Midterm 1 Flashcards
1
Q
What is the relationship between income and expenditure for an economy?
A. Income is greater than expenditure.
B. Income is less than expenditure.
C. Income equals expenditure.
D. Income could be greater or less than expenditure.
A
C
2
Q
In a simple circular-flow diagram, how are total income and total expenditures in an economy interrelated?
A. They are equal because firms re-invest their revenue.
B. They are equal only if there is no saving.
C. They never equal because some people’s income does not come from production activities.
D. They are equal because every transaction has a buyer and a seller.
A
D
3
Q
Which of the following is the correct definition of GDP?
A. the market value of all goods produced within a country
B. the market value of all final goods and services produced by the citizens of a country
C. the market value of all final goods and services consumed within a country over a number of years
D. the market value of all final goods and services produced within a country in a given period of time
A
D
4
Q
In order to include many different products in an aggregate measure, how is GDP computed?
A. using values of goods based on surveys of consumers
B. using primarily costs of production
C. using primarily market prices
D. using weights that are computed by how much of a particular good is produced relative to total output
A
C
5
Q
Suppose that an apartment complex converts to a condominium where the renters are now owners of their former apartments. What is included in GDP?
A. The rent was included in GDP; the purchases of the condominiums are not.
B. The rent was included in GDP, and so is the purchase of the condominiums.
C. The rent was not included in GDP; the purchases of the condominiums are.
D. The rent was not included in GDP; the purchases are not included either.
A
A
6
Q
Which of the following non-market goods or services is included as an estimate in Canadian GDP?
A. the value of unpaid housework
B. the value of vegetables that people grow in their gardens
C. the estimated rental value of owner-occupied homes
D. the estimated value of illegal drugs
A
C
7
Q
Over the past few decades Canadians have chosen to cook less at home and eat more at restaurants. What effect has this practice had on GDP?
A. It has increased measured GDP.
B. It has reduced measured GDP.
C. It has not affected measured GDP.
D. It has had an ambiguous effect on GDP.
A
A
8
Q
A professional gambler moves from a province where gambling is illegal to a province where gambling is legal. What impact does this move have on Canada’s GDP?
A. It raises GDP.
B. It decreases GDP.
C. It does not change GDP because gambling is never included in GDP.
D. It does not change GDP because in either case his income is included.
A
A
9
Q
Roommates Grace and Kelly are sharing household chores and think they have an even exchange. Other things the same, if instead they paid each other for the chores the other did, what would happen to GDP?
A. It would fall.
B. It would rise.
C. It would be unaffected because paid or not, household chores are not included in GDP.
D. It would be unaffected because paid or not, household chores are included in GDP.
A
B
10
Q
How are grapes treated in GDP terms?
A. They are always counted as intermediate goods
B. They are counted as intermediate goods only if they are used to produce another good like wine.
C. They are counted as intermediate goods only if they are consumed.
D. They are counted as intermediate goods whether they are used to produce other goods or consumed.
A
B
11
Q
George buys and lives in a newly constructed home he paid $200 000 for in 2010. He sells the house in 2011 for $225 000. How is GDP impacted?
A. The 2011 sale increases 2011 GDP by $225 000 and does nothing to 2010 GDP.
B. The 2011 sale increases 2011 GDP by $25 000 and does nothing to 2010 GDP.
C. The 2011 sale does not increase 2011 GDP and does nothing to 2010 GDP.
D. The 2011 sale increases 2011 GDP by $225 000, and 2010 GDP is revised upward by $25 000.
A
C
12
Q
Anna, a Canadian citizen, works only in Germany. How is the value added to production from her employment included in GDP?
A. It is only included in Canadian GDP.
B. It is only included in German GDP.
C. It is included in both German and Canadian GDP.
D. It is included in neither German nor Canadian GDP.
A
B
13
Q
An Italian company opens a pasta company in Ottawa. Where are the profits from this pasta company included? A. in both Canadian and Italian GNP B. in both Canadian and Italian GDP C. in Canadian GNP and Italian GDP D. in Canadian GDP and Italian GNP
A
D
14
Q
Which of the following is included in Canadian GDP?
