Test 1: Chapters 1, 2, 19, 20 Flashcards
What is economics?
The study of the use of scarce resources to satisfy unlimited wants.
What is scarcity?
As resources are limited. (diamond, platinum, oil, time: work/leisure).
What is opportunity cost?
What we give up relative to what we gain (what we give up to get something else).
What are the factors of production?
- Land (physical stuff)
- Labour (human capital)
- Capital (new plant + equipment (buildings, cars, trucks))
- Entrepreneurialship (reward for combining all 3)
What is the endowment?
- Amount of the factors of production on hand at any given time. It “makes stuff”
- Tells us how much we can make based on what we have
What is the Production Possibility Frontier/Boundary?
- PPF/PPB
- A curve that shows alternate combinations of goods that can be produced if all resources are used efficiently.
- Opportunity cost defines the slope (change in y/change in x)
- Points on curve are efficient
- Points within curve are attainable but inefficient
- Points outside the curve are unattainable
What is efficient?
When we can’t get more of one good without giving up some of the other.
What is a positive statement (economics)?
- What is
- Don’t involve value judgments
- Statements about matters of fact
- What actually is, was, or will be
What is a normative statement (economics)?
- What should be
- Depends on value judgment
- Cannot be evaluated solely by a recourse to facts
What are the four economic problems?
- What is produced and how?
- What is consumed and by whom?
- Why are resources idle at times?
- Is productive capacity growing?
What income are the returns to factors of production ( what do we receive for each factor of production)?
Land - rent
Labour - wages
Capital - interest
Entrepreneurialship - profit
What happens when productive capacity is growing?
Endowment increases, so GDP increases, so income increases.
When endowment increases. there’s an increase in production capacity = what was previously unattainable is now attainable (PPF shift outwards)
What is GDP?
- Gross Domestic Product
- Value of output in an economy
- Using domestic factors of production (land, labour…)
What is output?
output = expenditures = income
What is micro?
Individual or firm.
- Relative prices
- Firm output
- Individual labour supply
What is macro?
Country/economy (government spending, unemployment, national output, interest rates).
- Aggregate prices
- GDP
- Employment and unemployment
What are economics and government policy?
- Efficiency: producing what is wanted at lowest cost
- Economic fairness
- Resource distribution: keeping resources from being idle
- Growth: GDP increases, income increases
What is the nature of market economics?
- Self-organizing: self-interest, coordinated outcome
- Efficiency: produce what people want
- Self-interest and incentives: price increases - sell more, price decreases - buy more
What is specialization?
Doing few (or 1) task instead of many.
What is division of labour?
Breaking down production into few smaller specialized tasks.
What are the types of economic systems?
- Traditional: passed down by generation
- Command: central planned (communism)
- Free Market: market decides distribution
- Mixed economies: combination of 2+3, greater involvement of government
What are theories?
- An abstraction from reality
- Consists of: variables, assumptions, predictions
How do we test theories?
- Confronting predictions with evidence
- If it is in conflict with facts, it’s either amended or discarded to be replaced by a superior theory
What is a positive correlation?
X and Y move in the same directions.
What is a negative correlation?
X and Y move in opposite directions.
What are index numbers?
- Measure of some variable expressed relative to a base period, which is assigned the value 100.
- Can be used to compare different assets.
Value of index in given period = Absolute value in given period/Absolute value in base period X 100
What is cross-sectional data?
A single point in time.
What is time-series data?
Over time.
What is a scatter diagram?
- Graph showing 2 variables
- Each point represents the values of the variables for a particular unit of observation.
How can a function be expressed?
- In a verbal statement
- In a numerical schedule (a table)
- In a mathematical equation
- In a graph
What is the slope of a straight line?
- Slope (b) = ^Y/^X
- y = a + bx
- a = intercept
What is the slope of a non-linear function?
- Slope of curve changes as x changes
- Depends on x
- – slope = 0 \ negative slope | infinite slope
What is the role of the government in the macroeconomy?
- Fiscal policy
- Monetary policy
- Incomes policies
- Supply side policies
What is the fiscal policy?
How the government affects output through spending and taxes.
What is the monetary policy?
How the central bank (bank of Canada) controls the money supply (MS) to affect interest rates, output, prices…
What are incomes policies?
Direct attempt by government to control wages and prices.
What are the supply side policies?
Taxation measures designed to affect the supply side of the economy (decrease in taxes).
What are the key macroeconomic variables?
- National product/income (Y)
- Employment, unemployment and the labour force (E, U, LF)
- Inflation and the Price level (P)
What is real?
Measured in base year dollars or adjusted for inflation.
What is nominal?
Valued in today’s dollars.
What is the business cycle?
- Peaks and valleys
- Fluctuations of RGDP around a trend
- Recession, trough, recovery, peak
What is the potential output?
- Yp
- The amount of output the economy would produce if resources were fully employed
What is the output gap?
Output gap = actual output - potential output
OG = Y - Yp
What happens if Y
- Recession
- OG < 0
- Recessionary gap
What happens if Y>Yp?
- Boom/inflation
- OG > 0
- Inflationary gap
What does it mean to be employed?
- 15 years old or over (adult workers)
- Work for pay or profit
What does it mean to be unemployed?
- 15 years old or over
- Not employed but actively seeking employment (4 weeks)
What does it mean to not be in the labour force?
- Without work
- Not actively seeking employment
What does it mean to be apart of the labour force?
- Employed or unemployed
- LF = E + U
What is the working age population?
- WAP
- 15 or over
- Available to work (includes LF and not LF)
What is the labour force participation rate?
