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Macro > Test 1: Chapters 1, 2, 19, 20 > Flashcards

Test 1: Chapters 1, 2, 19, 20 Flashcards

1
Q

What is economics?

A

The study of the use of scarce resources to satisfy unlimited wants.

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2
Q

What is scarcity?

A

As resources are limited. (diamond, platinum, oil, time: work/leisure).

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3
Q

What is opportunity cost?

A

What we give up relative to what we gain (what we give up to get something else).

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4
Q

What are the factors of production?

A
  1. Land (physical stuff)
  2. Labour (human capital)
  3. Capital (new plant + equipment (buildings, cars, trucks))
  4. Entrepreneurialship (reward for combining all 3)
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5
Q

What is the endowment?

A
  • 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
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6
Q

What is the Production Possibility Frontier/Boundary?

A
  • 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
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7
Q

What is efficient?

A

When we can’t get more of one good without giving up some of the other.

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8
Q

What is a positive statement (economics)?

A
  • What is
  • Don’t involve value judgments
  • Statements about matters of fact
  • What actually is, was, or will be
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9
Q

What is a normative statement (economics)?

A
  • What should be
  • Depends on value judgment
  • Cannot be evaluated solely by a recourse to facts
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10
Q

What are the four economic problems?

A
  1. What is produced and how?
  2. What is consumed and by whom?
  3. Why are resources idle at times?
  4. Is productive capacity growing?
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11
Q

What income are the returns to factors of production ( what do we receive for each factor of production)?

A

Land - rent
Labour - wages
Capital - interest
Entrepreneurialship - profit

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12
Q

What happens when productive capacity is growing?

A

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)

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13
Q

What is GDP?

A
  • Gross Domestic Product
  • Value of output in an economy
  • Using domestic factors of production (land, labour…)
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14
Q

What is output?

A

output = expenditures = income

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15
Q

What is micro?

A

Individual or firm.

  1. Relative prices
  2. Firm output
  3. Individual labour supply
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16
Q

What is macro?

A

Country/economy (government spending, unemployment, national output, interest rates).

  1. Aggregate prices
  2. GDP
  3. Employment and unemployment
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17
Q

What are economics and government policy?

A
  1. Efficiency: producing what is wanted at lowest cost
  2. Economic fairness
  3. Resource distribution: keeping resources from being idle
  4. Growth: GDP increases, income increases
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18
Q

What is the nature of market economics?

A
  1. Self-organizing: self-interest, coordinated outcome
  2. Efficiency: produce what people want
  3. Self-interest and incentives: price increases - sell more, price decreases - buy more
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19
Q

What is specialization?

A

Doing few (or 1) task instead of many.

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20
Q

What is division of labour?

A

Breaking down production into few smaller specialized tasks.

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21
Q

What are the types of economic systems?

A
  1. Traditional: passed down by generation
  2. Command: central planned (communism)
  3. Free Market: market decides distribution
  4. Mixed economies: combination of 2+3, greater involvement of government
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22
Q

What are theories?

A
  • An abstraction from reality

- Consists of: variables, assumptions, predictions

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23
Q

How do we test theories?

A
  • Confronting predictions with evidence

- If it is in conflict with facts, it’s either amended or discarded to be replaced by a superior theory

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24
Q

What is a positive correlation?

A

X and Y move in the same directions.

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25
Q

What is a negative correlation?

A

X and Y move in opposite directions.

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26
Q

What are index numbers?

A
  • 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

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27
Q

What is cross-sectional data?

A

A single point in time.

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28
Q

What is time-series data?

A

Over time.

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29
Q

What is a scatter diagram?

A
  • Graph showing 2 variables

- Each point represents the values of the variables for a particular unit of observation.

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30
Q

How can a function be expressed?

A
  • In a verbal statement
  • In a numerical schedule (a table)
  • In a mathematical equation
  • In a graph
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31
Q

What is the slope of a straight line?

A
  • Slope (b) = ^Y/^X
  • y = a + bx
  • a = intercept
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32
Q

What is the slope of a non-linear function?