A. the difference in the price of the sale of an existing home and its original purchase price
B. goods produced by foreign citizens working in Canada
C. known illegal activities
D. goods produced by a Canadian company in France
A
B
15
Q
If the government reports that “GDP increased at an annual rate of 6.0 percent for the fourth quarter of 2010,” by how much did GDP increase?
A. 6.0 percent during 2010
B. 24.0 percent during 2010
C. 6.0 percent during the fourth quarter of 2010
D. 1.5 percent during the fourth quarter of 2010
A
D
16
Q
In the nation of Ophelia, quarterly GDP is always higher in the second quarter than in other quarters. In order to account for this predictable jump in GDP, what will Ophelia’s government statisticians most likely do?
A. make sure to account for inventory changes during the second quarter
B. report real GDP, not nominal GDP
C. focus on GNP rather than GDP during the second quarter
D. make a seasonal adjustment for the second quarter data
A
D
17
Q
What government level(s) is(are) considered when computing government purchases for GDP accounting purposes?
A. the federal government only
B. provincial and federal governments only
C. local, provincial, and federal governments
D. local and provincial governments, but not the federal government
A
C
18
Q
When a firm produces consumer goods and adds some to inventory rather than selling it, how is the increase in inventory counted in GDP?
A. It is not counted in the current quarter GDP.
B. It is counted in the current quarter GDP as investment.
C. It is counted in the current quarter GDP as consumption.
D. It is counted in the current quarter GDP as a statistical discrepancy.
A
B
19
Q
A German citizen buys an automobile produced in Canada by a Japanese company. What happens as a result?
A. Canadian net exports increase, Canadian GNP and GDP are unaffected, Japanese GNP increases, German net exports decrease, and German GNP and GDP are unaffected.
B. Canadian net exports, GNP, and GDP increase; Japanese GDP increases; German net exports decrease; and German GDP is unaffected.
C. Canadian net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GDP and GNP are unaffected.
D. Canadian net exports, GNP, and GDP are unaffected; Japanese GNP increases; German net exports decrease; and German GDP and GNP decrease.
A
C
20
Q
Which of the following represents a transfer payment?
A. You transfer $1000 from your bank account to a mutual fund.
B. The bank transfers $10 quarterly interest to your savings account.
C. The government sends your grandfather his pension cheque.
D. Your employer automatically transfers $100 each month from your wages to a nontaxable medical spending account.
A
C
21
Q
To encourage formation of small businesses, the government could provide subsidies. How would these subsidies be treated?
A. They would be included in GDP because they are part of government expenditures.
B. They would be included in GDP because they are part of investment expenditures.
C. They would not be included in GDP because they are transfer payments.
D. They would not be included in GDP because the government raises taxes to pay for them.
A
C
22
Q
Which of the following is included in the investment component of GDP?
A. purchases of stocks and bonds
B. purchases of capital equipment that was manufactured in a foreign country by a foreign firm
C. the estimated rental value of owner-occupied housing
D. purchases of new durable goods and appliances
A
B
23
Q
Which of these will increase Canadian net exports? ?
A. A Canadian resident buys a skateboard manufactured in Canada by a German firm.
B. A US resident buys a Blackberry manufactured in Canada.
C. A Canadian resident buys a souvenir in Paris.
D. A Canadian resident buys Microsoft stock.
A
B
24
Q
What would be the cause of total spending rising from one year to the next?
A. The economy must be producing a larger output of goods and services.
B. Prices at which goods and services are sold must be higher.
C. Either the economy must be producing a larger output of goods and services, or the prices at which goods and services are sold must be higher, or both.
D. Employment or productivity must be rising.
A
C
25
Which of the following best describes real GDP?
