Ch. 2 - The Data of Macroeconomics Flashcards Preview

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1
Q

What is GDP?

A

A measure of a nation’s total income and the total expenditure on its output of goods and services.
GDP equals the total value of all final goods and services produced within Canada during a particular year.

2
Q

What is CPI?

A

The consumer price index is a measure of price levels.

3
Q

What does the unemployment rate measure?

A

The fraction of worker who are unemployed.

4
Q

GDP is often considered the best measure of how well the economy is performing. This measure, which Statistics Canada computes every three months, is computed from a large number of primary data sources that include both administrative and statistical data. What do we mean by administrative data?

A

Administrative data are byproducts of government functions such as tax collection, education programs, and regulation.

5
Q

GDP is often considered the best measure of how well the economy is performing. This measure, which Statistics Canada computes every three months, is computed from a large number of primary data sources that include both administrative and statistical data. What do we mean by statistical data?

A

Statistical data come from government surveys of, for example, retail establishments, manufacturing firms, and farm activity.

6
Q

Why would GDP not be a perfect measure of Canadian income?

A

GDP is total income earned domestically. IT includes income earned domestically by foreigners, but it does not include income earned by domestic residents on foreign ground.

7
Q

How should Canadian policymakers go about using GDP measures?

A

For the purpose of stabilizing employment, we are interesting in a broad measure of job-creating activity within Canada. GDP is that measure. For evaluating trends in the standard of living of Canadians, it is appropriate to subtract that part of our GDP that represents income to foreigners.

8
Q

Where is the figure on GDP - what foreigners made located?

A

This figure is reported by Statistics Canada in the Balance of International Payments accounts.

9
Q

Why is nothing lost by focusing on the overall GDP for discussing business cycles and stabilization policy?

A

When we subtract off the foreign incomes part of the GDP, we see that the timing and size of the cyclical swings in the resulting series and in the GDP itself are almost identical.

10
Q

What is national accounting?

A

The accounting system used to measure GDP and many related statistics.

11
Q

Imagine an economy that produces a single good, bread, from a single input, labor. Describe the circular flow diagram associated with such a scenario.

A

There is a loop that represents the flow of bread and labor. and there is another loop corresponding tot he flow of dollars.

12
Q

In the bread and labor circular flow diagram, describe how the bread and labor flows?

A

The households sell their labor to the firms. The firms use the labor of their workers to produce bread, which the firms in turn sell tot he households. Hence, labor flows form households to firms, and bread flows from firms to households.

13
Q

In the bread and labor circular flow diagram, describe how the bread and labor flows?

A

The households buy bread from the firms. The firms use some of the revenue from these sales to pay the wages of their workers, and the remainder is the profit belonging to the owners of the firms (who themselves are part of the household sector). Hence, expenditures on bread flow from household to firms, and income in the form of wages and profits flows from firms to households.

14
Q

What does GDP measure in the circular flow diagram?

A

The flow of dollars in this economy.

15
Q

What’s the first way we can compute GDP in a circular flow diagram?

A

GDP is the total income from the production of bread, which equals the sum of the wages and profits.

16
Q

What’s the second way we can compute GDP in a circular flow diagram?

A

GDP is the total expenditure on purchases of bread.

17
Q

Summarize how you could compute GDP in a circular flow diagram?

A

We can look at either the flow of dollars from firms to households or the flow of dollars from households to firms.

18
Q

Why is it that we can look at either expenditures or income to compute GDP?

A

These two ways of computing GDP must be equal because the expenditures of buyers on products is, by the rules of accounting, income to the sellers of those products.

19
Q

Suppose that a firm produces and sells one more loaf of bread to a household. Clearly, this transaction raises total expenditure on bread, explain why it also has an equal effect on total income regardless who receives the extra income.

A

If the firm produces the extra loaf without hiring any more labor (such as by making the production process more efficient), then profits increase. If the firm produces the extra loaf by hiring more labor, then wages increase. In both cases, expenditure and income increase equally.

20
Q

Why does the diversity of products complicate the calculation of GDP?

