP

A

construct a quantity index and use the index to calculate the real GDP

15
Q

what are the different types of measures of inflation and their purpose

A
  • For measuring the changes in the cost of living, inflation rate is generally based on the CPI
  • For measuring the changes in the price level of goods produced in the economy, its based on the GDP deflator
  • Other measures can also serve other purposes
  • Ex. the Bank of Canada will have their own measure when designing monetary policies
15
Q

how do you interpret index numbers/ real GDP

A
  • can compare the index # to others
  • ex. comparing the index # of one year to the to the base year = 100 (# - 100) = % change in quantity
16
Q

can you compare 2 real values

A

only if they are measured at the prices of the same year

17
Q

what is the deflation approach

A

Consists of transforming nominal values into real values using price indexes

17
Q

how does the deflation approach work

A
  • Each component of the nominal GDP is deflated with the appropriate price index, and you add them up to calculate the real GDP
  • Ex. the value of durable goods is deflated with a price index constructed from the price of durable goods only
  • This is done because the prices of each component don’t have the same behaviour
18
Q

what is the inflation rate

A

the growth rate of the general price level

18
Q

what is the GDP deflator

A
  • an index that measures the overall changes in the price of all goods included in the GDP
  • Like average movement of all prices
18
Q

what are inflation rates normally

A
  • the annualized growth rates between 2 successive periods
  • if the data is already annual data, then only need to calculate the growth rates and don’t need to annualize it
19
Q

what is the decrease in general price level called

A

deflation

19
Q

when is the inflation rate is negative

A

when the price level decreases

19
Q

how do you calculate the inflation rate

A
  • since its a growth rate of the price index, just use the growth rate formula on the price index
  • the one that is xt - xt-1 / xt-1
19
Q

with the GDP deflator, what can CPI used to do

A

transform nominal values into real values

19
Q

who is CPI more appropriate for and why

A

its better for household members because the basket of goods used for the index is what households consume

19
Q

what happens to the real value when it grows at a slower rate than inflation

A

the real value decreases

19
Q

what does CPI inflation usually do

A

overestimates the change in cost of living since the items in the basket of goods was determined several periods in the past, and can change over time

19
Q

what happens to the real value when it grows at a faster rate than inflation

A

the real value increases

19
Q

if the growth rate of nominal wage was higher than inflation, what happens

A

the variable (ex. wage) was more fully indexed to inflation

19
Q

what happens when the nominal value and inflation grows at the same rate

A

the variable is indexed to inflation

19
Q

what is it called when welfare/pension benefits grow at the same rate as inflation

A

its inflation indexed

19
Q

what is inflation-indexed income

A

a way to preserve the purchasing power of individuals

ECON 102 (6 decks)

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