A. Real GDP evaluates current production at current prices.
B. Real GDP evaluates current production at the prices that prevailed in some specific year in the past.
C. Real GDP is not a valid measure of the economy's performance, since prices change from year to year.
D. Real GDP is a measure of the value of goods only; hence, it excludes the value of services.
B
26
Suppose GDP consists of wheat and rice. In 2006, 20 bushels of wheat are sold at $4 per bushel, and 10 bushels of rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the price of rice was $1 per bushel in 2001, the base year, what can we conclude?
A. Nominal 2006 GDP is $100, real 2006 GDP is $50, and the GDP deflator is 50.
B. Nominal 2006 GDP is $100, real 2006 GDP is $50, and the GDP deflator is 200.
C. Nominal 2006 GDP is $50, real 2006 GDP is $100, and the GDP deflator is 200.
D. Nominal 2006 GDP is $40, real 2006 GDP is $100, and the GDP deflator is 50.
B
27
```
If the GDP deflator is 200 and nominal GDP is $1 trillion, what is real GDP?
A. $5 billion
B. $200 billion
C. $500 billion
D. $2 trillion
```
C
28
The information below was reported by the World Bank in 2000.
Nominal GDP, Population
Kenya: $10 400 million, 30.1 million
Tanzania: $9000 million, 33.7 million
Zimbabwe: $7200 million, 12.6 million
```
On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest?
A. Kenya, Tanzania, Zimbabwe
B. Kenya, Zimbabwe, Tanzania
C. Zimbabwe, Kenya Tanzania
D. Zimbabwe, Tanzania, Kenya
```
C
29
Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are NOT measured as part of GDP According to most economists, why is GDP a useful measure of society's well-being?
A. GDP is not a useful measure of society's well-being because it does not measure many things that society values.
B. GDP is a useful measure of society's well-being because providing these other attributes is the responsibility of government.
C. GDP is a useful measure of society's well-being because it measures a nation's ability to produce the things that contribute to well-being.
D. GDP is an excellent measure of society's well-being because these other values cannot actually be measured.
C
30
```
Suppose that 25 years ago a country had nominal GDP of 1000, a GDP deflator of 200, and a population of 100. Today that country has a nominal GDP of 3000, a deflator of 400, and a population of 150. What happened to the real GDP per person?
A. It more than doubled.
B. It rose, but less than doubled.
C. It fell.
D. It has not changed.
```
D
31
Babe Ruth, the famous baseball player, earned $80 000 in 1931. Today, the best baseball players can earn 200 times as much as Babe Ruth in 1931. However, prices have also risen since 1931. What can we conclude from this information?
A. The best baseball players today are better off than Babe Ruth was in 1931.
B. Because prices have also risen, the standard of living of baseball stars hasn't changed since 1931.
C. One cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes.
D. One cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.
D
32
Which of the following situations is described by the term “inflation”?
A. The overall level of prices in the economy is increasing.
B. Incomes in the economy are increasing.
C. Stock-market prices are rising.
D. The economy is growing rapidly.
A
33
What does the CPI measure?
A. the overall price of inputs purchased by a typical producer
B. the overall price of goods and services bought by a typical consumer
C. the overall price of goods and services produced in the economy
D. the overall price of stocks on the Toronto Stock Exchange
B
34
Which of the following agencies calculates the CPI?
A. the National Price Board
B. the Department of Weight and Measurements
C. Statistics Canada
D. the Ministry of Finance
C
35
```
How often is the CPI calculated?
A. weekly
B. monthly
C. quarterly
D. yearly
```
B
36
In the CPI, how are goods and services weighted?