A
  • Slope of curve changes as x changes
  • Depends on x
  • – slope = 0 \ negative slope | infinite slope
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33
Q

What is the role of the government in the macroeconomy?

A
  1. Fiscal policy
  2. Monetary policy
  3. Incomes policies
  4. Supply side policies
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34
Q

What is the fiscal policy?

A

How the government affects output through spending and taxes.

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35
Q

What is the monetary policy?

A

How the central bank (bank of Canada) controls the money supply (MS) to affect interest rates, output, prices…

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36
Q

What are incomes policies?

A

Direct attempt by government to control wages and prices.

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37
Q

What are the supply side policies?

A

Taxation measures designed to affect the supply side of the economy (decrease in taxes).

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38
Q

What are the key macroeconomic variables?

A
  1. National product/income (Y)
  2. Employment, unemployment and the labour force (E, U, LF)
  3. Inflation and the Price level (P)
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39
Q

What is real?

A

Measured in base year dollars or adjusted for inflation.

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40
Q

What is nominal?

A

Valued in today’s dollars.

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41
Q

What is the business cycle?

A
  • Peaks and valleys
  • Fluctuations of RGDP around a trend
  • Recession, trough, recovery, peak
42
Q

What is the potential output?

A
  • Yp

- The amount of output the economy would produce if resources were fully employed

43
Q

What is the output gap?

A

Output gap = actual output - potential output

OG = Y - Yp

44
Q

What happens if Y

A
  • Recession
  • OG < 0
  • Recessionary gap
45
Q

What happens if Y>Yp?

A
  • Boom/inflation
  • OG > 0
  • Inflationary gap
46
Q

What does it mean to be employed?

A
  • 15 years old or over (adult workers)

- Work for pay or profit

47
Q

What does it mean to be unemployed?

A
  • 15 years old or over

- Not employed but actively seeking employment (4 weeks)

48
Q

What does it mean to not be in the labour force?

A
  • Without work

- Not actively seeking employment

49
Q

What does it mean to be apart of the labour force?

A
  • Employed or unemployed

- LF = E + U

50
Q

What is the working age population?

A
  • WAP
  • 15 or over
  • Available to work (includes LF and not LF)
51
Q

What is the labour force participation rate?

A

LF/WAP X 100

- Normally when this grows, our potential output grows

52
Q

What is the unemployment rate?

A

U/LF X 100

53
Q

What is the employment rate?

A

E/LF X 100

54
Q

What are the types of unemployment?

A
  1. Frictional: due to the “normal” working of the labour market (new entry, laid off, quit).
  2. Structural: occurs because of a mismatch between the supply and demand for labour (lack of skills, geographically challenged, occupation).
  3. Cyclical: due to economic downturn - recession.
55
Q

What happens if Y=Yp?

A
  • Full employment/natural rate

- Only frictional and structural unemployment

56
Q

What is NAIRU?

A

Non Accelllerating Inflation Rate of Unlemployment

57
Q

What are the costs of unemployment?

A
  1. Lost output/income
  2. Economic hardship
  3. Lower growth and investment
  4. General unrest
58
Q

What is the consumer price index?

A
  • 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

59
Q

What is the inflation rate?

A
  • % change in CPI

- % change in GDPDEF

60
Q

What are interest rates?

A

i = amount paid/$ borrowed (%)
Nominal (i)
Real (r)
i = r + inflation

61
Q

What are exchange rates?

A
  • e

- Value of currency in terms of another

62
Q

What happens when e increases?

A
  • Depreciation
  • Worth less
  • Pay more to get same amount
63
Q

What happens when e decreases?

A
  • Appreciation
  • Worth more
  • Pay less to get same amount
64
Q

What happens when interest rates go up?

A

Spending goes down.

65
Q

What is real GDP?

A

Value of current year output in base year prices.
(if base year is year 1)
RGDPy1 = P1 X Q1
RGDPy2 = P1 X Q2

66
Q

What is nominal GDP?

A

Valued in today’s prices.
NGDPy1 = P1 X Q1
NGDPy2 = P2 X Q2

67
Q

What is the percent change in NGDP?

