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Macroeconomics 2 > Mid-semester Exam > Flashcards

Mid-semester Exam Flashcards

1
Q

What is GDP

A

Refers to the quantity of goods and services produced within a country over a particular period of time

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2
Q

What does the expenditure approach to GDP do?

A

Sum of all final expenditure in an economy (not including transfers as no goods are produced and the flows they derive from are already accounted for).

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3
Q

Expenditure equation

A

C+I+G+NX

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4
Q

What does the income approach to GDP do?

A

Circular flow illustrates that one agent’s expenditure represents another’s income (e.g. consumption is income to a business). The income approach is the value of production that is distributed to economics agents in the form of income – sum of all productive income.

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5
Q

Income equation

A

wages+Profits+Tax on Production+Interest+Rents

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6
Q

What sort of tax is included in the income approach

A

corporate tax as something is produced

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7
Q

What does the production approach to GDP do?

A

Measures the value added in an economy - sum of all final goods and services produced int the economy is a give timeframe

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8
Q

What are some (7) issues with GDP

A

1) Measure of economic activity rather than well-being
2) Does not take into account distributional issues
3) Many government services are not sold in a market and are hard to value
4) Household production and anything that is not in the form of an exchange transaction are not captured
5) Does not capture black economy
6) No measure of health or environmental degrediation
7) Subcategories are often interdependent (I and C)

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9
Q

Definition of employed

A

Worked at least 1 hour in the reference week

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10
Q

Definition of unemployed

A

Did not work at all in the week before the survey, must have been actively looking for work in the past 4 weeks and must be ready to begin work.

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11
Q

Is the GDP deflator and CPI more volatile

A

CPI as it only captures consumption goods

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12
Q

How is the CPI calculated?

A

CPI= current price x base quantity / base price x base quantity

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13
Q

What does a price index do?

A

A price index is the weighted average of the prices of a basket of goods and services produced in an economy in a given period of time. Measure of the average price level

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14
Q

What doe the base approach do?

A

measure of real growth - maintains the base year’s prices in the next period.

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15
Q

What is the problem with the base approach and how can you address it?

A

The growth rate varies depending in the choice of base and as time passes, the basket of goods changes. Can be addresses by using CVM

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16
Q

What are the steps to calculating a CVM

A

1) calculate real GDP with Y1 as the base
2) Take the ratio of real GDP in Y2 / Nominal Y1
3) Calculate real GDP with Y2 as the base
4) Take the ratio of real GDP in Nominal Y2 / Real Y1
5) Take the geometric average of the two ratios

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17
Q

What is the geometric average

A

nth root of g1 x …. x gn

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18
Q

Formula of the GDP deflator

A

Deflator = nominal / real

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19
Q

How do you calculate inflation in the GDP deflator

A

1) Set the base year to 100
2) Find the CVM growth rate
3) Growth Y2 Nominal GDP by this rate
4) Take the ratio Nominal Y2 / Real Y2

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20
Q

What is Gross National Product

A

Sum of finished products produced by enterprises and citizens of a country, including those abroad.

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21
Q

What is Gross National Income

A

GDP plus net income paid by other countries (interest and dividends)

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22
Q

What is Purchasing Power Parity?

A

Using the exchange rate is problematic for comparisons of costs between countries as non-tradable are typically less costly in developing countries. PPP is the number of currency units required to purchase an identical quality and quantity in the local market as US$1 would in the United States. Issues arise from measurement issues and finding the same products in the country.

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23
Q

What are macroeconomics primarily concerned with

A

Economics is primarily concerned with long-run growth cycles and short run deviations from trend in business cycles.

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24
Q

What should models do?

A
  • capture essential feature of the world needed to analyse a particular issue
  • be simple
  • do not have to be realistic
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25
Q

What is correlation

A

Pxy = (Cov (x,y) )/√(var (x) var (y))=

∑〖(x- x ̅ )(y-y ̅)〗 )/(√(∑〖(x- x ̅ )〗^2 ) 〖(x- y ̅ )〗^2

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26
Q

What is the business cycle component in the HP Filter

A

yt - Tt

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27
Q

What is the HP filter?

A

min of the sum of: (yt - Tt)^2 + lambda ((Tt+1 - Tt) - (Tt - Tt-1))

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28
Q

What are pro and countercyclical variables?

A

If the deviations from trend in an economics variable are positively (negatively) correlated with deviations from trend in real GDP, the variable is procyclical (countercyclical). If neither, it is acyclical.

29
Q

What are lagging and leading variables?

A

A variable is leading if x is useful in predicting the future path of GDP (opposite for lagging). A variable is coincident if it follows the same path as GDP and is neither leading not lagging.

30
Q

What are the key components of the Solow-Swam Model?

A

Production Function
Capital Accumulation
Labour Force Growth
Resource Constraint

31
Q

What is the Production Function

A

Y = K^a L^ 1- a Y = f (K,L)

32
Q

What is the Capital Accumulation Function in words

A

Individuals save a fixed share of output which is then invested (that is I = sY). Capital also depreciates, at a fixed rate of d. Hence, in the next period, the capital stock (K) will be investment in the current period (szY) plus the existing capital stock minus depreciation and adjusted for population growth ((n +d) K).

33
Q

Capital Accumulation Formula

A

k + 1 = szf (k) + k(n + d) / 1 + n = 0 for steady state

34
Q

What is the resource constraint?

