Week 1: Introduction, Macroeconomic Data

Question 1

Macroeconomic method

Answer 1

Output = A x N
A- a positive number
N- number of employed workers in an economy

Question 2

Describing fluctuations with output gap…

Answer 2

• describes an economy’s position relative to its potential output, the relative deviation of output Y from potential output Yn

Y ̃ = (Y − Y n)/Yn = (Y/Yn) − 1

*positive Y ̃means being above potential output

Question 3

GDP behavior

Answer 3

-GDP grows with (on average) a constant rate, but unevenly, with swings around the overall tendency upwards
- In the long-run growth components dominates

*you cannot ignore fluctuations

Question 4

Macroeconomic method -terminology

Answer 4

Exogenous variables - coming from outside a model and not affected by the model
- a subclass of high is parameters (constant numbers)

Endogenous variables - unknowns, calculated within a model

Question 5

Aggregates of Interest are….

Answer 5

-Gross domestic product
-inflation
-GDP per capita
-unemployment rate

Question 6

GDP - Gross Domestic Product

Answer 6

Was created as part of the National Income and Product Account system (NIPA) in the US in the 1930s in the wake of the Great Depression

Question 7

GDP purpose

Answer 7

Measures the market value of all final goods and services produced in an economy within a period of time
Market value -> they have to be sold/bought

Y=total output - intermediate expenditure = value added

It is also the total income generated in an economy
* revenues from selling goods generate benefits for those producing them

Question 8

GDP - circular flow diagram

Answer 8

H/holds, Govt., Firms

H->private expenditure (domestic) and Factors (labour,capital, land), G-> govt. spending, exp. On exports ->Firms

Firms -> goods, services, lab. Comp. Prop. Income, -> households

H-> exp. On imports
Firms -> goods, lab. Comp + prop. Income -> Taxes -»> Govt.

Question 9

GDP is the total expenditure on final goods in an economy

Answer 9

GDP =C+I+G+NX
C is Consumption;
I is (Non-financial) Investment;
G is Government spending;
NX = Exports − Imports is Net exports;

Question 10

Consumption versus investment

Answer 10

• Investment is (mostly) spending on fixed assets (goods that are durable and create a long-lived stream of benefits);
  Examples of fixed assets
  Tangible: Factories, machinery, vehicles, computer hardware, dwellings;
  Intangible: New technologies, software, artistic originals;
• The rest is consumption (e.g., food, cars, household appliances, etc.

Question 11

In All: GDP measures total production, income, and expenditure on final goods

Answer 11

Y = Total output − Intermediate expenditure
Y= Lab. Comp. + property income + taxes
Y= C+I+G+NX

*all data are presented seasonally adjusted

Question 12

GDP Deflator - Price Index

Answer 12

Price index = P is the average price level in an economy, the ‘price’ of real GDP

nGDPt =Pt ·rGDPt =Pt ·Yt

Pt = nGDPt/rGDPt

Question 13

Consumer Price index - the cost of a consumption basket today relative to that cost in the base year

Answer 13

CPI t = cost of basket in year ‘t’/cost os basket in base year

• only includes consumer goods
• can include imports and second hand items

Question 14

Real GDP v. Nominal GDP

Answer 14

Real uses prices from base year
Nominal uses current prices

So GDP or Y refer to rGDP

Question 15

Prices indices: Deflator v. CPI

Answer 15

Deflator = P2 x V2/P1 x V2

CPI = P2 x V1/P1 X V1

P1 is the earlier price, the one from the base year, same with volume

Question 16

Growth rates

Answer 16

Change in variables is characterized through its growth rate -> the percentage change it it from period to period

gY =Yt−Ytb/Ytb = Yt / Ytb - 1
gP =Pt−Ptb/Ptb = Pt/Ptb - 1

Ytb= Y at time -1

Question 17

GDP per capita

Answer 17

‘Per capita’ -> per person

yt= Yt/Lt

yt - GDP per capita
Lt - population

• spending person, final output person

Question 18

Short run, medium run, long run

Answer 18

Short run - fluctuations

Medium run - returning to the path of potential output

Long run - sustained growth

Question 19

GDP and components

Answer 19

GDP - 1. Total value added 2. Total income 3. Total final expenditure (generated in an economy during a reported period)

Intermediate expenditure/consumption – acquisition of goods and services to be used in producing othergoods (e.g. raw materials);

Private consumption – acquisition of goods and services for the immediate satisfaction of individual or communal needs or wants (cf. investment);

Investment (fixed investment) – spending with a view to create an asset that generates a durable stream of benefits (e.g. buildings, equipment, dwellings, software, new technologies);

Net exports – difference between exports and imports;

Question 20

Volume and price aggregates

Answer 20

■ Real GDP (rGDP, GDP at constant prices) – a volume measure of GDP, is calculated using quantities of goods from the reporting period (RP), which are then expressed in terms of prices in the base period (BP);
■ Nominal GDP (nGDP, GDP at current prices) – GDP calculated with both quantities and prices from the RP;
■ GDP deflator – an aggregate measure of the price level, the ratio of nGDP to rGDP. It can be interpreted as the ‘price’ of real GDP;
■ Consumer price index (CPI) – shows by how many times buying a consumption basket (a fixed set of goods and services) in the RP is more expensive than in the BP. It is the ratio of the basket’s cost in the RP to that in the BP;
■ Inflation – a measure of price growth in an economy, the growth rate of either GDP deflator or the CPI;