1.2 Measuring the Macroeconomy

Question 1

Macroeconomics

Answer 1

study of how aggregate economy behaves within a social world that is inherently unstable

makes sure that the economic system works properly

Question 2

exogenous variables

Answer 2

pre-determined variables outside of the model

e.g. consumer optimism or gov spending

Question 3

endogenous variables

Answer 3

determined within the model e.g. unemployment rate

Question 4

comparatives statics

Answer 4

shows effect of an exogenous shock

Question 5

Macro indicators

Answer 5

GDP Level vs Growth rate

Inflation rate vs price level

unemployment rate vs level

Question 6

nominal gdp

Answer 6

sum of quantities Q at time t in every sector i multiplied by their current price

can increase over time because of either

i. quantities increase (real growth)
ii. prices increase (nominal)

Question 7

real GDP

Answer 7

at time t is constructed as the sum of all quantities Q multiplied by constant prices P (fixed at a certain “base year”)

Question 8

how to measure aggregate output in economy

Answer 8

National Income Accounting: measures economic activity and its component in a given country

total production = total expenditure = total income

any output is purchased by someone and results in income to someone

Question 9

How can GDP be calculated

Answer 9

i. by income (wages, rent, interest, and profits earned by agents in the domestic economy)
ii. by output (totalling value of all final goods and services produced)
iii. by added value (sum of value added from all goods and services produced) = total sales - intermediates
iv. by expenditure (C+I+G+X-M)

Question 10

problems relating to GDP measure

Answer 10

GDP counts “bads” as “goods” - money spent to destroy building or fund wars

omits underground economic activity - only measures formal markets

ignores distributional issues and inequality and environmental spillovers

overlooks full impact of commons (free use of tech or cultural events)

happiness versus living standards (does not account for living time: Easterlin Paradox)

Question 11

Consumer Price Index

Answer 11

average cost of living, as represented by typical basket of goods and services purchased by consumers in a country

Question 12

GDP deflator

Answer 12

average price of output at every t

Nominal GDP/Real GDP

Question 13

unemployment

Answer 13

number of people who have no job but are looking for one

Question 14

employment

Answer 14

number of people who have a job

Question 15

labour force

Answer 15

sum of employment and unemployment

Question 16

unemployment rate

Answer 16

unemployed / labour force

proportion of unemployed people with respect to the Labour Force

Question 17

link between unemployment rate and participation rate

Answer 17

when unemployment rate is too high, some of the unemployed give up looking for a job and exit the labour force, so the participation rate is lower

Question 18

is it possible for nominal gdp in a year to be less than real gdp in the same year?

Answer 18

if the prices in that year are less than prices in the base year

Question 19

explain whether it is possible for nominal GDP to increase and real GDP to decrease in the same period

Answer 19

nominal gdp can rise because either the price level is rising or quantity has increased. nominal gdp can increase while real gdp falls if the increase in price level is proportionately larger than the drop in real economic activity

Question 20

when is gdp deflator a better measure than inflation rate

Answer 20

if one wants to know how the price level of goods produced in said country is changing

Question 21

when is inflation rate a better measure than gdp deflator

Answer 21

when one wants to know how the price level of consumer goods was changing over time

consumers care about the cost of living (goods they actually consume)

some goods are sold not to consumers but to firms (tools), gov and foreigners

some goods bought by consumers are not produced domestically but are imported from abroad

Question 22

labour rate

Answer 22

number of labour force / number of adult population

Question 23

participation rate

Answer 23

ratio of labour force to total population of working age

Question 24

discouraged worker

Answer 24

people who are unemployed but give up looking for a job (not incl. in labour force)

Question 25

labour force

Answer 25

unemployed + employed

Question 26

labour force survey

Answer 26

used to compute unemployment rate and is based on interviews with a representative sample of individuals

Question 27

why care about unemployment?

Answer 27

still associated with financial and psychological suffering

extent of suffering depends on nature of unemployment

unemployment rate provides a signal that the economy is not using some of its resources

low unemployment rate can show that economy is overusing its resources and there may be labour shortages

Question 28

inflation

Answer 28

sustained rise in general level of prices

Question 29

pure inflation

Answer 29

where inflation would only be a minor inconvenience because relative prices would be unaffected

Question 30

why care about inflation?

Answer 30

inflation affects income distribution
leads to uncertainty, making it harder for firms to make decisions about the future, such as investment decisions.

deflation leads to high uncertainty.

Question 31

okun’s law

Answer 31

output growth is high = unemployment decreases

Question 32

phillips curve

Answer 32

higher unemployment is associated with lower inflation (on average)

Question 33

short run

Answer 33

few years. movements in output are primarily driven by movements in demand. changes in demand, perhaps as a result of changes in consumer confidence or other factors

Question 34

medium run

Answer 34

a decade. economy tends to return to level of output determined by supply factors: capital stock, level of tech and size of labour force. factors move sufficiently slowly that we can take them as given.

Question 35

long run

Answer 35

few decades or more. capital stock and level of tech e.g. education system, saving rate, role of gov.