A

Because different products have different values.

21
Q

Why do national accounts use market prices to compute the total value of different goods and services?

A

Because these prices reflects how much people are willing to pay for a good or service.

22
Q

Why is the sale of a used good not included as part of GDP?

A

The sale of the used good reflects the transfer of an asset, not an addition to the economy’s income.

23
Q

When an individual buys a financial asset, why isn’t this counted as part of GDP?

A

Like used goods, it reflects a transfer, not an addition. A swap of one pre-existing asset (money) for another (the stock or bond) does not involve any productive activity.

24
Q

Imagine that a bakery hires workers to produce more bread, pays their wages, and then fails to sell the additional bread. Assume the bread spoils, how does this affect GDP?

A

In this case, the firm has paid more in wages but has not received any additional revenue, so the firm;s profit is reduced by the amount that wages have increased. Total expenditure in the economy hasn’t changed because no one buys the bread. Total income hasn’t changed either - although more is distributed as wages and less as profit. Because the transaction affects neither expenditures nor income, it doesn’t affect GDP.

25
Q

Imagine that a bakery hires workers to produce more bread, pays their wages, and then fails to sell the additional bread. Assume the bread is stored in inventory, how does this affect GDP?

A

The owners of the firm are assumed to have “purchased” the bread for the firm’s inventory, and the firm’s profit is not reduced by the additional wages it has paid. Because the higher wages raise total income, and greater spending on inventory raises total expenditure, the economy’s GDP rises. When the firm sells the inventory, it’s much like used goods. There is spending by bread consumers, but there is inventory disinvestment by the firm. This negative spending by the firm offsets the positive spending by consumers, so the sale out of inventory doesn’t affect GDP.

26
Q

Why are the sale of intermediate goods omitted from GDP calculations?

A

The value of the intermediate goods is already included as part of the market price of the final good in which they are used. To add intermediate goods to the final goods would be double-counting.

27
Q

With intermediate goods in mind, what’s one way of computing the value of all final goods and services?

A

Summing up the value added at each stage of production.

28
Q

What is value added?

A

The value added of a firm equals the value of the firm’s output less the value of the intermediate goods that the firm purchases.

29
Q

What’s the relation between value added and GDP?

A

For the economy as a whole, the sum of all value added must equal the value of all final goods and services. Hence, GDP is also the total value added of all firms in the economy.

30
Q

Although most goods and services are valued at their market price when computing GDP, some are not sold in the marketplace and therefore do not have market prices. What must we do if GDP is to include the value of these goods and services?

A

We must use an estimate of their value, called an imputed value.

31
Q

Explain why imputations are especially important for determining the value of housing.

A

A person who rents a house is buying housing services and providing income for the landlord; the rent is part of GDP, both as an expenditure by the renter and as income for the landlord. Many people, however, live in their own homes. Although they do not pay rent to a landlord, they are enjoying housing services similar to those that renters purchase.

32
Q

How do GDP calculations take account of the housing services enjoyed by homeowners?

A

GDP includes the “rent” that these homeowners “pay” themselves. Statistics Canada estimates what the market rent for a house would be if it were rented and includes that imputed rent as part of GDP. This imputed rent is included both in the homeowner’s expenditure and in the homeowner’s income.

33
Q

Explain why imputations are especially important for determining the value of government services.

A

Giving a value to public services is difficult because they are not sold in a marketplace and therefore do not have a market price.

34
Q

How do GDP calculations take account of government services?

A

The national accounts include government services in GDP by valuing them at their cost. That is, the wages of these public servants are used as a measure of the value of their output.

35
Q

In many cases, imputation is called for in principle but, to keep things simple, is not made in practice. Give some examples. (3)

A
  • Because GDP includes the imputed rent on owner-occupied houses, one might expect it also to include the imputed rent on cars, lawn mowers, jewelry, and other durable goods owned by households. Yet the value of these rental services is left out of GDP.
  • In addition, some of the output of the economy is produced and consumed at home and never enters the marketplace.
  • Finally, no imputations are made for the value of goods and services sold in the underground economy.
36
Q

How do imputations translate into an imperfect measure of GDP? When are these imperfections most problematic?