A. according to how much consumers buy of each item
B. according to whether the goods and services are necessities or luxuries
C. according to the levels of production of the goods and services in the domestic economy
D. according to the expenditures on them in the GDP national income accounts
A
37
```
The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 litres of milk, 2 shirts, and 2 pairs of pants. In 2005 the price of bread was $1.00 per loaf, the price of milk was $1.50 per litre, the price of a shirt was $6.00, and the price of a pair of pants was $10.00. In 2006 the price of bread was $1.75 per loaf, the price of milk was $2.25 per litre, the price of a shirt was $7.50, and the price of a pair of pants was $13.00. What was the inflation rate, as measured by the CPI, for Aquilonia between 2005 and 2006?
A. 20 percent
B. 24.4 percent
C. 30 percent
D. 36.67 percent
```
D
38
If this year the CPI is 125 and last year it was 120, what do we know?
A. Most goods have become more expensive.
B. The price level has increased.
C. The inflation rate has increased.
D. Some goods have become cheaper.
B
39
If the price index in the first year was 90, in the second year was 100, and in the third year was 95, what did the economy experience?
A. 10 percent inflation between the first and second years and 5 percent inflation between the second and third years
B. 10 percent inflation between the first and second years and 5 percent deflation between the second and third years
C. 11 percent inflation between the first and second years and 5 percent inflation between the second and third years
D. 11 percent inflation between the first and second years and 5 percent deflation between the second and third years
D
40
```
From October 2009 to October 2010, the CPI in country A rose from 116.5 to 119.8. In country B, it rose from 97.2 to 102.3. What were the inflation rates in the two countries?
A. 3.3 percent in A and 6.7 percent in B
B. 3.3 percent in A and 5.1 percent in B
C. 2.8 percent in A and 6.7 percent in B
D. 2.8 percent in A and 5.2 percent in B
```
D
41
For questions 41 consider the table below, which shows the CPI for various categories of goods and services.
```
2006:
Food and Beverages- 168.4
Housing- 169.6
Transportation- 153.3
Gasoline- 139.6
```
```
2007:
Food and Beverages- 173.6
Housing- 176.2
Transportation- 154.3
Gasoline- 141.4
```
```
Among these categories, what was the highest rate of inflation?
A. 6.6 percent
B. 5.2 percent
C. 3.9 percent
D. 3.1 percent
```
C
42
The table below pertains to an economy with only two goods—books and calculators. The fixed basket consists of 5 books and 10 calculators.Use it to answer questions 42, 43, and 44.
Price of books, Price of calculators
2005: $24, $8
2006: $30, $12
2007: $32, $15
Using 2005 as the base year, what is the consumer price index?
A. 100 in 2005, 135 in 2006, and 155 in 2007
B. 100 in 2005, 270 in 2006, and 310 in 2007
C. 200 in 2005, 270 in 2006, and 310 in 2007
D. 200 in 2005, 540 in 2006, and 620 in 2007
A
43
The table below pertains to an economy with only two goods—books and calculators. The fixed basket consists of 5 books and 10 calculators.Use it to answer questions 42, 43, and 44.
Price of books, Price of calculators
2005: $24, $8
2006: $30, $12
2007: $32, $15
Using 2006 as the base year, what is the consumer price index?
A. 78.22 in 2005, 100 in 2006, and 121.10 in 2007
B. 74.07 in 2005, 100 in 2006, and 114.81 in 2007
C. 100 in 2005, 135 in 2006, and 155 in 2007
D. 200 in 2005, 270 in 2006, and 310 in 2007
B
44
The table below pertains to an economy with only two goods—books and calculators. The fixed basket consists of 5 books and 10 calculators.Use it to answer questions 42, 43, and 44.
Price of books, Price of calculators
2005: $24, $8
2006: $30, $12
2007: $32, $15
Using 2007 as the base year, what is the consumer price index?
A. 52.66 in 2005, 84.25 in 2006, and 106.5 in 2007
B. 64.52 in 2005, 87.10 in 2006, and 100 in 2007
C. 52.66 in 2005, 90.89 in 2006, and 100 in 2007
D. 100 in 2005, 135 in 2006, and 155 in 2007
B
45
What are the categories of Canadian consumer spending, ranked from largest to smallest?
