ECON Ch 19-22

Question 0

Gross domestic product

Answer 0

The market value of all final goods and services produced in an economy in a given year.

Question 1

Macroeconomics

Answer 1

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Question 2

Market value in GDP

Answer 2

Value each good and service in monetary terms. Price each good or service is sold for.
1 car valued at $50k –> GDP = $50k

Question 3

Final goods or services in GDP definition

Answer 3

Good or service purchased by a final user. Used to calculate GDP.
Don’t include intermediate goods because we would double count
Ex. In 2016–> 50 tires at $10 each and 5 cars at $500. Of the 50 tires, 20 are used for the 5 cars (don’t include tires in GDP, just car (5005)). 20 are sold directly to consumer (count (2010)) and 10 are not sold (still produced, do count (10*10)).
If it is produced this year, include it. Doesn’t matter if sol or not.

Question 4

In a given year part of GDP definition

Answer 4

If you buy a newly constructed home in 2015 for $450K and sell it in 2016 for $600K, then it only counts the $450K in 2015 and nothing in 2016. Since the GDP measures production, and the house isn’t produced in 2016, don’t include.
But if we hire a real estate broker in 2016, then you include that salary.
Only counts new goods and services, not resold.

Question 5

What do we include in the GDP?

Answer 5

GDP (Y) = consumption (C) + investment (I) + government purchases (G) + (exports (X) - imports (M)).
Exports - imports is considered net exports (NX).

Question 6

Consumption

Answer 6

Spending by households on goods and services, not including spending on new houses (counted in investment).
What you buy.

Question 7

Investment

Answer 7

Spending by firms on new factories, office buildings, and additions to inventories, plus spending by households and firms on new houses.
Firms expedentures on goods (unsold)

Question 8

Government purchases

Answer 8

Spending by federal, state, and local governments on goods and services, such as teachers’ salaries, highways, and aircraft carriers.
Doesn’t include transfer payments, since those don’t result in immediate production of new goods and services.

Question 9

Net exports

Answer 9

The value of exports - value of imports.
Inputs are American expenditure on foreign goods.

We want domestic production (production in US), so we add up value of goods sold to foreigners and subtract value of goods sold to Americans by foreigners.
Has been negative for us recently

Question 10

Do we include following in GDP?

1. Tires ford buys to put on a car
2. A used tire you buy for personal car
3. A new tire you buy for personal car
4. Value of car produced in us and exported to England
5. Profit earned in 2004 fof a house you bought in 2001
6. Commission earned by an employment counselor when she locates a job for a client.

Answer 10

1. No because intermediate good
2. No because used
3. Yes
4. Yes
5. No because not this year
6. Yes.

Question 11

Why do we separate real and nominal GDP

Answer 11

Suppose the GDP rises. Is it because of production increasing or prices increasing?

Question 12

Nominal GDP

Answer 12

The value of final goods and services at current year prices
Q 2011 * P2011

Question 13

Real GDP

Answer 13

Value of final goods and services at base- year prices (typically 2009)
Q2017 * P2009

Question 14

Nominal and real GDP general relation

Answer 14

After 2009, prices have gone up. So using today’s prices are larger, meaning nominal is bigger post 2009.
In 2009 they were equal
Before 2009, real was bigger.

Question 15

Price level

Answer 15

A measure of the average prices of goods and services in the economy.
Stable prices are desirable because they allow households and firms to plan for the future appropriately.

Question 16

GDP deflator

Answer 16

Used to measure the price level
(NOM GDP / real GDP) * 100
Since the same in the base year, GDP def is 100 in base year.

Question 17

What is gdp of us

Answer 17

$18.5 trillion w base year of 2009
Since prices usually go up over time, if we used base year of 1980, GDP would be lower.
Need to be aware of the base year when we compare countries.

Question 18

GDP of Iceland and china?

Answer 18

$20 billion (smaller than us but larger per- capita (per person))
$11 trillion in China.

