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Econ _ principles > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

The production approach relies on measuring GDP by only looking at the price of the _________

A

final good

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2
Q

Value added consists of :

A

wages, profit and capital costs

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3
Q

Value added is DEFINITELY NOT the same as the _____

A

income

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4
Q

The value-added approach although it mimics the income approach is not the _____

A

same

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5
Q

nominal growth rate is almost always greather than the _____

A

real growth rate

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6
Q

Why was Japan’s real growth rate greater than the nominal growth rate in the mid 90s?

A

Because of sustained deflation

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7
Q

nominal growth rate =

A

real growth rate + inflation

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8
Q

once you’re in the deflationary spiral there is :

A

no way out

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9
Q

the base year is the year in which the ___ equals this _____

A

nominal value equals the real value

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10
Q

nominal GDP uses _____ prices

A

current

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11
Q

real GDP uses ______ prices

A

prices of a base period

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12
Q

two consecutive quarters of economy contraction is referred to as ________

A

recession

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13
Q

Insecurity among consumers can lead to a ______

A

recession

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14
Q

GDP (production approach)=

A

total value added + taxes less subsidies on products

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15
Q

Price of labour is determined by:

A

wage rate

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16
Q

Factor price for capital is determined by:

A

rent, dividend, interest, profit

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17
Q

In the income approach you add taxes less_______

A

subsidies on production and imports

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18
Q

What is GDP and why is it considered a good measure of economic performance?

A

GDP stands for Gross Domestic Product and is often considered the best way to measure how well an economy is performing. It is a measure of the total economic output of a country over a specific period, typically a year. GDP is considered a good measure of economic performance because it captures both the income and expenditure of the economy, which are really the same thing.

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19
Q

How is GDP defined?

A

GDP can be defined in two ways: (1) the total income of everyone in the economy, or (2) the total expenditure on the economy’s output of goods and services. Both definitions are equivalent, as for the economy as a whole, income must equal expenditure.

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20
Q

What are the rules for computing GDP?

A

To compute GDP, the market value of all final goods and services produced within the economy in each period of time is measured. This is done using market prices to reflect how much people are willing to pay for goods and services. Thus, GDP = Σ piq, where pi is the price of good i and q is the quantity of good i. Used goods are not included in GDP because a sale of a used good is a transfer of an asset, not an addition to the economy’s income.

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21
Q

What is the difference between nominal GDP and real GDP?

A

Nominal GDP is the value of goods and services measured at current prices, while real GDP is the value of goods and services measured using a constant set of prices adjusted for inflation.

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22
Q

What are stocks and flows in economics?

A

Stocks are quantities measured at a given point in time, while flows are quantities measured per unit of time.

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23
Q

What is GDP and why is it important?

A

GDP is probably the most important flow variable in economics. It tells us how much money is flowing around the economy’s circular flow per unit of time. It is a measure of the total value of all final goods and services produced within an economy in a given period of time.

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24
Q

What is the formula for computing GDP?

A

GDP = Σ p*q, where p is the price of good i and q is the quantity of good i. Market prices are used to determine the total value of different goods and services because they reflect how much people are willing to pay for them.

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25
Q

Why are used goods not included when counting GDP?

A

Used goods are not included in GDP as their sale represents a transfer of an asset, not an addition to the economy’s income.

26
Q

How is the treatment of inventories accounted for in GDP?

A

When a firm increases its inventory of goods, this investment in inventory is counted as an expenditure by the firm owners. Thus, production for inventory increases GDP just as much as production for final sale. A sale out of inventory, however, is a combination of positive spending (the purchase) and negative spending (inventory disinvestment), so it does not influence GDP.

27
Q

How are intermediate goods and value added accounted for in GDP?

A

When calculating the value of goods produced in stages, GDP only considers the value of the final good. This is because the value of intermediate goods is already included as part of the market price of the final goods in which they are used.

28
Q

What are imputations and how are they used in calculating GDP?

A

Imputations are estimates of the value of goods and services that are not sold in the marketplace and therefore do not have market prices. These are largely used to determine the value of housing and government services in GDP. For example, when houses are owned by the people who live in them, national statistical agencies estimate what the market rent for a house would be if it were rented and include that imputed rent as part of GDP.