A

Everything is either consumer of saved (invested)

y = c + sy

35
Q

What is labour force growth

A

(1 + n) N

36
Q

What is equilibrium capital

A

K* = (sz / n + d) ^ (1 / 1 - a)

37
Q

What is equilibrium income?

A 
y* = z* capital equilibrium but ^ (a / 1 - a)
y* = z* (sz / n+d) ^ (a / 1-a)
38
Q

What is equilibrium consumption

A

y* - sy

= (1 - s) z* (sz / n + d) ^ (a / 1-a)

39
Q

what is log

A

log = change

so change in y / y = a change in k / k

40
Q

What are the two lines on the SS Diagram

A

Straight line = k (n + d)
Logish line = szf(k)
Y on y axis, k on x axis

41
Q

What is the effect of higher z

A

Shift in the log curve - higher k and y

42
Q

What is the effect of higher s

A

Shift in log curve - higher k and y

43
Q

What is the effect of higher d

A

Shift in straight line - lower k and y

44
Q

What is the effect of higher n

A

Shift in straight line - lower k and y

45
Q

What it the effect of a negative shock to capital

A

Temporary shift along log curve

46
Q

What does the SS model imply about poverty

A

In extremely poor countries, the population may not be able to save (below a certain income threshold per capita, the savings rate is 0). Essentially, output is a function of labour and capital, which depreciates at a rate of d. In order to maintain or increase the capital stock, investment is needed to offset depreciation and population growth. For capital to grow, s > n+d. However, below a particular income threshold, savings are 0 as people can only cover their basic needs.

Below this level (y bar), depreciation and population growth eat into the capital stock and small increases in income (below the threshold) will not put the country on a path to the equilibrium – the capital stock trends to 0. Therefore, a ‘big push’ is needed to increase investment and the capital stock to k-bar.

47
Q

Where are the steady states

A

When capital per worker is above a certain threshold, capital increases over time to reach the equilibrium, otherwise it will gradually decrease back to equilibrium = stable.

48
Q

What did Romer say about z

A

Emphasises the role of research and development in advancing technology

49
Q

What did Lucas say about z

A

Introduces the concept of human capital – n is typically just hours but Lucas says that skills and experience also matter and productivity varies between people. To increase productivity, you should raise human capital, which can increase indefinitely. Y = z * F(K, NH)
 

50
Q

What are the central aspects of the household sector in the one period model

A

 Assumes that there is one household which exists in one period
 The household has a time endowment where h = hours
– Time is either used for leisure (l) or work (Ns or h – l)
 The wage rate is w
– Labour income is wNs or w(h – l)
 Non-labour income is π
 Tax = T
 No savings in the model: income = consumption

51
Q

What is consumption / household income in the 1 period model

A

w (h-l) - T + pi

= labour income + non-labour income - tax

52
Q

What does the household budget curve look like?

A

C on y axis, L on x axis
h is along the x axis and there is a rectangle from here to (pi - T) on the y axis representing after tx non-labour income. There is a triangle on top

53
Q

What does an increase in after tax non labour income look like?

A

Shifts both curves up

54
Q

What is an indifference curve

A

shows all consumption bundles that offer the same utility

55
Q

Where is the optimal point

A

Intersection of indifference curve and Budget line

56
Q

Where is the equilibrium point on the household budget curve

A

tangent to the indifference curve where the marginal rate of substitution is equal to the wage rate

57
Q

What is in the firm graph

A

puts Y against the labour supply, log line of production function (xF(K,N)), and the wage

58
Q

Why is w = MRS the equilibrium point on the household budget?

A

he rate at which the consumer is willing to trade

leisure for consumption is the same as the rate at which leisure trades for consumption on the market

59
Q

What is the marginal rate of substitution

A

The marginal rate of substitution of leisure for consumption equals the relative price of leisure in terms of consumption goods

60
Q

What is the effect of increasing profits on households

A

pure income effect resulting in higher leisure and consumption (normal goods) - shifts curve higher.

Shifts labour supply curve to the left (supply is lower at all wage rates)

61
Q

What is the effect of increasing wages on households?

A

Substitution effect: keep utility level but substitute towards consumption as relative price of leisure rises.

Income effect: consumer more of leisure and consumption as normal goods (slope increases)

Generally, we assume that SE > IE

62
Q

What is the Marginal Product of Labour?

A

additional output that can be produced with one

additional unit of labour holding capital constant (slope of production function)

63
Q

What is the Marginal Product of Capital?

A

additional output that can be produced with one

additional unit of capital holding labour constant. Slope of production function with N fixed at N*

64
Q

What are 3 properties of the production function?

A
  • constant returns to scale
  • diminishing returns
  • 1 firm in 1 period
65
Q

What does increasing capital do the the MPL

A

Increases - shifts up

66
Q

What does increasing z do to the firm function?

A

Shifts production function up as more can be produced with the same inputs. Shifts marginal product of labour out

67
Q

What are firm profits equal to?

A

profit = Y - wN
= z F (k,N) - wN
distance between revenue and cost functions

68
Q

Why is w = MPL the optimal point for firms?

A

To the left of this, MPN > w, so one more unit of labour at w produces more than w units of consumption goods

Macroeconomics 2 (2 decks)

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