Topic 1- The Measurement & Structure of The Economy Flashcards
What is a business cycle?
Irregular short-term fluctuations in economic activity
What is a contraction?
The period of time during which aggregate economic activity is falling
What is an expansion?
The period of time during which aggregate economic activity grows
What does the business cycle being recurrent mean?
The pattern of contraction-trough-expansion-peak occurs again and again
What does the business cycle not being periodic mean?
That it does not occur at regular predictable intervals
What are endogenous variables?
The variables that are the object of analysis in an economic model can be explained using economic principles
What 2 main assumptions do economic models make?
Simplifying and critical
What is a simplifying assumption?
A way of making a model simpler without affecting any of its important conclusions
What is a critical assumption?
An assumption that affects the conclusions of the model in important ways
What is positive analysis?
Examines the facts and the economic consequences of a policy
What is normative analysis?
Examines what should be; determines whether a policy should be used
What is the main assumption of the Classical Approach?
People pursue their own self-interests and prices adjust reasonably quickly to get to the market equilibrium
What is the conclusion of the Classical Approach?
Government should only have a limited role in the economy as their policies will be ineffective or counterproductive
What are the 3 main approaches to measuring GDP?
- Product approach
- Income approach
- Expenditure approach
What are National Income accounts?
Accounting framework used in measuring current economic activity
What is the definition of GDP?
The total value of all final goods and services which are produced for the marketplace during a given time period and within the nation’s borders
What are intermediate goods?
Goods used up in the process of producing something else
What is a final good?
A product sold to its final user
Describe the Product (Values added) approach
Add up the market values of goods and services produced, excluding any goods and services that are used up in the intermediate stages of production
Describe the Income approach
Add up all the forms of income generated by production. Aggregate Income = total wages + total profit + total tax
Describe the Expenditure approach
Add up the amount spent by all the final users of domestically produced goods and services
What are the 4 main categories of spending?
- Consumption
- Private Investment
- Government purchases
- Net exports
What is a capital good?
A long-lasting tool used in production
What is capital stock?
The total value of all capital goods in the economy
What are inventories?
Stocks of unsold finished goods, goods in process and raw materials held by firms
What is inventory investment?
The amount by which inventories increase during the year
Describe Consumption
Spending by households on final goods and services. Includes imports and house rent but excludes Buying houses and financial assets
Give the 3 main components of Private Investment
- Business fixed investment purchases of capital goods
- Planned residential investment purchases of new homes by households
- Unplanned changes in firms’ inventory stocks
What are the 2 components of Government Purchases
Government investment and consumption
Describe Net Exports
Exports - Imports
What is Government Investment?
Capital goods purchased by the government
What is Government Consumption?
Spending on goods & services that are used up in the period
What is the difference between Government Purchases & Expenditure?
Expenditure includes Transfer Payments (TR)
What is the income-expenditure identity?
Y≡C+I+G+X-M
What is the Fundamental Identity of National Income Accounting?
The fact that: total production=total income=total expenditure
What is a Stock Variable?
A variable representing a quantity at a moment in time
What is a Flow Variable?
A variable representing a process that takes place over a period of time
Give 3 economic examples of flow variables
- GDP
- Income
- Expenditure
Give 2 economic examples of stocks
- Wealth
- Capital
How are stocks and flows mathematically related?
The rate of change of a stock is a flow e.g dK/dt=I
What is Gross National Product (GNP)?
The total value of goods and services produced for the market by domestic factors of production during a given time period
What are Net Factor Payments from abroad (NFP)?
Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors by home economy
What is the equation linking GNP, GDP and NFP?
GNP = GDP + NFP
What is Net National Product (NNP)?
NNP = GNP - Depreciation
What is depreciation in a macro context?
The value of the capital that wears out during the period over which economic activity is measured
What are the 3 types of Income that make up National Income?
- Wages
- Proprietors’ Income (income of self-employed)
- Rental income of persons
What is Private Disposable Income (Ypvt)?
The income that the private sector (households and businesses) has available to spend
What is the formula for Ypvt?
Ypvt = GDP + NFP + TR + INT - T
What does INT stand for?
Interest payments on government debts
What is Net Government Income (Ygvt)?
The part of GDP that is not at the disposal of the private sector
What is the formula for Ygvt?
