Measurements in the economy

Question 1

What is the Gross Domestic Product?

Answer 1

The value of economic activity (transactions/productions)
It is a nominal value: a measurement at that moment in time

Question 2

What is the GDP equation and what are the variables?

Answer 2

GDP = C + I + G + NX
C: Consumption
I: Investment
G: Government spending
NX: Net exports (Exports (x) - Imports (m))

Question 3

What are the three things that are never in GDP calculations?

Answer 3

• Used goods (was calculated when it was new)
  
  • Intermediary goods (products needed to create a final product, like tires on a car: the int. product was calculated when they were used to create the final product)
  • Transfer payments (money that was transferred from one level of govt to another: taxes from fed govt to prov govt)

Question 4

What is the income method of GDP?

Answer 4

NDP (Net Domestic Product)

Question 5

What is the equation for NDP and what are the variables?

Answer 5

W + c + R + π + O + tf + i
W = wages
c = interest income
π = corporate profit
R = small business income
O = farm income
tf = (tax - subsidies)
i = interest income

Question 6

What is a trade balance?

Answer 6

Difference between x and m

Question 7

How do we call a trade balance that is positive?

Answer 7

Trade surplus

Question 8

How do we call a trade balance that is negative?

Answer 8

Trade deficit

Question 9

What does a trade surplus indicate?

Answer 9

A growing, healthy economy

Question 10

What is GNP and what is its equation?

Answer 10

it is the Gross National Product
GNP = C + I + G + NX + A
A = People abroad

Question 11

What is NNP and what is its equation?

Answer 11

it is the Net National Product.
NNP = GNP - D
D = Depreciation (cost of doing business - money spent to keep up with competition)

Question 12

What is a RGDP?

Answer 12

It is the nominal GDP adjusted to inflation. It includes the deflator

Question 13

What is inflation?

Answer 13

A general rise in prices

Question 14

What are the two types of inflation and what do they mean?

Answer 14

• Demand-pull: increase in aggregate demand
• Cost-push: increase in aggregate supply

Question 15

What is an acceptable annual inflation rate?

Answer 15

2-3%

Question 16

What effect does high inflation have on consumers?

Answer 16

They lose purchasing power

Question 17

What are the causes of Demand-pull inflation?

Answer 17

• Increase in income
• Increase in demand
• Supply cannot keep up

Question 17

What could be an employers response to inflation?

Answer 17

Indexing the employee’s salary

Question 18

How do you fix high demand-pull inflation?

Answer 18

1- Increase taxes (takes a long time to do)
2- Increase interest rate (r) (interest = price of borrowing money)

Question 19

How do you fix a high cost-push inlfation?

Answer 19

1- Subsidies/loans from govt (increase in G) (mostly used option)
2- Lower tariffs on intermediary goods

Question 20

What is the 72 rule?

Answer 20

72/%r to see how long investments double

Question 21

what is the 70 rule?

Answer 21

70/%growth GDP to see how long prices to double

Question 22

How do we measure the inflation for AD changes (measuring deflation) and what are they?

Answer 22

1- CPI: Consumer Price Index
- Number out of 100
- “Basket of goods”
- Most common products that people buy
- If it increases as years go by, prices increase, inflation
- Can be done month to month

2- GDP deflator
- Price index for all goods and services
- Number out of 100
- Annual index

Question 23

What is the equation for a deflator?

Answer 23

Deflator = Nominal GDP/Real GDP x 100

Question 24

What is a base year when calculating inflation?

Answer 24

A base year is the year where the value of a dollar is equal to one.

Question 25

What is the equation for future value and what are its variables?

Answer 25

FV = P(1+r)t FV = Future value P = Principal r = interest rate t = Number of times it was calculated

Question 26

What is the equation for inflation?

Answer 26

Inflation = (YR2 D - yR1D / YR1D) x 100

Question 27

What is the difference between fixed and variable interest?