A

%^NGDP (y1-y2) = NGDPy2 - NGDPy1 / NGDPy1 X 100

68
Q

What is the percent change in RGDP?

A

%^RGDP (y1-y2) = RGDPy2 - RGDPy1 / RGDPy1 X 100

69
Q

How do we calculate price increase?

A

%^NGDP - %^RGDP

70
Q

What is the GDP deflator?

A
  • GDPDEF
  • A measure of aggregate price

GDPDEF = NGDP/RGDP X 100

71
Q

What is the percent change in GDPDEF?

A

%^GDPDEF (y1-y2) = GDPDEFy2 - GDPDEFy1 / GDPDEFy1 X 100

72
Q

What is aggregate price?

A
  • Average price
  • Gage to what we believe prices are
  • Index number?
73
Q

What is the CPI in year 1 and 2?

A

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

74
Q

What is the percent change in CPI?

A

%^CPI (y1 - y2) = CPIy2 - CPIy1 / CPIy1 X 100

75
Q

What is CPI?

A
  1. Subset of goods
  2. Change in price, fixed quantities
  3. Accurate (more than GDPDEF)
  4. Average consumer

base year 2002
updated every 2 years

76
Q

What is GDPDEF?

A
  1. All goods
  2. Change in quantities, fixed price
  3. Measured with error
  4. All consumers

base year 2007
updated every quarter (3 months)

77
Q

What are the problems with the CPI?

A

Causes overstatement.

  1. New good bias (prices go down, don’t change)
  2. Substitution bias (buy cheap over expensive)
  3. Quality change bias (upgraded models)
78
Q

What are the problems with GDP?

A
  1. Illegal activities
  2. Underground economy
  3. Home production and leisure
  4. Economic “bads”
79
Q

What is GDP/capita?

A

RGDP/population

80
Q

What is the circular flow of income?

A

Markets:

  1. Goods Market: buy stuff
  2. Financial Market: lenders meet borrowers
  3. Factor Market: buy and sell factors (land…)

Participants:

  1. Households
  2. Domestic firms and financial systems
  3. Government
  4. Rest of the world
81
Q

What is the circular flow chart?

A

Look at picture

82
Q

How do we determine GDP?

A
  • Value added approach
  • Expenditure approach (add all expenditures)
  • Income approach (add all income)
83
Q

What is the value added approach?

A
  • Value of output less the value of inputs used in production.
  • Difference between what you paid and what you sell it for
84
Q

What are intermediate goods?

A

Goods used as inputs in production.

85
Q

What are final goods?

A

Goods to end consumer (iI buy and I won’t sell).

86
Q

What is the expenditure approach?

A

GDP = C + I + G + (X - IM)

87
Q

What is consumption?

A
  • C
  • All final sales
  • Durable, semi-durable, non-duarable, services
88
Q

What are investments?

A
  • I
  • Gross investments
  • New plant, equipment, inventory, new housing
89
Q

What is net investment?

A

Net investment = gross investment - depreciation

90
Q

What is depreciation?

A
  • Depreciation = gross investment - net investment
  • Capital cost allowance (CCA)
  • Replacement cost of capital
91
Q

What are government expenditures?

A
  • G
  • All levels of government purchases
  • Excludes government transfers (money that is provided that no good is given for - healthcare, education)
92
Q

What are exports?

A
  • X

- Canadian goods sold abroad

93
Q

What are imports?

A
  • IM

- Foreign goods sold in Canada

94
Q

What are net exports?

A
  • NX

- X - IM

95
Q

What is the income approach?

A

GDP = NDI (at factor cost) + non-factor payments

96
Q

What is net domestic income (at factor cost)?

A

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

97
Q

What are non-factor payments?

A

(indirect taxes - subsides) + depreciation

98
Q

What is gross national product?

A
  • Value of producing domestically owned factors
  • Take into account what we own elsewhere and what elsewhere owns here

GNP = GDP + NFII

99
Q

What is net foreign investment income?

A

NFII = income received by Canadians from foreigners - incomes paid to foreigners by Canadians

100
Q

What is net domestic product?

A

The total amount of new stuff that’s made.

NDP = GDP - depreciation

Macro (3 decks)

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