29
Q

How is imputed rent included in GDP for homeowners?

A

When a homeowner lives in their own house, the national statistical agencies typically estimate what the market rent for the house would be if it were rented and include that imputed rent as part of GDP. This imputed rent is included as both the homeowner’s income and expenditure.

30
Q

Why is imputed rent on cars and other durable goods left out of GDP?

A

Imputed rent on cars, fridges, and other durable goods is left out of GDP because it is not practical to estimate their rental value. These goods are consumed by their owners rather than rented out to others, so there is no market price for imputed rent.

31
Q

Why are some goods and services not included in GDP?

A

Some goods and services are not included in GDP because they are produced and consumed at home and never enter the marketplace, such as home cooked meals. Additionally, no imputation is made for the value of goods and services sold in the black economy, which is the part of the economy that is hidden from the government, either to evade taxation or because the activity is illegal.

32
Q

How are government services, such as police officers and firefighters, included in GDP?

A

Government services, such as police officers and firefighters, are included in GDP by valuing them at their cost, which includes the wages of these public servants. This is an example of imputations being used to estimate the value of goods and services that do not have market prices.

33
Q

What are the three broad categories of spending that the GDP is divided into?

A

final consumption expenditure, gross capital formation, and net exports.

34
Q

What is final consumption expenditure, and how is it further broken down?

A

Final consumption expenditure is the spending on goods and services with the aim of consuming them. It is further broken down into household consumption on non-durable goods, durable goods, semi-durable goods, and services, non-profit institutions serving households (NPISH), general government consumption, and net tourism consumption.

35
Q

Which category of final consumption expenditure includes spending by both local and central government on goods and services and services that government workers provide?

A

General government consumption includes spending by both local and central government on goods and services and services that government workers provide.

36
Q

What is gross capital formation, and what are the two subcategories that it is broken down into?

A

Gross capital formation is the total amount of spending that is aimed at providing something in the future (i.e., investments). It is broken down into gross fixed capital formation and inventory investment.

37
Q

What is gross fixed capital formation, and what are the three components that it includes?

A

Gross fixed capital formation includes the purchase of new factories and equipment by firms (business fixed investment), the purchase of schools, motorways, etc. by the government (general government fixed investment), and the purchase of new housing by households and landlords (residential fixed investment).

38
Q

What is net exports, and how is it calculated?

A

Net exports are the value of goods and services exported to other countries minus the value of goods and services imported from other countries. It is calculated as exports minus imports.

39
Q

Why do economists adjust data for seasonal changes in economic variables such as GDP?

A

Economists adjust data for seasonal changes to eliminate the portion of fluctuations due to predictable seasonal changes, allowing them to study quarter-to-quarter fluctuations in economic variables.

40
Q

What is inflation and how is it measured?

A

Inflation is the increase in the overall level of prices. It is measured by the percentage change in the price level from one period to the next. The most used measure of the level of prices is the consumer price index (CPI), which turns the prices of many goods and services into a single index measuring the overall level of prices.

41
Q

How is the CPI calculated and what does it measure?

A

The CPI is calculated by computing the price of a basket of goods and services purchased by a typical consumer and weighting different items. It is the price of this basket of goods and services relative to the price of the same basket in some base year. It measures how much it costs to buy a fixed basket of goods and services now relative to how much it cost to buy the same basket in the base year.

42
Q

How is the GDP-deflator different from the CPI?

A

The GDP-deflator measures the prices of all goods and services produced, whereas the CPI measures the prices of the goods and services bought by consumers only. The GDP-deflator includes only those goods produced domestically, while imported goods are not part of the GDP-deflator but are included in the CPI.

43
Q

What is the difference between a Laspeyres index and a Paasche index?

A

A Laspeyres index is a price index with a fixed basket of goods, while a Paasche index is a price index with a changing basket. Neither of the two is clearly superior. When prices of different goods are changing by different amounts, the Laspeyres index tends to overstate the increase in the cost of living, while the Paasche index tends to understate it.

44
Q

What is the PCE-deflator and how is it calculated?