A. food, alcoholic beverages and tobacco products, housing, transportation, and health and personal care
B. health and personal care, housing, food, alcoholic beverages and tobacco products, and transportation
C. housing, food, alcoholic beverages and tobacco products, transportation, and health and personal care
D. housing, transportation, food, health and personal care, and alcoholic beverages and tobacco products
D
46
```
If the cost of shelter increases by 10 percent, then, other things the same, how much is the CPI likely to increase?
A. by about 10 percent
B. by about 7 percent
C. by about 3 percent
D. by about 1 percent
```
C
47
What does the rate of core inflation EXCLUDE?
A. clothing and footwear
B. alcoholic beverages and tobacco products
C. the most volatile components from the CPI basket of goods and services
D. the least volatile components from the CPI basket of goods and services
C
48
Which of the following best characterizes the consumer price index?
A. It is a measure of a nation’s standard of living.
B. It shows the increase in productivity.
C. It measures the increase in the prices of all final goods and services produced within the borders of a country.
D. It is an imperfect measure of the cost of living.
D
49
When the relative price of a good increases, how will consumers respond?
A. by buying more of it and its substitutes
B. by buying less of it and its substitutes
C. by buying less of it and more of its substitutes
D. by buying more of it and less of its substitutes
C
50
```
Suppose the price of a litre of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, what will people likely buy?
A. more milk and more T-shirts
B. more milk and fewer T-shirts
C. less milk and more T-shirts
D. less milk and fewer T-shirts
```
D
51
By not taking into account the possibility of consumer substitution, how is the CPI biased?
A. It understates the cost of living.
B. It overstates the cost of living.
C. It may overstate or understate the cost of living depending on how much prices rise.
D. It doesn't accurately reflect the cost of living, but it is unclear if it overstates or understates the cost of living.
B
52
When the quality of a good improves, what happens to the purchasing power of the dollar?
A. It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B. It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C. It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D. It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
A
53
Suppose that lawn mowers are part of the market basket used to compute the CPI. Then suppose that the quality of lawn mowers improves while the price of lawn mowers stays the same. If Statistics Canada precisely adjusts the CPI for the improvement in quality, then, other things equal, what will happen?
A. The CPI will rise.
B. The CPI will fall.
C. The CPI will stay the same.
D. Lawn mowers will no longer be included in the market basket.
B
54
Suppose that in 2010, OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed, and it is cheaper to operate than gasoline engines. Which of the following problems in the construction of the CPI would this situation represent?
A. substitution bias and introduction of new goods
B. introduction of new goods and unmeasured quality change
C. unmeasured quality change and new goods
D. income bias and substitution bias
A
55
What do economists believe about the bias in the CPI as a measure of the cost of living?
A. Economists agree that the bias in the CPI is a very serious problem.
B. There is still debate among economists on whether CPI understates or overstates increases in the cost of living.
C. Economists agree on the severity of the CPI bias, but there is still debate on what to do about it.
D. There is still debate among economists on the severity of the CPI bias and what to do about it.
D
56
In Canada, if the price of imported oil rises so that the price of gasoline and heating oil rise, what happens to the GDP deflator and the consumer price index?
A. The GDP deflator rises much more than the consumer price index rises.
B. The consumer price index rises much more than the GDP deflator rises.
C. The GDP deflator and the consumer price index rise by about the same amount.
D. The consumer price index rises slightly more than the GDP deflator rises.
B
57
```
If the nominal interest rate is 8 percent and the rate of inflation is 2 percent, what is the real interest rate?
A. 16 percent
B. 10 percent
C. 6 percent
D. 4 percent
```
C
58
What does the real interest rate tell you?
A. how fast the number of dollars in your bank account rises over time
B. how fast the purchasing power of your bank account rises over time
C. the number of dollars in your bank account
D. the purchasing power of your bank account
B
59
```
In Japan in 2000 nominal interest rates were 1.5 percent and the inflation rate was –0.5 percent. What was the real interest rate?