A

Because the imputations necessary for computing GDP are only approximate, and because the value of many goods and services is left out altogether. These imperfections are most problematic when comparing living standards across countries.

37
Q

Many economic variables measure a quantity of something - a quantity of money, a quantity of goods and so on. Economists distinguish between 2 types of quantity variables. What are they?

A
  • Stocks

- Flows

38
Q

In terms of economic variables, what are stocks?

A

A quantity measured at a given point in time.

39
Q

In terms of economic variables, what are flows?

A

A quantity measured per unit of time.

40
Q

What’s a good analogy for stocks and flows?

A

The amount of water in a bathtub is a stock.

The amount of water coming out of the faucet is a flow.

41
Q

What is GDP in relation to the bathtub example?

A

GDP is probably the most important flow variable in economics: it tells us how many dollars are flowing through the economy’s circular flow per unit of time.

42
Q

Stocks and flows are often related. When building theories to explain economic variables, it is often useful to determine whether the variables are stocks or flows. What are 4 great examples of related stocks and flows that we study in future chapters?

A
  • A person’s wealth is a stock; his income and expenditure are flows.
  • The number of unemployed people is a stock; the number of people losing their jobs is a flow.
  • The amount of capital in the economy is a stock; the amount of investment is a flow.
  • The government debt is a stock; the government budget deficit is a flow.
43
Q

What is nominal GDP?

A

The value of goods and services measured at current prices.

44
Q

What is real GDP?

A

The value of goods and services measured using a constant set of prices.

45
Q

Why does real GDP provide a better measure of people’s economic well-being than nominal GDP?

A

Because a society’s ability to provide economic satisfaction for its members ultimately depends on the quantities of goods and services produced.

46
Q

Give the equation for GDP Deflator and explain what it measures.

A

Also called the implicit price delfator for GDP,
GDP Deflator = Nominal GDP / Real GDP
The GDP deflator measure the price of output relative to its price in the base year.

47
Q

What does the GDP Deflator reflect?

A

What’s happening to the overall level of prices in the economy.

48
Q

Give the equation for Nomial GDP and explain what it measures.

A

Nominal GDP = Real GDP X GDP Deflator

Nominal GDP measures the current dollar value of the output of the economy.

49
Q

Give the equation for Real GDP and explain what it measures.

A

Real GDP = Nominal GDP / GDP Deflator

Real GDP measures output valued at constant prices.

50
Q

How does the GDP deflator earn its name?

A

Real GDP = Nominal GDP / GDP Deflator

It is used to deflate (that is, take inflation out of) nominal GDP to yield Real GDP.

51
Q

We’ve been discussing real GDP as if the prices used to compute this measure never change from their base-year values. What would be the problem with this approach?

A

If this were truly the case, over time, prices would become more and more dated.

52
Q

Althoug they used to periodically update the prices used to compute real GDP, how does Statistics-Canada now solve the problem of working with outdated base-years for comparison?

A

Statistics Canada now calculates chain-weighted measured of real GDP. With these new measures, the base year changes continuously over time.

53
Q

Explain, in essence, how chain-weighted measures of GDP work.

A

Average prices in 2009 and 2010 are used to measure real growth from 2009 to 2010 and so on. These various year-to-year growth rates are then put together to form a “chain” that can be used to compare the output of goods and services between any two dates.

54
Q

Why is the new chain-weighted measure of real GDP better than the more traditional measure?

A

Because it ensures that the prices used to compute real GDP are never far out of date.

55
Q

What is the national accounts identity?

A

Y = C + I + G + NX

56
Q

What is consumption?

A

Consumption consists of the goods and services bought by households.

57
Q

What are the 3 categories of consumption?

A
  • Durable goods
  • Non-durable goods
  • Services
58
Q

What are investments?

A

Investment consists of goods bought for future use.

59
Q

What are the 3 categories of investment?

A
  • Business fixed investments
  • Residential construction
  • Inventory investment.
60
Q

What is business fixed investment?

