Topic 1: Macro Data and Performance Metrics Flashcards
GDP (formal definition)
market value of final goods and services newly produced within a nation during a fixed period of time
Value Added approach (GDP)
revenue less costs of non-labor inputs
Income approach (GDP)
Sum the returns to all productive factors (returns = wages and salaries to labor and interest, dividends, rents and royalties paid to investors)
Expenditure approach (GDP)
sum spending on all final goods and services (final goods and services are not used to product other goods or services)
Which GDP approach is used in practice?
Expenditure
GDP equation
Y = C + I + G + NX
GDP equation - C
consumptions
GDP equation - I
investment
GDP equation - G
governments consumption and gross investment (does not include transfer payments)
GDP equation - NX
net exports of goods and services
types of consumption expenditure
durable goods, non durable goods, services
types of investment expenditure
residential, business structures, business equipment and software, change in private inventories
types of government expenditure
national defense, non defense, state and local
difference between GDP and GNP
GNP is output produced by domestically owned factors of production and GDP is output produced within a nation
NFP
net factor payments from abroad, payments to domestically owned factors located abroad minus payments to foreign factors located domestically.
GDP as related to GNP
GDP = GNP - NFP
real GDP
adjust for price changes to reflect only quantity changes
GDP Deflator
price index that applies fixed base year prices to value current year quantities consumed - nominal/real
CPI
weighted average of price changes where the weights reflect consumer purchasing patterns
how is production a circular process?
households provide factors of production to firms through labor and savings, production earns the funds needed to pay off the factors of production (revenue is what is above and beyond cogs, therefore must include wages, salaries, dividends, profits, etc in income approach for GDP)
what household factor(s) is included in I in the GDP equation?
residential construction, only new homes because “used goods” don’t count
consumption smoothing
changes in consumption do not fluctuate in line with GDP. When income is low, consumption stays about the same and less is saved, leading to more volatile fluctuations in investment.
how are private inventories calculated into GDP?
firm produces in Q1 and doesn’t sell - gets sold into private inventory. in Q2 someone buys it so it is part of C and needs to be deducted from private inventory
how to denote nominal GDP
YP(p is average price level for all goods and services included in GDP)
two ways GDP can go up
Y goes up (good), P goes up (bad - inflation) – if P goes up and Y stays constant, country is not better off
CPI-u
CPI-u(urban consumer), weighted average of price changes where the weights reflect consumer purchasing patterns
what is in GDP deflator that isn’t in CPI-u
GDP deflator includes everything that is in GDP while CPI-u is just a basket of goods that represent general consumption
problems with CPI
substitution bias - something in basket skyrockets in price, consumers will find a substitute, therefore actually buying patters may not match - leads to overstatement of cost of living AND introduction of new goods example- a computer sold 10 year ago does less than now but prices about the same - cost of living in reference to this has gone down
example: 1981 CPI-u=90.5 and min wage = 3.35 AND 2012 CPI-u=228.61, what is real value of min wage now?
8.42
name 3 price indexes
GDP deflator, PCE and CPI-u
inflation rate (equation)
(Pt+1 - Pt)/Pt
disinflation
declining inflation rate
deflation
declining price level (negative inflation rate)
Feds prefer which price index and why?
PCE because it avoids substitution bias, coverage of more items and weights given to items
labor force
unemployed + employed
unemployment rate
unemployed/labor force
participation rate
labor force/adult population
employment ratio
employed/adult population
civilian labor force
>16 yrs old, employed or searching
adult population does not include
military or institutionalized (schools, prison, etc)
recession
2 consecutive quarters of declining GDP
PCE doesn’t include
agriculture and energy, etc. things with volatile prices
PPP
Purchasing Power Parity - adjustment to evaluate other countries GDP using Am prices, corrects for differences in cost of living
Gini coefficient
measures inequality 0<100, 0 perfect equality and 100 perfect inequality
Okuns Law
predicted unemployment Δu = -.5(%change in realgdp - 3)
u =civilian unemployment rate
when does unemployment peak?
recessions
underemployment
involuntary part time
marginally attached
haven’t sought work in the last 4 weeks, but have in the last year (“discouraged workers”)
long term unemployment
6mo or longer
interest rate
rate of return promised by borrower to lender
nominal interest rate
rate at which nominal value of an asset increases over time
real interest rate
rate at which the real value of an asset increases over time
real vs. nominal interest rates
real = i - inflation
ex ante
expected real interest rate (never negative)
ex post
realized real interest rates (could be negative)
household wealth
household assets-liabilities
national wealth
sum of all households’, firms’ and governments’ wealth within a nation
wealth determined by
savings by individuals, businesses and government