A. –2 percent
B. –1 percent
C. 1 percent
D. 2 percent
```
D
60
```
In the country of Hyrkania, the CPI in 2005 was 140 and the CPI in 2006 was 154. Jake, a resident of Hyrkania, borrowed money in 2005 and repaid the loan in 2006. If the nominal interest rate on the loan was 14 percent, what was the real interest rate?
A. 18 percent
B. 14 percent
C. 10 percent
D. 4 percent
```
D
61
Define macroeconomics
-The study of economy-wide phenomena, including inflation, unemployment, and economic growth.
62
Examples of macroeconomic statistics.
- total income of everyone in the economy (GDP)
- the rate at which average prices are rising and falling (inflation and deflation)
- the percentage of labour force that is out of work (unemployment)
- total spending at stores (retail sales)
- the imbalance trade between Canada and the rest of the world (the trade deficit)
63
Define microeconomics.
The study of how households and firms make decisions and how they interact in markets.
64
Define gross domestic product (GDP)
- measures the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services
* the market value of all final goods and services produced within a country in a given period of time
- *for an economy as a whole, income must equal expenditure
- best single measure of a society’s economic well-being
* is a good measure of economic well-being for most, but NOT ALL purposes
65
True or false. For an economy as a whole, income must equal expenditure.
True. Every dollar of spending by some buyer is a dollar of income for some seller.
66
If Karen pays Doug $100 to mow her lawn. In this case, Doug is a seller of a service and Karen is a buyer. Doug earns $100 and Karen spends $100. How does this affect GDP?
-since the transaction contributes equally to the economy’s income and its expenditure, the GDP rises by $100
67
Describe the circular flow diagram.
- describes all the transactions between households and firms i a simple economy
- households buy goods and services from firms, these expenditures flow through the markets for goods and services, firms use the money they receive from sales to pay workers’ wages, landowner’s rent, firm owner’s profit, this income flows through the markets for factors of production
- money flows from households to firms then back to households
68
How can GDP be calculated with the circular flow diagram?
-adding up the total expenditure by households or by adding up the total income (wages, rent, profit) paid by firms
69
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “GDP is the market value...”
- adds together many different kinds of products into a single measure of the value of economic activity (comparing apples and oranges)
- market prices measure the amount people are willing to pay for different goods (reflect value of those goods)
70
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “...of all...”
- includes all items produced in the economy and sold LEGALLY in markets
- assumes that the owner of a house pays rent to himself so the rent is included in both his expenditure and income (*owner-occupied housing is estimated its rental value)
- excluded from GDP: items produced and sold illicitly, items produced and consumed at home
- marriage affects GDP
- underestimation of the true amount of productive activity taking place in the economy
71
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “...final...”
- paper (intermediate good) is used too make a card (final good)
- GDP only includes the value of final goods (value of intermediate goods already included in prices of final goods) otherwise double counting
- EXCEPTION: when an intermediate good is produced and rather than being used, is added to a firm’s inventory of goods to be used or sold at a later date (now seen as final, added to GDP, then later GDP is reduced)
72
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “...goods and services”
-GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, dentist visits)
73
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “...produced...”
- includes only goods and services currently produced
| - does not include those from the past (selling a used car)
74
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “...within a country...”
- items are included in a nation’s GDP if they are produced domestically , regardless if the nationality of the producer
- British citizen works temporarily in Canada=his production part of Canadian GDP
- Canadian citizen owns a factory in Haiti=his production part of Haiti’s GDP
75
“GDP is the market value of all final goods and services produced within a country in a give period of time.” What are the issues with “... in a given period of time.”
- measures the value of production that takes place within a specific interval of time (year or quarter/three months)
- when the government reports quarterly GDP, it presents data after they have been modified by a statistical procedure “seasonal adjustment” (adjust the quarterly data to take out the seasonal cycle)
76
Define statistical discrepancy
The difference between total expenditure and total income of GDP
77
What is the GDP equation and its components?
