Yes Flashcards
GDP
The total monetary value of all goods and services produced within a country’s borders in a specific period of tine, usually a year.
Components of GDP
Consumption (C): the purchase of clothing by households
Investment (I): company buys a new machine
Government Spending (G): government builds a new highway
Net Exports (NX): country exports more than it imports resulting in a positive net balance
Nominal vs. Real GDP
Nominal GDP is a measure of economic output that uses current prices, while Real GDP adjusts for inflation.
GDP per capita
GDP per capita is a measure of a country’s economic output per person, calculated by dividing the country’s GDP by its total population.
Inflation rate
The rate at which the average price level increases over time.
Inflation rate = [(Price index in year 2 - Price index in year 1)/(Price index in year 1)] X 100
National Income and Products (NIPA)
Used to:
Measure the nation’s economic performance
Compare a nation’s income and output to that of other nations
Track the economy’s condition throughout the business cycle
Circular flow diagram
Learn it!
Business Cycle
Learn it!
Recession
Periods of economic downturns when output and employment are falling
Depression
A very deep and prolonged downturn
Expansions (aka recoveries)
Periods of economic upturns when output and employment are rising
Business-cycle peak
The point at which the economy turns from expansion to recession
Business-cycle trough
The point at which the economy turns from recession to expansion
Self-regulating economy
(Pre-1930 conventional wisdom) Problems such as unemployment are resolved without government intervention through the working of the invisible hand
Keynesian economics
(Post 1930s conventional wisdom) Economic slumps are caused by inadequate spending, and they can be mitigated by government intervention
Included and not included in calculating GDP
Included:
- domestically produced final goods and services (including capital goods)
- new construction of structures
- changes to inventories
Not included:
- intermediate goods and services
- used goods
- financial assets like stock and bonds
- foreign-produced goods and services
Gross National Product
GNP is defined as the total factor income earned by residents of a country. it EXCLUDES factor income earned by foreigners and INCLUDES factor income earned by residents aboard.
GDP per worker
a measure of income per head of the working population
Market basket of goods and services
Refers to a collection of items that are commonly purchased by consumers
price index
The ratio of the current cost of the market basket to the cost in a base year, multiplied by 100
Price index in a give year = [(Cost of market basket in a given year)/(Cost of market basket in base year)]X100
Consumer Price Index
CPI is the most common measure of the aggregate price level and typically used to measure inflation. It measures the cost of the market basket of a typical family
Producer price Index
PPI measures the average change over time in the prices domestic producers receive for their output
GDP deflator
Measure the price level by calculating the ratio of nominal GDP to real GDP
GDP Deflator = (Nominal GDP/Real GDP) X 100
Inflation vs deflation
Inflation is a rising aggregate price level. Deflation is a falling aggregate price level.
Real income
Gives a measure of the amount of goods and services that we can consume with a given nominal income.
Business cycle SR vis LR
In the SR, movements in inflation are closely related to the business cycle. In the LR, the overall level of prices is mainly determined by changes in the money supply.
Disinflation
The process of bringing the inflation rate down
Nominal vs real interest rates
Nominal: the interest rate expressed in dollar terms
Real: nominal interest rate minus the rate of inflation
Formula: Real interest rate = Nominal interest rate - Inflation rate
Fisher effect (interest rates)
An increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
Planned Vs Actual Spending
Planned: saving or investment is the intended actions of households and firms
Actual: saving or investment is the realised outcome resulting from actions of households and firms.
Full employment
When those people who want to work at the going rate are able to find a job
SR equilibrium of the economy
Where aggregate (planned) expenditure [E = C + I + G + NX] crosses the actual spending [45 degree line] curve. Where Actual = Planned
Deflationary gap
Look at diagram!!!!!
The difference between full employment output and expenditure when expenditure is less than full employment output
Inflation gap
Look at diagram!!!!!!
The difference between full employment out and actual expenditure when actual expenditure is greater than full employment
Multiplier effect
Refers to the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
Government purchases are said to have a multiplier effect on AD.
- a euro of government purchases can generate more than a euro of AD
Formula:
Multiplier = 1/(1 - MPC)
Multiplier - 1/MPS
Accelerator principle
Relates the rate of change of AD to the rate of change in investment.
MPC
Marginal Propensity to Consumer is the fraction of extra income that a household consumes rather than saves
MPS
Marginal Propensity to Save is the fraction of extra income that a household saves rather than consumes
Autonomous expenditure
Spending that is not dependent on income/output
Money Supply
The total value of financial assets in the economy that are considered money
Function of money
Medium of exchange;
- an asset that individuals acquire for the purpose of trading rather than for their own consumption
Store of value:
- enables people to save the money they earn today and use it to buy the goods and services they want tomorrow
Unit of account:
- money provides a yardstick for measuring and comparing the values of a wide variety of goods and services
Monetary aggregate
M1: included only the most liquid forms of money
M2: includes near-money financial assets that can’t be directly used as a medium of exchange but can readily be converted into cash or checkable bank deposits
Bank reserves
The currency that banks hold in their vaults plus their deposits at the Central Bank
How banks create money
- purpose of financial markets and institutions: act as a bridge between lenders and borrowers
- accepting deposits and making loans -> able to create money
- when money is deposited, part of it goes in the bank’s vault
Excess reserves
A bank’s reserves over and above its required reserves. ASSUME bank’s don’t want this
Money Supply curve
LOOK AT THE DIAGRAM!!!
Represents the relationship between the quantity of money supplied in the economy and the interest rate.
- vertical curve as it is fixed by the central bank
Money demand
Downward slowing
Effect of increase in money supply
- shift Ms curve to the right
- lead to a lower value of Mooney as more money is circulating in the economy
- lead to an increase in Price level (inflation)