Question 19

Interpret the GDP deflator

Answer 19

Say we get the GDP deflator in 2012 is 116 (nominal/real in 2012)
This means that prices have gone up by 16% since the base year (2009)

Question 20

Inflation

Answer 20

The percent change in deflator from the previous year.

100 * (GDP Def 2012- DEF 2011) / DEF 2011
(NEW-OLD)/OLD
Interpret–> say we get 1.5%. This means the price level rose by 1.5% over this year.
We can also do this with the consumer price index.

Question 21

Indexing

Answer 21

Name the base variable and then be consistent. Care about the difference between years, not the values themselves.

Question 22

Other measures of total production and total income

Answer 22

Gross national product (production performed by citizens of a nation, including overseas production (larger than GDP)

National income: GDP - consumption of fixed capital (GDP-depreciation)

Personal income: income received by households; includes transfer payments but excludes firms retained earnings

Disposable personal income: personal income - personal tax payments. This measures amount households are able to spend or save.

Question 23

How unemployment is measured in the US

Answer 23

Household survey (~60,000 households and asks questions)
1. Have you worked for 1 hour in the past week?
If yes, you’re employed. If no, then a second question
Have you looked for a job in past 4 weeks?
Yes means unemployed.
No means not in labor force.

Question 24

Employed

Answer 24

Worked 1+ hours in reference week (or were temporarily away from their jobs)

Question 25

Unemployed

Answer 25

Someone who hasn't worked in past week and has looked for a job during last 4 weeks and is available for work.

Question 26

Unemployment rate

Answer 26

unemployed / labor force

Question 27

How population is divided into different employment caterogires

Answer 27

Only look at people aged 16+ Of these people, some are not in the labor force (retired, students). Most of these people are not available for work But some of them are available for work but haven't looked for work. And even small portion are discouraged, stopped looking for job. In a prolonged recession, this number increases, but unemployment rate doesn't account for this, so rate actually goes down Labor force are rest of the working age population Of these, either unemployed or employed. Rate = unemployed / labor force.

Question 28

Labor force participation rate

Answer 28

Labor force / working age population * 100 | Measures the percentage of the working age population in the labor force.

Question 29

Employement-population ratio

Answer 29

Employment / working age population * 100 | The percentage of the working age population that is employed.

Question 30

Problems with unemployment ratio

Answer 30

Could underestimate unemployment Because the distinguishing between people who are unemployed and not in labor force is tough (discouraged workers) Only measures employment, not intensity of employment (full vs part time --> some are underemployed, not unemployed) May overestimate: May falsely claim to actively be looking for work May claim to not be working to evade taxes or keep criminal activity unnoticed.

Question 31

Types of unemployment

Answer 31

Frictional, structural, cyclical

Question 32

Frictional unemployment

Answer 32

Short term unemployment that arises from the process of matching workers with jobs Matching issues For example, right after graduation, I get a job but haven't started yet. Or I reject an offer from a company. Looking for good company. Not a problem, but rather, we encourage employee choice. Job search, entering or re entering labor force or between jobs.

Question 33

Seasonal unemployment

Answer 33

Part of frictional Some jobs fluctuate in avlaiability due to seasonal demand, like ski instructor or farm work Releases raw and seasonally adjusted employment figures

Question 34

Structural unemployment

Answer 34

Economics change. We went from farming to manufacture to services to tech. Say you were a farmer, need to learn how to manufacture and so on. Not a bad thing, as the economy is moving forward Unemployment that arises from a persistent mismatch between skills and attributes of workers and the requirements of jobs.