A

The purchase of a new plant and equipment by firms.

61
Q

What is residential construction (investment)

A

The purchase of new housing by households and landlords.

62
Q

What is inventory investment?

A

The increase in firms’ inventories of goods (if inventories are falling, inventory investment is negative).

63
Q

What are government purchases?

A

The goods and services bought by federal, provincial, and municipal governments. It does not include transfer payments to individuals.

64
Q

Why aren’t transfer payments included in government expenditures?

A

Because transfer payments reallocate existing income and are not make in exchange for currently produced goods and services, they are not part of GDP.

65
Q

What do net exports represent?

A

Net exports represent the net expenditure from abroad on our goods and services, which provides income for domestic producers.

66
Q

What’s the equation for gross national product?

A

Gross National Product = GNP = GDP - Net Income of Foreigners

67
Q

What’s the equation for net national income and how do we get it?

A

Net National Income = GNP - Depreciation

To obtain net national income, we subtract the depreciation of capital from GNP.

68
Q

What is depreciation called in the national accounts?

A

Capital Consumption Allowances.

69
Q

Once we get net national income, what’s the next adjustment we make?

A

The next adjustment in the national accounts is for indirect business taxes, such as sales taxes.

70
Q

Why do we adjust the net national income for indirect business taxes?

A

These taxes place a wedge between the price that consumers pay for a good and the price firms receive. Because firms never receive this tax wedge, it is not part of their income.

71
Q

What do we obtain once we subtract indirect business taxes from net national income?

A

National income.

72
Q

What is national income?

A

A measure of how much everyone in the economy has earned.

73
Q

The national accounts divide national income into which 3 components?

A
  • Compensation of employees
  • Corporate profits
  • Nonincorporated business and net interest income
74
Q

What is compensation of employees in the national accounts?

A

The wages and fringe benefits earned by workers.

75
Q

What is corporate profits in the national accounts?

A

The income or corporations after payments to their workers and creditors.

76
Q

What is nonincorporated business and net interest income in the national accounts?

A

The income of noncorporate businesses and the income that landlords receive, including the imputed rent that homeowners “pay” to themselves, less expenses, such as depreciation; and the interest domestic businesses pay minus the interest they receive, plus interest earned from foreigners.

77
Q

What is personal income?

A

The amount of income that households and noncorporate businesses receive.

78
Q

A series of adjustments takes us from national income to person income. What’s the first?

A

First, we reduce national income by the amount that corporations earn but do not pay out, either because the corporations are retaining earnings or because they are paying taxes to the government.

79
Q

How do we reduce national income by the amount that corporations earn but do not pay out?

A

This adjustment is made by subtracting corporate profits [from national income] (which equal the sum of corporate taxes, dividends, and retained earnings) and adding back dividends.

80
Q

A series of adjustments takes us from national income to person income. What’s the second?

A

We increase national income by the net amount the government pays out in transfer payments.

81
Q

How do we reduce adjusted national income by the amount the government pays out in transfer payments?

A

This adjustment equals government transfers to individuals minus social insurance contributions paid to the government.

82
Q

A series of adjustments takes us from national income to person income. What’s the third?

A

We adjust national income to include the interest that households earn rather than the interest that businesses pay.

83
Q

How do we reduce adjusted national income to include the interest that households earn rather than the interest that businesses pay?

A

This adjustment is made by adding personal interest income and subtracting net interest (the difference between personal interest and net interest arises in part from the interest on the government debt).

84
Q

In summing up the series of adjustments, give the equation which properly represents personal income int he nation accounts.

A

Personal income = National income - Corporate profits - Social insurance contributions - Net interest + Dividends + Government transfers to individuals + personal interest income

85
Q

How do obtain personal disposable income?

A

By subtracting personal tax payments from personal income.

Personal Disposable Income = Personal Income - Personal tax Payments

86
Q

Why are we interesting in personal disposable income?

A

Because it is the amount households and noncorporate businesses have available to spend after satisfying their tax obligations to the government.

