PRINCIPLES OF MACRO: The Macroeconomic Environment V2 Flashcards
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Define Macroeconomics
Macroeconomics examines various issues affecting whole economies (the economy on an aggregate level).
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the major macroeconomic issues?
- Economic growth
- Unemployment
- Inflation
- Economic relationships with the rest of the world
- The financial well-being of individuals
- Businesses and government
- The relationship between the financial system and the economy
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What does Economic Growth describe?
Economic growth is the term economists use to describe the change in the level of an economy’s output from period to period. The rate of economic growth measures the percentage change in output. This is usually measured over short periods, such as 12 or 3 months.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What is one of the most important observations of economic growth? Give an example.
Volatility
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Economic growth is argued to have “twin” characteristics. What are they?
Short-term rates of growth but positive long-term growth.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the Short-term rates of growth characteristics?
Fluctuating growth in real GDP from quarter to quarter of year to year. Consistent with the concept of the inherent instability of the economy.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the differences between Nominal and Real figures?
Nominal figures are measured in the actual prices occurring at the time of measurement. Measured at current prices.
Real figures adjust for changes in prices and, hence, for inflation. Measured at constant prices.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Define nominal GDP
The market value of the final production of goods and services within a country in a given period using that year’s prices (also called “current prices”).
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Define real GDP
Nominal GDP adjusted for changes in the price level, using prices from a base year (constant prices) instead of “current prices” used in nominal GDP; real GDP adjusts the level of output for any price changes that may have occurred over time.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Define current prices
The prices at which goods are sold in a nation in a particular year; current prices are used when calculating nominal GDP.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Define constant prices
The prices from a base year that are used to calculate real GDP in other years; this allows for a more accurate measure of how a country’s actual output changes over time, because using constant prices cancels out any changes in the price level between years.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What is the main difference between nominal and real values?
The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP. This calculation shows how much a change in the base year’s GDP relies upon changes in the price level.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Why do we need to calculate real GDP?
Real values measure the…
1. Purchasing power net of any price changes over time.
- The real GDP determines the purchasing power net of price changes for a given year.
- Real GDP accounts for inflation and deflation.
- It transforms the money-value measure from nominal GDP into an index for the Economy’s quantity of total output.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the main problems from nominal GDP?
The nominal GDP figure can be misleading when considered by itself, since it could lead a user to assume that significant growth has occurred, when in fact there was simply a jump in a country’s inflation rate.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
How is real GDP calculated?
The figures are derived by a process known as chain linking. Real GDP is calculated by dividing nominal GDP over a GDP deflator.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Explain the process of chain linking.
Involves taking GDP values in consecutive pairs of years (e.g. 2020 and 2021) and re-calculating the more recent of the two years (2021) as if prices in the previous year (2020) had continued to prevail.
You can then calculate the percentage change between this re-calculated GDP number and GDP in the previous year. This then gives you an estimate of the volume change in percentage terms between this pair of years (e.g. the % change in the volume of production/consumption between 2020 and 2021).
By doing so you will have a data series that represents percentage changes in volumes from year to year.
Finally, choose a particular year known as the reference year, (e.g. 2019, and apply the volume changes (percentage changes) both forwards and backwards to the nominal GDP value for this year. This creates a quantity measure in value terms at constant reference year prices (e.g. at constant 2019 prices).
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What does an increase in real GDP imply?
An increase in real GDP means that aggregate demand has risen faster than the rate of inflation and therefore the economy is experiencing growth.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
If general price levels are rising which is greater: the growth of nominal GDP or the growth of real GDP?
Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What is a sign of volatility?
The most common way of showing economic volatility is through the annual rates of growth of real (constant-price) GDP, i.e. the annual percentage changes in real GDP.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the signs of inherent instability that characterises the macroeconomic environment
Short-term growth rates illustrate volatility and Fluctuating growth rates generate business cycles.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Define GDP
Gross Domestic Product is the values of output produced within a country, typically a 3-month or 12-month period.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What type of goods does GDP use and exclude?
GDP focuses on final goods and services (those purchased by a final user). It excludes intermediate goods and services (those used up in the process of making something else).
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What is the exception to the rule that intermediate goods and services are excluded from GDP?
The exception is when intermediate goods and services are exported overseas.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
Why are the terms national output and national income used interchangeably?
National output generates national income.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
When comparing nominal (current-price) GDP over time, what’s occurring in terms of inflation?
When comparing nominal (current-price) GDP over time, no adjustment is being made for the effect of inflation
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
How much was Nominal GDP in the UK in 1999 and 2017?
1999: rose above £1 trillion
2017: rose above £2 trillion
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
If you want to measure changes in the volume of production, what must you do?
If we are talking about changes in the volume of production we need to eliminate the effects of price changes on GDP.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What does Real GDP figures take into account?
Real GDP figures take account of inflation by eliminating changes in nominal GDP that arise from changes in prices.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What form of GDP does economic growth relate to?
Economic growth relates to changes in real GDP (constant-price GDP)
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What does the growth of real GDP allow us to infer?
The growth of real GDP allows us to infer the growth in the volume of output
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What does the growth of nominal GDP allow us to infer?
The growth of nominal GDP (current-price GDP) reflects changes in the value of output. The growth of nominal GDP therefore reflects both changes in volumes of output and changes in prices
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
When the rate of inflation is positive, what is the state of the economy in terms of GDP?
When the rate of inflation is positive, real GDP figures will grow more slowly than nominal GDP figures
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What is an example of nominal GDP rising giving an incorrect idea about the economy?
- Nominal GDP rose by 24.2%, which gives the depiction that the economy was growing.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What was the national output and real GDP in 1975?
Contrary to the growth in nominal GDP, the volume of national output was contracting and real GDP fell by 1.5%.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What lead to the 24.2% growth in nominal GDP in 1975?
The growth in nominal GDP was being driven by inflation and not by the volume of output which was falling.
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the main factors behind fluctuation in rates of growth in real GDP from period to period
The business cycle and demand-side factors
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
What are the main factors behind the path in the level of real GDP when seen over many periods (long-term growth in real national income and volume of production)
Long-term growth and supply-side factors
Introduction to Macroeconomic Issues and Ideas: An Overview of Key Macroeconomic Issues
