test 2 Flashcards
what is the GDP
measures a country’s aggregate economic activity, total output of goods and services (total value of final goods and services produced within a country during a particular year)
what is a final good
good or product that is at its last stage of production and ready to be consumed (car vs steel which is a intermediate good)
6 limitations to the GDP
- exclusion of non-market transactions
- does not account for the inequality of income and wealth
- rises with each incident of social breakdown (crime, divorce)
- rises with each environmental disaster, pollution, repair expenditure
- does not account for the depletion of natural resources
- increases with war expenditure and post-war rebuilding activities
what is the human development index (HDI)
ranks countries on a scale from 0-1
- low: (0-.499)
- medium: (.5-.699)
- high: (.7-.799)
- very high: (.8-1)
3 developmental goals that countries are ranked by for the HDI
- standard of living measured by real per capital income
- longevity measured by life expectancy at birth
- knowledge or education as measured by the weighted average of adult literacy and mean years of schooling
what is not included for measuring the GDP
- financial transactions (securities, gov transactions, private transfer payments, illegal or legal underground)
- transfer of second hand goods
- household production
what are the two ways to measure the GDP
expenditure approach and income approach
what is the expenditure approach formula
GDP=C+I+G+NX
what is personal consumption (C)
goods and services bought by households for immediate use (durable goods, nondurable goods, services)
what is gross domestic private investment (I)
goods bought for future use
- business fixed: investment by private firms in physical assets (machinery)
- new residential construction
- inventory investment by firms: when goods produced are not sold because of lower demand, they go to inventory stocks
what is government purchases (G)
goods and services bought by the government
what is net exports (NX)
value of goods and services exported to other countries (X-IM)
3 cases of NX/trade balance
- positive: X-IM>0, trade surplus
- negative: X-IM<0, trade deficit
- zero: X-IM=0, trade balance
what is the income approach formula
GDP= NDI + indirect taxes - subsidies + depreciation
what is part of the net domestic income at factor price (NDI)
- wages/salaries: labour or employment income earned
- corporate profit: corporates and gov. enterprises before taxes
- farm and unincorporated business income: wages, rent, profit, interest
- interest and investment income: earned on bank deposits, corporate bond holdings, financial assets
what are indirect taxes
paid by consumers on their purchases (goods and services tax, GST)
what are subsidies
financial aid given to private corporations to reduce production cost
what is depreciation/capital consumption allowance
money firms spend on repairing physical capital
different formulas for income approach
- net domestic product at market price (NDP)= NDI+indirect taxes-subsidies
- net indirect taxes= indirect taxes-subsidies
- GDP= NDP+depreciation
GDP vs GNP
GDP: income earned within Canada by Canadians
GNP: income earned within Canada by Canadians but ALSO earned in and by foreigners
GNP formula
GNP= GDP + net income from abroad
net income from abroad: income earned abroad by Canadians - income earned in Canada by foreigners
3 cases of GNP
- if net income abroad is zero: GNP=GDP
- if net income abroad is positive: GNP>GDP
- if net income abroad is negative: GNP
is GNP or GDP more important
GDP if goal is to increase economic growth
GNP if goal is to measure how well they are living
what is the nominal GDP and formula
value of current output measured in terms of current prices
NGDPt= Σ Pt x Qt
what is the real GDP and formula
value of current output measured in terms of some base-year constant price
RGDPt= Σ Pb x Qt
what is the business cycle
used to measure the ups and downs in the level of the RGDP and other related macroeconomic variables
explain the business cycle graph
x axis: time y axis: RGDP potential GDP is a straight line RGDP is curvy inflationary gap: above potential GDP recessionary gap: under potential GDP peak: the highest in inflationary gap trough: the lowest in the recessionary gap recession: when it goes down recovery: when it goes back up zero: when potential=real
what is the potential GDP (Y*)
what the economy could produce if all resources were employed at their normal levels of utilization (full-employment output)
what is the actual GDP (Y)
what the economy actually produces
what is the output gap
difference between actual and potential (Y-Y*)
3 types of output gaps
- when YY* (Y-Y*=pos), the gap is inflationary (a measure of the market value of all goods and services produced above potential)
- when Y=Y* (Y-Y*=0), the gap is a zero gap
employment, unemployment, labour force, working age population
- employment: number of adult workers (15+) who have a job
- unemployment: number of individuals who are not employed but are searching for a job
- labour force: number of unemployed and employed
- working age population: number of people (15+) who are legally entitled to work in Canada
unemployment consequences
causes financial insecurities (economic, social and psychological effects) and national waste (productive resources)
labour force formula
L=E+U
unemployment rate formula
u=U/L X 100
employment rate formula
e=E/W x 100
labour force participation rate
lf= L/W x 100
3 types of unemployment
- frictional: temporarily between jobs or looking for a job (short-term)
- structural: mismatch between available jobs and available skilled workers (production technology, seasonal variation/unemployment
- cyclical: short-term cyclical fluctuations in the economy (unemployment goes up every summer and down every fall) business cycle ups and downs