LF/WAP X 100
- Normally when this grows, our potential output grows
What is the unemployment rate?
U/LF X 100
What is the employment rate?
E/LF X 100
What are the types of unemployment?
- Frictional: due to the “normal” working of the labour market (new entry, laid off, quit).
- Structural: occurs because of a mismatch between the supply and demand for labour (lack of skills, geographically challenged, occupation).
- Cyclical: due to economic downturn - recession.
What happens if Y=Yp?
- Full employment/natural rate
- Only frictional and structural unemployment
What is NAIRU?
Non Accelllerating Inflation Rate of Unlemployment
What are the costs of unemployment?
- Lost output/income
- Economic hardship
- Lower growth and investment
- General unrest
What is the consumer price index?
- CPI
- Measure of aggregate price
- Looks at the cost of a virtual basket meant to represent consumption of the average consumer
CPI = value of basket in current(given) year/value of basket in base year X 100
%^CPI = new-old/old X 100
What is the inflation rate?
- % change in CPI
- % change in GDPDEF
What are interest rates?
i = amount paid/$ borrowed (%)
Nominal (i)
Real (r)
i = r + inflation
What are exchange rates?
- e
- Value of currency in terms of another
What happens when e increases?
- Depreciation
- Worth less
- Pay more to get same amount
What happens when e decreases?
- Appreciation
- Worth more
- Pay less to get same amount
What happens when interest rates go up?
Spending goes down.
What is real GDP?
Value of current year output in base year prices.
(if base year is year 1)
RGDPy1 = P1 X Q1
RGDPy2 = P1 X Q2
What is nominal GDP?
Valued in today’s prices.
NGDPy1 = P1 X Q1
NGDPy2 = P2 X Q2
What is the percent change in NGDP?
%^NGDP (y1-y2) = NGDPy2 - NGDPy1 / NGDPy1 X 100
What is the percent change in RGDP?
%^RGDP (y1-y2) = RGDPy2 - RGDPy1 / RGDPy1 X 100
How do we calculate price increase?
%^NGDP - %^RGDP
What is the GDP deflator?
- GDPDEF
- A measure of aggregate price
GDPDEF = NGDP/RGDP X 100
What is the percent change in GDPDEF?
%^GDPDEF (y1-y2) = GDPDEFy2 - GDPDEFy1 / GDPDEFy1 X 100
What is aggregate price?
- Average price
- Gage to what we believe prices are
- Index number?
What is the CPI in year 1 and 2?
CPIy1 = value of basket in year 1 prices (P1 X Q1) / value of basket in year 1 prices (P1 X Q1) X 100
CPIy2 = value of basket in year 2 prices (P2 X Q1) / value of basket in year 1 prices (P1 X Q1) X 100
What is the percent change in CPI?
%^CPI (y1 - y2) = CPIy2 - CPIy1 / CPIy1 X 100
What is CPI?
- Subset of goods
- Change in price, fixed quantities
- Accurate (more than GDPDEF)
- Average consumer
base year 2002
updated every 2 years
What is GDPDEF?
- All goods
- Change in quantities, fixed price
- Measured with error
- All consumers
base year 2007
updated every quarter (3 months)
What are the problems with the CPI?
Causes overstatement.
- New good bias (prices go down, don’t change)
- Substitution bias (buy cheap over expensive)
- Quality change bias (upgraded models)
What are the problems with GDP?
- Illegal activities
- Underground economy
- Home production and leisure
- Economic “bads”
What is GDP/capita?
RGDP/population
What is the circular flow of income?
Markets:
- Goods Market: buy stuff
- Financial Market: lenders meet borrowers
- Factor Market: buy and sell factors (land…)
Participants:
- Households
- Domestic firms and financial systems
- Government
- Rest of the world
What is the circular flow chart?
Look at picture
How do we determine GDP?
- Value added approach
- Expenditure approach (add all expenditures)
- Income approach (add all income)
What is the value added approach?
- Value of output less the value of inputs used in production.
- Difference between what you paid and what you sell it for
What are intermediate goods?
Goods used as inputs in production.
What are final goods?
Goods to end consumer (iI buy and I won’t sell).
What is the expenditure approach?
GDP = C + I + G + (X - IM)
What is consumption?
- C
- All final sales
- Durable, semi-durable, non-duarable, services
What are investments?
- I
- Gross investments
- New plant, equipment, inventory, new housing
What is net investment?
Net investment = gross investment - depreciation
What is depreciation?
- Depreciation = gross investment - net investment
- Capital cost allowance (CCA)
- Replacement cost of capital
What are government expenditures?
- G
- All levels of government purchases
- Excludes government transfers (money that is provided that no good is given for - healthcare, education)
What are exports?
- X
- Canadian goods sold abroad
What are imports?
- IM
- Foreign goods sold in Canada
What are net exports?
- NX
- X - IM
What is the income approach?
GDP = NDI (at factor cost) + non-factor payments
What is net domestic income (at factor cost)?
NDI = labour income + incorporated business income (dividends and retained earning) + unincorporated business income + farm income + rental income + interest income
OR
NDI = GDP - (interest taxes - subsides) - depreciation
What are non-factor payments?
(indirect taxes - subsides) + depreciation
What is gross national product?
- Value of producing domestically owned factors
- Take into account what we own elsewhere and what elsewhere owns here
GNP = GDP + NFII
What is net foreign investment income?
NFII = income received by Canadians from foreigners - incomes paid to foreigners by Canadians
What is net domestic product?
The total amount of new stuff that’s made.
NDP = GDP - depreciation