Question 35

Natural rate of unemployment

Answer 35

Frictional + structural When all unemployment is due to frictional and structural factors, economy is at full employment. Always some unemployment, not bad though. Somewhere around 4-5 percent

Question 36

Cyclical unemployment

Answer 36

During recessions. Worry about this. | As you recover from recessions, unemployment from cyclical factors falls

Question 37

Deflation

Answer 37

Prices going down across time. Bad thing. Not seen in US

Question 38

Problem with GDP for inflation

Answer 38

GDP deflator reflects movement in GDP. Problem is we are looking at cost of living for average American. Americans consume in parts, not mentioned in GDP. For example, if I buy a BMW, it's not in the GDP. Also, if we produce an export--> if that price goes up, GDP goes up. But we may never touch it as a consumer and it would be reported as inflation So, we look at consumer price index.

Question 39

Consumer price index

Answer 39

A measure of the average change over time in the prices a typical urban family of four pays for the goods and services they purchase. Build an imaginary basket and fix the basket (no changes in quantity). Compare the price of the basket in one month to the price in the next month.

Question 40

How to calculate CPI

Answer 40

Base year is 1982, CPI is 100 then CPI = expenditures in current year / expenditures in base year * 100 Keep quantity fixed, change prices.

Question 41

How to interpret CPI

Answer 41

If CPI = 150 | This means prices have increased 50% since base year.

Question 42

Inflation measured by CPI

Answer 42

(CPI new - cpi old) / cpi old The percentage change in the CPI. Measures how much prices have gone up in the previous yea.

Question 43

Problem with CPI

Answer 43

Overestimates inflation Doesn't account the increase in quality. May not be making life more expensive. Subs bias-- consumers may change their purchasing habits away from goods that have increased in price. New product bias-- basket changes only every 10 years. Delay to including new goods like cell phones Outlet bias-- uses full retail price, but people get discounts Overestimates true CPI by .5 to 1 percent. For example, if price of tea goes up and coffee stays same, I'm just not going to buy as much tea. But CPI doesn't say that, overestimates.

Question 44

Price level in year x in terms of price in set year (for example 2010): How to get value in 2014 dollars given value in 1989 dollars

Answer 44

Price level in year x in terms of price in 2010 = CPI X/CPI 2010 Real receipt = nominal receipt * (CPI 2010/CPI X) Value in 2014 dollars = value in 1989 dollars * (CPI 2014 / CPI 1989)

Question 45

Long run vs short run

Answer 45

Long run is growth | Short run is expamsion and contractions, recessions.

Question 46

Long run economic growth

Answer 46

The process by which rising productivity increases the average standard of living. Use real GDP per capita to look at increase. Because this accounts for increased population-- the amount of production in economy, per person, adjusted form changes in price level.

Question 47

What causes long term real GDP per capita growth

Answer 47

Labor productivity-- the quantity of goods and services that can be produced by one worker or by one hour of work. Why can the average American consume eight times as many goods and services now than in 1900? Because the average American produces 8 times as many goods and sverices in an hour now than in 1900 So, what determines labor productivity growth? Technological change, increases in capital per hour worked, property rights, NOT SHORT TERM GOVERNMENT CHANGES L -->labor/ education health K --> capital Technology / productivity

Question 48

Capital affecting long term GDP growth

Answer 48

Increases in capital per hour worked Capital is manufactured goods that are used to produce other goods and services. The more capital a worker has available to use (including human capital, the accumulated knowledge and skills workers process), the more productive

Question 49

Technological change influencing GDP growth

Answer 49

Improvements in capital or methods to combine inputs into outputs (new technologies) allow for workers to produce more in a given period of time. Entrepreneurs pioneer new ways to bring together the factors of production to produce better or lower cost products.

Question 50

Property rights influencing long term GDP growth

Answer 50

Market system cannot function unless fights to private property are secure Governments can aid growth by establishing independent court systems.

Question 51

How to graph long term and short term economic growth

Answer 51

Real GDP per capita on y axis and time on x axis | Trend line is linear, but really short term fluctuations around the line.

Question 52

Business cycle

Answer 52

Alternating periods of expanding and contracting economic activity. From peak to peak or trough to trough on the real GDP per capita vs time graph

Question 53

Expansion

Answer 53

When graph increases. Going from trough to a peak.

