Term One Flashcards
What are the differences between GDP Deflator and CPI
CPI:
Fixed basket of goods
Goods from domestic and imports
GDP Deflator:
Basket of Goods varies
Only Domestically produced G and S
What is the difference between GDP and GNP,
Give a NFP defintions
GDP is all domestically produced G and S regardless of producer nationality.
GNP is GDP Plus Net Factor Payments (NFP)
It is all G and S produced by economies nationals, regardless of where it was produced.
NFP: payments to domestic factors abroad minus payments to foregin factors in domestic.
Is GDP a Stock or Flow Variable
It is a Flow,
Wealth is an example of a stock variable.
Why would you use chain-weighted GDP.
Give an explanation.
When you use constants base year for real GDP, prices can change significantly (e.g Computers) and the base year is no longer representative.
Chain -Weighted uses moving base year for the prices to ensure that the prices keep up to date with technological advancements.
Derive Saving Accounting Identity using GDP and the Saving from personal disposable income.
PDI= Y-T
Saving = PDI - C
Y= C + I + G + X - Z
S= I + G + X - Z - T
S + (T-G) = (X-Z) + I
Private + Gov Saving = NX + Investment = Total Saving
Define the Nominal Exchange Rate
It is the The price of a unit of domestic currency in terms of foreign currency. Dollars per each pound.
Donated by letter S
Define the Real Exchange Rate
It is the ratio of prices between domestic and foreign goods when they are expressed in the same currency.
Donated by sigma
Sigma = SP/P*
Define the effect of absolute purchasing power parity
where in the long run prices of domestic and foreign goods become equalized, therefore the real exchange rate is equal to 1.
Define relative purchasing power parity
In the long run, the real exchange rate is constant.
What is the Ballassa- Samuelson effect
In richer countries, non-tradeable goods have a higher price because they have higher demand.
What happens to tradeable prices
they equalise
What are the internal terms of trade
Where P is the price of non-traded goods and P* is the price of traded goods.
What are the external terms of trade
P are goods that exported
P* are goods that are imported
What happens to net exports when the real exchange rate depreciates?
domestic goods will cost less the foreign goods.
Therefore import demand falls as they are more expensive (relatively).
Domestic firms will try to offset this by producing there own substitutes for cheaper.
This will result in an increase in the level of export demand.
What is the difference between static and dynamic models?
Static Models are in a steady state and tell you what the equilibrium is. They are a snapshot at one point in time.
Dynamic models show you the equilbrium and how to move away and towards it. They are across time periods.
What is Okun’s law? Give the equation.
if output is above trend rate, then unemployment will be below equilibrium and visa-versa. U -Ubar= -g(Y-Ybar)
Define the output gap
The percentage difference between the actual output and the trend output.
What is a leading, lagging or coincident varible.
Leading and lagging are obvious.
Coincident means that they move at the same time.
What are the three types of arbitrage?
Triangular, Spatial and Yield
Explain Yield Arbitrage
There is an inverse relationship between price and rate of return for a bond.
Yield is where the process of buying and selling causes the rate of return of two bonds to become equalised.
What is spatial arbitrage?
It is where the rate of return of bonds differs due to their geographical location.
What is an arbitrage opportunity?
It is where someone makes a profit due to a difference in the price between two investment opportunities.
What is triangular arbitrage?
Where there are three countries and you convert from one currency to the other.
Then when you complete the full circle, you should have the initial investment left over. If not, it is because of arbitrage differences.
Write down the UIP condition
It=I*t-(St+1-St)/St