Answer 27

Fixed = one interest rate for the duration of the loan Variable = Interest rate changes during the loan

Question 28

How do we calculate real interest rates?

Answer 28

Real r = nominal r - inflation

Question 29

What is the problem with G?

Answer 29

Debts + Deficits

Question 30

What is the difference between debt and deficit?

Answer 30

Deficit = difference between revenue and spending Debt = borrowed money to cover deficits

Question 31

What are the two ways to cover deficits?

Answer 31

- Internal debt: borrowing from citizens (selling bonds) - External debt: borrowing from other countries (Japan, EU, China) (90% of debt comes from this)

Question 32

What is the equation for the debt-to-GDP ratio?

Answer 32

Debt/GDP x 100

Question 33

Is the Debt-to-GDP ratio valuable on its own?

Answer 33

No, it needs to be compared to other years in order to make sense of it

Question 34

What does the debt-to-GDP ratio tell us?

Answer 34

It is a measurement of the financial health of a country

Question 35

What are bonds?

Answer 35

loans on a certificate that are an investment for those who buy them. They can also indicate the financial health of a country

Question 36

Why do governments sell bonds and what do they do to the country's debt?

Answer 36

The governments sell bonds to solve demand-pull inflation (control AD) This raises/creates internal debt

Question 37

What are the types of bonds?

Answer 37

- Federal bond: issued by a national govt. e.g.: Canada savings bond (CSB), Treasury Bills (in USA). 5-30 years - Municipal bond or provincial bond: regional. e.g.: QSB. 5-30 years - Corporate bond: issued by corporations. e.g.: apple, IBM, Amazon. 5-20 years. Offer higher interest rate because they are always subjected to shut down - Zero coupon bond: can be traded on the bond market, kind of at a discount. Sold before the end of the bond term

Question 38

What does the interest rate of a country's bond tell us?

Answer 38

Government bond's interest rate depends on the financial health or the general state of the country. Subjected to how likely you are to get your money back

Question 39

How do we know which federal bonds are good to have

Answer 39

Bonds of the federal are rated bonds: rated for risk of default (risk of losing your money) (rated from an AAA down) Ratings agencies are Moody's, Standard & Poor's, Fitch

Question 40

What is the business cycle theory?

Answer 40

A visual way to look at economic growth (Aggregate Economic Activity) over time

Question 41

What is a full cycle of the business cycle?

Answer 41

Full expansion and full contraction

Question 42

How many years are there typically between recessions?

Answer 42

12 years on average

Question 43

How do we call the part going up on the business cycle theory and what does it bring?

Answer 43

Growth/expansion : higher AD and higher inflation at least 2 consecutive quarters (min. 6 months)

Question 44

How do we call the highest part on the business cycle theory and what does it bring?

Answer 44

A peak/ boom: lowest unemployment, highest AD and inflation. It is usually short-lived

Question 45

How do we call the part going down on the business cycle theory and what does it bring?

Answer 45

contraction/recession: shrinking in growth, rising unemployment, lower AD, lower consumption, lower interest rates Lasts 6 months to 2 years

Question 46

How do we call the lowest part on the business cycle theory and what does it bring?

Answer 46

Through/depression: lowest employment, bad economic times, lowest purchasing power

Question 47

What are the three ways to observe the direction of the change in the economic measurements and what do they mean?

Answer 47

- Procyclical: with the cycle. Any indicator picked goes along with the direction of the cycle. (If the GDP goes up and we are in growth) - Acyclical: no relation. - Countercyclical: against the cycle. (if inflation goes up and we are in recession)

Question 48

What are the three ways to observe the timing of the change in the economic measurements and what do they mean?

Answer 48

- Leading indicator: the change in the measurement happened before the movement on the cycle - Lagging indicator: the change in measurement happened after the cycle movement - Coincidental indicator: change in measurement happens at the same time as the cycle movement (unemployment rate is usually a coincidental indicator)