A

The PCE-deflator is another measure of inflation, calculated like the GDP-deflator but based on only the consumption component of GDP. It is the ratio of nominal consumer spending to real consumer spending.

45
Q

Why is the PCE-deflator the preferred gauge of inflation for the Federal Reserve?

A

The PCE-deflator is the preferred gauge of inflation for the Federal Reserve because it allows the basket of goods to change over time as the composition of consumer spending changes, and because it is based on the consumption component of GDP.

46
Q

How does the CPI tend to overstate inflation?

A

The CPI tends to overstate inflation due to several factors, such as the substitution effect, where it does not reflect the ability of consumers to substitute cheaper goods for more expensive goods in their basket. Additionally, the introduction of new goods into the market, which increase the real value of money, is not reflected in a lower CPI. Lastly, quality improvements in goods that are difficult to measure lead to an overestimation of the true cost of living.

47
Q

What is the significance of the PCE-deflator’s inclusion of imported goods?

A

The PCE-deflator’s inclusion of imported goods provides a more accurate measurement of inflation by capturing the effect of changes in global prices.

48
Q

Why is the PCE-deflator the Federal Reserve’s preferred gauge of how quickly prices are rising?

A

The PCE-deflator allows the basket of goods to change over time as the composition of consumer spending changes, providing a more accurate measurement of inflation.

49
Q

What is the substitution effect, and how does it affect the CPI’s measurement of inflation

A

The substitution effect refers to consumers’ ability to substitute cheaper goods for more expensive goods in their basket. Because the CPI measures the price of a fixed basket of goods, it does not reflect the true cost of living as it rises less rapidly than the CPI when relative prices change.

50
Q

How does the introduction of new goods into the marketplace affect the CPI’s measurement of inflation?

A

The introduction of new goods increases the real value of the currency, but this increase in purchasing power is not reflected in a lower CPI, leading to an overestimation of inflation.

51
Q

Why is attempting to achieve zero measured inflation not recommended?

A

Macroeconomists factor in the fact that the CPI overstates inflation, and as such, attempting to achieve zero measured inflation may result in an overly tight monetary policy, which could have negative effects on the economy.

52
Q

What is the unemployment rate, and what does it measure?

A

The unemployment rate measures the percentage of people who want to work but do not have jobs.

53
Q

What are the two methods of measuring the unemployment rate, and how do they differ?

A

The two methods of measuring the unemployment rate are the claimant count method and the Labour Force Survey/Household Survey. The claimant count method involves counting the number of people claiming unemployment benefits, while the Labour Force Survey/Household Survey uses questionnaire surveys to classify individuals into employed, unemployed, and not in the labour force categories.

54
Q

What is the problem with using the claimant count method to measure unemployment?

A

The claimant count method is subject to changes in government rules for eligibility to unemployment benefits, making it an unreliable measure of unemployment.

55
Q

What are the three categories into which adults are placed in the Labour Force Survey/Household Survey?

A

The three categories into which adults are placed in the Labour Force Survey/Household Survey are employed, unemployed, and not in the labour force.

56
Q

What is included in the employed category in the Labour Force Survey/Household Survey?

A

The employed category includes those who work as paid employees, work in their own business, or work as unpaid workers in a family member’s business. It also includes those who are not working but have jobs from which they are temporarily absent.

57
Q

What is included in the unemployed category in the Labour Force Survey/Household Survey?

A

The unemployed category includes those who are not employed, are available for work, and have tried to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off.

58
Q

How are discouraged workers classified in the Labour Force Survey/Household Survey?

A

Discouraged workers who want a job but have given up looking are counted as not being in the labour force.

59
Q

What is the Establishment Survey, and how is it used to measure unemployment?

A

The Establishment Survey is a method used by the Bureau of Labor Statistics to obtain an estimate of the number of workers firms have on their payrolls. It is used to measure employment levels and changes in employment over time.

60
Q

Formula for unemployment rate:

A

(Number of unemployed / number of employed + number of unemployed) *100

61
Q

Formula for Labour Force Participation Rate:

A

Labour Force/Adult Population * 100

Econ _ principles (11 decks)

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