Topic 6 Flashcards
In _______ we studied how consumers and firms make decisions and their effects on markets and industries.
microeconomics
In _______we will study the national economy as a whole, focusing on interactions between groups of economic agents.
macroeconomics
In Microeconomics: Single commodity (X) market
In Macroeconomics:_________
Whole economy
In Micro: Price of X
In Macro: ________
Price Level
In Micro: Quantity of X
In Macro: _________
“Gross Domestic Producet (GDP)
Gross Domestic Product (GDP) is defined as the market value of all ________________ within an economy in a given period of time.
the final goods and services produced
Only _____________ are counted: goods produced in previous years do not count
newly produced goods
Only ______ are counted: intermediate goods used to produce final goods do not count.
final goods
Some firms produce _______ which are used by other firms as inputs in the production of _______(e.g. an Intel Pentium processor chip is an input into Dell’s PCs).
intermediate goods; final goods
GDP excludes - Most \_\_\_\_\_\_\_\_\_\_\_\_ (e.g. own housework, do-it-yourself repairs) \_\_\_\_\_\_\_ transactions (e.g. illegal drugs)
non-market transactions; Illegal
To avoid ______ we focus on _________ at each stage of the supply chain for any good or service.
double counting; the value added
“_______ measures each firm’s contribution to the economy’s total output. It is the increase in the value of goods as they move along the stages of the supply chain towards the final consumer.”
Value added
Nominal GDP is calculated on the basis of prices which applied at the time the activities took place (“________”)
For example
Nominal GDP2005 = Quantity2005 x Price2005
current prices
Real GDP is based on prices which applied in the “_____” year, e.g. Year 2000 or Year 2005 or Financial Year 2003/04.
For example
Real GDP2005 = Quantity2005 x PriceBaseYear
base
Over time, nominal GDP may increase either because output _____, or simply because prices ______.
increases; increase
Real GDP focuses on the economy’s _________
output of goods & services.
If output of g&s is constant while prices increase, nominal GDP also _____ but _____ does not. Real GDP only ______if _______ increases.
increases; real GDP; increases; output of g&s
Conceptually, real GDP is ______ that has been “deflated” to strip out ___________.
nominal GDP; the effects of price rises
To deflate nominal GDP, we use ___________, just like we would deflate any nominal quantity.
Real GDP = (Nominal GDP / Price Index) x 100
the relevant price index
Which price index should be used?
- The ______is the best price index for this purpose.
- It is calculated in a different way from the CPI and so it is different from the CPI. However, the differences are generally quite small.
- For the purposes of our course, these 2 price indexes can be considered the same
GDP deflator; essentially
The price level is the ______ average of all prices
weighted
In this course, the CPI (consumer price index) is used as the only indicator of the _____.
price level
The ________ is the rate of change (or the growth rate) in the price level, usually reported in terms of _______
inflation rate; % per annum.
CPI = (cost of fixed basket at _______-period prices / cost of fixed basket at _____-period prices) x 100
current; base
The inflation rate: rate of change in the ________ (price level)
cost of living
Inflation rate = { (CPI ___ year - CPI ____ year)/ CPI last year } x 100
this; last
Using CPI to compare across years =>need to convert nominal amounts to dollars of a single (same) year; e.g Yr 2005; or Yr 1960, or Yr 2000
Simplest: convert to dollars of the base year
VALUE base year dollars = VALUE year z dollars / ________
CPI year z
, which measures output (same as income) per person is often used as a measure of _______, or of wellbeing (happiness).
Real GDP per capita; the living standard
GDP as a measure of living standard
As a measure of living standard, it has some advantages:
- familiar, readily available, and convenient
- highly correlated with indicators of ______ (e.g. number of cars or phones per person) and indicators of ________ (e.g. life expectancy, level of education, etc
material wealth; socio-economic development
Problems when comparing the same country over time:
- No account of the underground economy and household production (___________)
- _________ doesn’t mean what an average person actually owns (eg. Stiglitz’s point).
- Less ______?
- Increase in income inequality?
- Deterioration in environment?
non-market transactions; Per capita; leisure
Additional problems when comparing GDP per capita between countries:
- ______ level of political freedom and social justice?
- What ______ to use?
+ Purchasing power parities (PPPs) are ____than usual exchange rates for comparisons across countries with very different levels of income.
+ PPPs are notional (theoretical) exchange rates that would make the price of a product the same in different countries.
+ Example: The “Big Mac” PPP, published by The Economist; other PPPs: by UN, OECD, etc.
Same; exchange rates; better
Standard of living = happiness ?
- Even when there is a clear rise in the standard of living (e.g., having more of all goods and services, and more leisure, and less stress at work) this does not guarantee a rise in happiness, or _____wellbeing (SWB).
- For example, a person with a rising standard of living may still be unhappy if the ________ standards of living rise even faster than his/her own.
subjective; neighbours’
Two essential groups of economic agents:
- HOUSEHOLDS: ______ and _______. Household provide labour to firms, are owners of firms and are consumers of firms’ products.
- FIRMS: productive organisations that create new value by transforming inputs into outputs.
private individuals; their families
Households’ spending = _______ for new goods & services
…. this leads to firms producing the required products
…. this leads to firms earning revenue
…. this leads to firms paying incomes to households
…..these support the ______by households
demand; spending
GDP is measured in THREE different ways:
- Income Measure GDPy: Adding up the total amount of incomes received by ______ for supplying factor inputs
- Output Measure GDPo: Adding up the total value of output of g&s produced by _____ in the economy
- Expenditure Measure GDPe: Adding up the total amount of spending on domestic ______.
household; firms; outputs
In principle, GDPo = GDPy = GDPe
Aggregate output = Aggregate income = Aggregate expenditure (______)
demand
Savings (S) : the part of households’ ________ that is not spent on consumption at the current time (note: S is the current flow of savings in _____ period- NOT the stock of accumulated past savings; that is their wealth
disposable income; this
In economic discussion, “investment” means _______or construction of ______ capital assets, e.g., factories, machinery, homes, roads, etc.
=»>This definition excludes purchases of existing homes, shares (because no new production is involved)
purchases; new
From circular flow: Aggregate output = Aggregate demand
Any unsold output is considered “________ inventory ________”, counted as part of AD, so the above equality holds as an identity.
unintended; investment
- X : the flow of money received from exporting goods and services to overseas markets (the rest of the world).
- M : the flow of money paid to the rest of the world for imported goods and services from overseas producers.
- net exports: X-M = NX
If a country imports more than it exports (M > X) it has a ________. If it imports less than it exports (M < X) it has a .
trade deficit; trade surplus
GDP measures two things at once - the total ______ of everyone in the economy and the total ______on the economy’s output of goods and services.
income; expenditure
For an economy as a whole, income must _______ expenditure
equal
Calculating GDP for the economy in two ways by:
-Adding up total _______by households
or Adding up the total _____ (wages, rent and profit)
expenditure; income
The GDP deflator measures the current level of prices relative to the level of prices in the base year. In other words, the GDP deflator tells us the ___in nominal GDP that is attributable to a rise in _____ rather than a rise in quantities produced
rise; prices
Inflation rate is the percentage change in the_______ form the preceding period
price index
Consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a _________
typical customer.
GDP of this period subtracts out of the _______ of the inputs at the begining of that period
market value
Economic INVESTMENT
Firm: Capital equipment, inventory, structures
Household: new _____
homes
Economic CONSUMPTION
ANY spendings on new final goods/services by households except for ____ homes
new