Question 54

Recession

Answer 54

When graph falls. Going from peak to trough. 2 consequence falling quarters are a recession.

Question 55

How inflation rate relates to recession and expansion

Answer 55

During expansions, demand is high relative to supply, so prices increase. High inflation During recessions, demand is low relative to supply, prices increase more slowly or even decrease, low inflation or deflation

Question 56

Stabilization

Answer 56

Central bank and government reduce the fluctuation of output. Makes the fluctuations closer to the trend line on the real GDP per capita vs time graph.

Question 57

Great moderation

Answer 57

Period since the mid - 1980s where fluctuations around trend line have been smaller. Occurred because of increasing importance of services. Decreases the effect of business cycle on GDP Also unemployment insurance. Still buy stuff during recession

Question 58

Unemployment during recession

Answer 58

Increases as GDP goes down.

Question 59

How are unemployment, GDP, and inflation affected by recessions and expansions

Answer 59

Recession: U up, GDP down, inflation down Expansion: U down, gdp up, inflation up

Question 60

How severe was Great Recession

Answer 60

``` GDP down 4% Unemployment up (9-10%) As opposed to natural rate of 4-5% Inflation down. Desired was about 2% ```

Question 61

Growth across countries

Answer 61

As real gdp increases, growth rate decreases | More developed economies don’t grow as much.

Question 62

Different types of growth across type of economy

Answer 62

1. Undeveloped / underdeveloped —> least real gdp, highest growth rate 2. Emerging markets—> Russia, India, China. Centrally planned economy to a market economy. Growth rate of gdp is very high (>5%) These markets are in the middle of real gdp and have middle growth rates 3. Industrialized. Larger economies with smaller growth rates.

Question 63

Model for long term economic growth

Answer 63

Labor productivity—> quality of goods and services that can be produced by 1 worker or by 1 hour of work. 2 main factors influence this: 1. Quantity of capital per hour worked 2 level of technology Promote research and development Patent law. Education/health

Question 64

Technological change

Answer 64

Change in the quantity of output a firm can produce using a given quantity of inputs.

Question 65

3 main sources of technological change

Answer 65

1. Better machinery and equipment Inventions like the steam engine, machine tools, electric generators, and computers have allowed faster economic growth 2. Increases in human capital Human capital is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences 3. Better means of organizing and managing production If managers can do a better job of organizing production, then labor productivity can increase. An example of this is the just-in-time system, first developed by Toyota. Thus involves assembling goods from parts that arrive at the factory exactly when they’re needed.

Question 66

Long run capital change

Answer 66

First units of capital most effective. Allows output per hour to increase most. Subsequent increases result in diminishing returns. Smaller incremental increases in output.

Question 67

Long run tech change

Answer 67

More effective way to increase output per hour in countries where capital is already high.

Question 68

Short term focus

Answer 68

Stabilization policies If we are above trend line, stabilize. Lower the gdp. We don’t want a big boom and bust. If we are below the trend line, fight for policy to move the gdp up.

Question 69

Savings

Answer 69

``` Private savings (by households) And public savings (by the government) ```

Question 70

Private savings

Answer 70

Household income not spent. Household incomes includes payments for factors of production (Y) and transfer payment (TR). Households consume (C) and pay taxes (T) So Sprivate = Y + TR - C - T

Question 71

Public savings

Answer 71

Government saves whatever it brings in but doesn’t spend. (May be negative, known as dissaving) S public = T-G-TR

Question 72

Total saving

Answer 72

S private + S public = Y-C-G So, savings = investment. When S public is 0, government spends as much as it brings in. Balanced budget Positive value is budget surplus Negative value is budget deficit. Funds deficits with selling treasury bonds (borrowing). Takes away from money aValiavible for investment spending

Question 73

Gross national product

Answer 73

Production performed by citizens of a nation, including overseas production (larger than GDP) For example, ford production in Mexico is in GNP, not in GDP Cars produced by Toyota in US is in GDP, not the GNP