87
Q

Because real GDP and the other measures of income reflect how well the economy is performing, economists are interested in studying the quarter-to-quarter fluctuations in these variables. Yet, when we start to do so, one fact leaps out. What is that fact?

A

All these measures of income exhibit a regular seasonal pattern. The output of the economy rises during the year, reaching a peak in the fourth quarter, and then falling in the first quarter of the next year.

88
Q

Why is it not surprising that real GDP follows a seasonal cycle?

A
  • Some of these changes are attributable to changes in our ability to produce.
  • In addition, people have seasonal tastes.
89
Q

What does it mean for data to be seasonally adjusted?

A

This means that the data have been adjusted to remove the regular seasonal fluctuations. Therefore, when you observe a rise or fall in real GDP or any other data series, you must look beyond the seasonal cycle for the explanation.

90
Q

What does the CPI seek to epress?

A

Just as GDP turns the quantities of many goods and services into a single number measuring the value of production, the CPI turns the prices of many goods and services into a single index measuring the overall level of prices.

91
Q

How does Statistics Canada go about computing the CPI?

A

Statistics Canada weighs different items by computing the price of a basket of goods and services purchased by a typical consumer. The CPI is the price of this basket of goods and services relative to the price of the same basket in some base year.

92
Q

The CPI is the most closely watched index of prices, but it isn’t the only such index. What’s the other?

A

The Producer Price Index

93
Q

What does the The Producer Price Index measure?

A

The price of a typical basket of goods bought by firms rather than consumers.

94
Q

What does Core Inflation measure?

A

The increase in price of a consumer basket that excludes food and energy products.

95
Q

Why is core inflation sometimes viewed as a better gauge of ongoing inflation trends?

A

Because food and energy prices exhibit substantial short-run volatility.

96
Q

The GDP deflator and CPI give somewhat different information about what’s happening to the overall level of prices in the economy. There are 3 key differences between the two measures. What’s the first difference and what does it entail?

A

The GDP deflator measures the prices of all goods and services produced, whereas the CPI measures the prices of only the goods and services bought by consumers. Thus, an increase in the price of a good bought by firms or the government will show up int he GDP deflator but not in the CPI.

97
Q

The GDP deflator and CPI give somewhat different information about what’s happening to the overall level of prices in the economy. There are 3 key differences between the two measures. What’s the second difference and what does it entail?

A

The GDP deflator includes only those goods produced domestically. Imported goods are not part of GDP and do not show up in the GDP deflator. Hence, an increase in the price of a Volkswagen made in Germany and sold in this country affects the CPI, because the Volkswagen is bought by consumers, but it doesn’t affect the GDP deflator.

98
Q

The GDP deflator and CPI give somewhat different information about what’s happening to the overall level of prices in the economy. There are 3 key differences between the two measures. What’s the third and most subtle difference and what does it entail?

A

The third and most subtle difference results from the way the two measures aggregate the many prices in the economy. The CPI assigns fixed weights to the prices of different goods, whereas the GDP deflator assigns changing weights. In other words, the CPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes.

99
Q

What do economists call a price index with a fixed basket of goods?

A

A Laspeyres Index

100
Q

What do economists call a price index with a changing basket of goods?

A

A Paasche Index

101
Q

Economic theorists have studied the properties of these different types of price indices to determine which is a better measure of the cost of living. The answer, it turns out, is that neither is clearly superior. How does a Laspeyres Index behave?

A

When prices of different goods are changing by different amounts, a Laspeyres (fixed basket) index tends to overstate the increase in the cost of living because it does not take into account that customers have the opportunity to substitute less expensive goods for more expensive ones.

102
Q

Economic theorists have studied the properties of these different types of price indices to determine which is a better measure of the cost of living. The answer, it turns out, is that neither is clearly superior. How does a Paasche Index behave?

A

A Paasche index (changing basket) tends to understate the increase int he cost of living. While it accounts for the substitution of alternative goods, it does not reflect the reduction in consumers’ welfare that may result from such substitutions.

103
Q

What do economists do to alleviate the negative effects we get when using a Paasche or Lespeyres index?