Ygvt = T - TR - INT
What is wealth?
The value of everything an individual owns minus their liabilities
What is the formula for Saving (S)?
S≡Y+NFP-C-G
What is the saving rate (s)?
The proportion of GDP saved
What is the saving rate formula?
s = S/Y
What is the formula for Private Saving (Spvt)?
Spvt = Ypvt - C
What is the formula for Government Saving (Sgvt)
Sgvt = Ygvt - G > 0
What is the formula for national savings?
S = Spvt + Sgvt
What is the Current Account Balance (CA)?
The payments that a country receives from abroad in exchange for currently produced goods and services minus the payments made to foreigners by the domestic economy
What are the 2 components of the CA we look at?
- Net exports
- Net income from abroad
What is the equation linking CA and S?
S = I + CA
What are the 3 things private saving is used to finance?
- Private Investment (I) in new capital
- The government budget deficit
- The current account balance
What are the 2 components of national wealth?
- The country’s domestic physical assets
- Net foreign assets
What are net foreign assets?
A country’s foreign assets, foreign stocks, bonds and factories owned by domestic residents minus its foreign liabilities
What are foreign liabilities?
Domestic physical and financial assets owned by foreigners
What is an index?
A series of numbers each one representing a different period
What is the formula for an index number in period t?
It = (Value of measure in period t/Value of measure in base period)x100
What does the consumer price index (CPI) take into account?
Includes prices of used and imported goods but leaves out prices of exports, goods purchased by businesses and the government as well as financial assets
What is a GDP deflator?
Price index constructed from the cost of the goods and services included in GDP
What is the inflation rate (π)?
The percentage rate of change of the price level from one period to the next
What is the formula for inflation rate (π)?
πt = (Pt - Pt-1)/Pt-1
What is a nominal variable?
An economic variable measured using current market prices or that is not adjusted for the currency’s changing value
What is a real variable?
A variable measured using the prices of a base year or one that has been adjusted for the currency’s changing value
What is the formula for a real value in t?
Real value in t = (Nominal value in t/price index in t)x100
What is the formula for GDP deflator in t?
GDP deflator in t = (Nominal GDP in t/real GDP in t)x100
What does the GDP price index take into account?
The opposite of CPI: prices of goods purchased by the government, of goods purchased by businesses and of exports but ignores used goods and imports
Give 4 main problems with GDP
- Environmental quality not accounted for
- Inequality not accounted for
- Quality changes are not accounted for
- The underground economy
What are the 2 main types of bonds?
Coupon and discount bonds
What is a coupon bond?
A bond that pays the owner of the bond a fixed interest payment every year until the maturity date, when a specified final amount is repaid
What is a discount bond?
A bond bought below its face value and then the face value is repaid at the maturity date
What is the yield to maturity (i)?
The interest rate that equates the present value of cash flow payments received from a bond with its value today
What is coupon rate (cr)?
The cash amount of the yearly coupon payment (C) expressed as a percentage of the face value of the bond (F)
What is the equation linking the price of a perpetual bond (Pb) and its yield to maturity (i) and what does it show?
i = C/Pb
it shows a negative relationship between the price of a bond and its yield to maturity
What is the formula for yield to maturity?
Pb = F/(1+i)^n
What is the rate of return (R)?
The amount of each payment to the owner plus the change in the security’s value, expressed as a fraction of its purchase price
What is the formula for rate of return?
R = current yield + capital gain
What is capital gain?
The change in a bond’s price
What is nominal interest?
The rate at which the nominal value of an interest-bearing asset changes over time
What is real interest rate?
The rate at which the real value of an interest-bearing asset changes over time
What is the formula for real asset value in t?
Real asset value in t = Nominal asset value in t/Price level in t
What is the Fisher equation?
Real interest rate (r) = nominal interest rate (i) - inflation(π)
How do you calculate the expected/exante real interest rate?
expected real interest rate = nominal interest rate - expected inflation rate
What is the ex post real interest rate?
The interest rate that is adjusted for actual changes in the price level
How would you calculate the growth rate of variable w = x/y
%change w = %change x - %change y
Describe Private Investment in relation to capital stock
Private investment is the rate of change of capital stock (dk/dt)
