The Data of Macroeconomics Flashcards
Chapter 2
What does GDP stand for?
Gross Domestic Product
Define Gross Domestic Product (GDP)
A measure of overall economic activity, defined as the total expenditure on final goods and services produced within a country’s borders.
What are the two definitions of GDP?
Total expenditure on final goods and services and total income earned by factors of production.
What is Expenditure?
The total amount spent on final goods and services in an economy, which equates to total income earned by sellers.
What is the circular flow in economics?
The continuous movement of money among households and firms, where firms provide goods and services to households, and households provide labor to firms.
Define Value Added
The value of output minus the value of intermediate goods used in the production process, representing the increase in value at each production stage.
What components make up GDP expenditure?
Consumption (C), Investment (I), Government spending (G), and Net exports (NX).
What is Consumption (C)
The total value of all goods and services purchased by households. Including: Durable Goods, Non Durable goods and services.
What is the role of government spending in GDP?
Government spending on goods and services contributes to GDP but does not include transfer payments.
What is Investment (I)
Spending on capital goods that will be used for future production, including business fixed investment, residential fixed investment, and inventory investment.
What does NX or XM stand for?
The difference between a country’s total exports and total imports.
Nominal GDP
GDP measured using current prices, without adjusting for inflation.
How does real GDP differ from nominal GDP?
Real GDP adjusts for inflation by measuring GDP using the prices of a base year, while nominal GDP uses current prices.
GDP Deflator
A measure of overall price changes in the economy, calculated by dividing nominal GDP by real GDP X 100.
What is the inflation rate?
The percentage increase in the overall level of prices in the economy over a specific period.
Consumer Price Index (CPI)
A measure that examines the average change over time in the prices paid by consumers for a market basket of consumer goods and services.
Real GDP Growth Rate
The rate at which a nation’s real GDP changes from one year to the next, adjusted for the effects of inflation.
What is the fundamental identity of GDP expenditure?
Y = C + I + G + NX, where Y is GDP, C is consumption, I is investment, G is government spending, and NX are net exports.
Chained Real GDP
A method of calculating GDP that updates the base year for inflation every year, providing a more accurate measure of economic growth.
What key factors are included in the CPI’s “basket”?
Food and beverages, energy, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.
Why might the CPI overstate inflation?
Due to factors such as substitution bias, the introduction of new goods, and unmeasured changes in quality.
What is an Intermediary good?
A product used as an input to produce a final good and not counted separately in GDP to avoid double counting.
Define Money Metric Utility
A way of measuring utility in monetary terms, showing how much income a consumer needs to reach a certain level of satisfaction.
Define Inventory Investment
The change in the stock of unsold goods held by businesses; it is counted as part of investment (I) in GDP.
Positive if inventories increase
Negative if inventories decrease
What is a flow
A variable measured over a period of time, such as income, spending, or GDP per year or per month.
What is a stock
A variable measured at a specific point in time, showing a total amount — like wealth, capital, or money in a bank account at a moment.
What is the Production Approach to calculate GDP
Measures the value added at each stage of production.
GDP=∑(Value of Output−Intermediate Goods)
This avoids double counting by only including the value added by each firm.
What is the Expenditure approach to calculate GDP
Measures total spending on final goods and services.
GDP=C+I+G+(X−M)
What is the Income Approach to calculate GDP
Measures total income earned by factors of production.
GDP=Wages+Rent+Interest+Profits
It adds up all income earned by households and firms.
What is NFIA and what does it stand for?
Net Factor Income from Abroad: The difference between income earned by a country’s residents from abroad and income earned by foreigners within the country.
Factor income received from abroad−Factor income paid to abroad
What are the different factor payments included in NFIA
Rent, wage, Interest, Profit
Formula for CPI
(Cost of basket in base month / Cost of basket in current month) × 100
What is Core Inflation?
Core inflation measures the underlying trend in prices by excluding food and energy, which are often volatile.
It gives a clearer picture of long-term inflation by ignoring short-term price spikes in things like petrol or fresh food.
Are the prices of capital good included in GDP Deflator or CPI
GDP
Are the prices of imported goods included in GDP Defaltor or CPI
CPI
Does CPI or GDP Deflator more responsive to changes in the basket of goods?
GDP Deflator is more responsive because its basket changes every year based on what the economy actually produces.
CPI uses a fixed basket (updated occasionally), so it lags behind changes in consumer habits.
What is GNI
Total income earned by a country’s residents and businesses, regardless of where it’s earned.
GNI=GDP+Net Factor Income from Abroad (NFIA)
Includes:
Wages, profits, interest earned abroad
-
Minus income earned by foreigners domestically
What is GNP
Gross National Product
Total output produced by a country’s residents and businesses, regardless of location.
Also calculated as:
GNP=GDP+NFIA
What is a positive trade surplus
NX > 0
Define Employed
Someone working at a paid job
Define someone who is unemployed
They are not employed but are actively looking for a job
What is a labor force?
The amount of labor available for producing goods and services
Employed + Unemployed
Who would be classed as not in the work force?
Someone who is not employed of looking for work
What is the unemployment rate ?
The % of labor force that is unemployed (Not working or not actively looking for work.
What is the equation for the Unemployment rate?
(Number of unemployed / labor force) X 100
What is the Labor Force Participation rate?
The % of the adult population that is either employed or unemployed
What is the equation used to calculate Labor Force Participation rate?
(Labor Force / adult population) X 100