A

Because a Lespeyres index overstates inflation and a Paasche index understates inflation, one might strike a compromise by taking an average of the two measured rates of inflation.

104
Q

Striking a compromise by taking an average of the two measured rates of inflation is the approach taken by which other type of index?

A

The Fisher Index. In this case, the average is the square root of the product of the two measured rates.

105
Q

What are 3 problems with price indexes?

A
  • Substitution bias
  • The introduction of new goods
  • Unmeasured changes in quality
106
Q

How does the introduction of new goods distort the CPI?

A

When a new good is introduced int he marketplace, consumers are better, because they have more products from which to choose. In effect, the introduction of new goods increases the real value of the dollar. Yet this increase in the purchasing power of the dollar isn’t reflected in a lower CPI.

107
Q

How does Unmeasured changes in quality distort the CPI?

A

When a firm changes the quality of a good it sellf, not all of the good’s price change reflects a change in the quality of goods over time. If unmeasured quality improvement (rather than unmeasured quality deterioration) is typical, then the measured CPI rises faster than it should.

108
Q

Why is keeping workers employed a paramount concern of economic policymakers?

A

Because an economy’s workers are its chief resource.

109
Q

Some unemployment occurs because of friction in labor markets. How is this sort of unemployment often called?

A

Structural unemployment.

110
Q

When does cyclical unemployment appear?

A

It occurs when the overall level of economic activity is insufficient to employ all those wanting work.

111
Q

Does the measured unemployment rate measure cyclical or structural unemployment?

A

Both.

112
Q

When is a person said to be employed?

A

If he spent most of the previous week worker at a paid job, as opposed to keeping house, going to school, or doing something else.

113
Q

When is a person said to be unemployed?

A

If he is not employed and is waiting for the start date of a new job, is on temporary layoff, or has been looking for a job.

114
Q

When is a person said to not be in the labor force?

A

When they don’t fit the categories of employed or unemployed.

115
Q

What is a discouraged worker?

A

A person who wants a job but has given up looking. Not counted in the labor force.

116
Q

What is the labor force?

A

The sum of employed and unemployed.

Labor force = Number of employed + number of unemployed

117
Q

What is the unemployment rate?

A

The percentage of the labor force that is unemployed.

Unemployment Rate = Number of Unemployed / Labor Force

118
Q

What is the labor force participation rate?

A

The percentage of the adult population that is in the labor force.
Labor Force Participation Rate = Labor Force / Adult Population

119
Q

What’s the first reason the difference between the labor force participation rate has gradually diminished?

A

New technologies, such as the washing machine, clothes dryer, refrigerator, freezer, and dish-washer, which have reduced the amount of time required to complete routine household tasks.

120
Q

What’s the second reason the difference between the labor force participation rate has gradually diminished?

A

Improved birth control, which has reduced the number of children born to the typical family.

121
Q

What’s the third reason the difference between the labor force participation rate has gradually diminished?

A

Changing political and social attitudes.

122
Q

Although the increase in women’s labor-force participation is easily explained, the fall in men;s participation may seem puzzling. There are several developments at work. What’s the first?

A

Young men now stay in school longer than their fathers and grandfathers did.

123
Q

Although the increase in women’s labor-force participation is easily explained, the fall in men;s participation may seem puzzling. There are several developments at work. What’s the second?

A

Older men now retire earlier and live longer.

124
Q

Although the increase in women’s labor-force participation is easily explained, the fall in men;s participation may seem puzzling. There are several developments at work. What’s the third?

A

Full-time students, retirees, and stay-at-home father are all counted as out of the labor force.

125
Q

What relationship should we expect to find between unemployment and real GDP?

A

Because employed workers help produce goods and services and unemployed workers do not, increases in the unemployment rate should be associated with decreases in real GDP.

126
Q

What is Okun’s law?

A

The negative relationship between cyclical unemployment and GDP.

127
Q

Be precise about the magnitude of the Okun’s law relationship.

A

Change in the Unemployment Rate = -0.5 [(%Change in Real GDP) -4]

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