Y=C+I+G+NX
GDP=Consumption+Investment+Government Purchases+Net Exports
78
GDP component: Consumption
- spending by households on goods and services, with the exception of purchases of new housing
- durable goods (automobiles, appliances) and non durable goods (food, clothing), intangible services (haircuts, dental care, post secondary education)
79
GDP component: Investment
- spending on capital equipment, inventories, and structures, including household purchases of new housing
- purchase of a new house
- purchases of goods (such as capital equipment, structures, inventories) used to produce other goods
80
GDP component: Government purchases
- spending on goods and services by local, territorial, provincial and federal governments
- includes salaries of government workers and spending on public works (Canadian Forces general wages)
* a Canadian Pension Plan benefit to an elder is NOT part of the GDP (transfer payment)
81
Define transfer payments
- Canada Pension Plan for elders
- is not made in exchange for a currently produced good or service
- alter household income, but do not reflect the economy’s production
- GDP is intended to measure income from and expenditure on the production of goods and services
* **NOT counted in GDP and NOT counted as part of government purchases
82
GDP Component: Net Exports
- the value of a nation’s exports minus the value of its imports, also called the trade balance
- subtraction made because imports of goods and services are included in other components of the GDP
83
Suppose that a household buys a $30,000 car from Volkswagen. What happens to GDP?
- increases consumption by $30,000
- reduces net exports by $30,000 (it’s an import)
- overall, has no effect on GDP
84
List in order the total GDP components from largest to smallest
Y=C+I+G+NX
1) consumption
2) investment
3) government purchases
4) net exports
85
What does it mean when net exports have a negative sign?
Net exports=exports-imports
| There must be more imports than exports to be a negative sign.
86
If total spending rises from one year to the next, one of the two things must be true?
1) the economy is producing a larger output of goods and services
2) goods and services are being sold at higher prices
87
Define real GDP
- the value of the goods and services produced this year if we valued them at the prices that prevailed in some specific year in the past (valued at constant price of the base year)
- shows how the economy’s overall production of goods and services changes over time
- measure of the amount produced not affected by changes in prices
- reflects the economy’s ability to satisfy people’s needs and desires
- is a better gauge of economic well-being than nominal GDP
88
2013: $1...100 hot dogs, $2...50 hamburgers
2014: $2...150 hot dogs, $3...100 hamburgers
2015: $3...200 hot dogs, $4...150 hamburgers
A) Calculate Nominal GDP.
B) Calculate Real GDP (base year 2013).
C) Calculate GDP Deflator.
```
A)
2013: (1*100 + 2*50)=200
2014: (2*150 + 3*100)=600
2015: (3*200 + 4*150)=1200
B)
2013: (1*100 + 2*50)=200
2014: (1*150 + 2*100)=350
2015:(1*200 + 2*150)=500
C)
2013: (200/200)*100=100
2014: (600/350)*100=171
2015: (1200/500)*100=240
```
89
Define nominal GDP
-the production of goods and services valued at current prices
90
Define GDP deflator
- reflects the prices of goods and services, but not the quantities produced
- (Nominal/Real)*100
- used to monitor the average level of prices in the economy
91
How are real, nominal and GDP deflator affected?
A) quantities produced rise over time but prices remain the same
B) prices rise over time but the quantities produced stay the same
A) both nominal and real GDP rise together, GDP deflator is constant
B) nominal GDP rises, real GDP remains the same, GDP deflator rises
*GDP deflator reflects what’s happening to prices, not quantities
92
Define inflation rate.
- inflation: situation in which the economy’s overall price level is rising
- percentage change in some measure of the price level from one period to the next
- inflation rate in year 2 = (GDP deflator of year 2-GDP deflator of year1)/GDP deflator of year 1 *100
93
What are the features of the real GDP?
1) it grows over time, which enables the typical Canadian to enjoy greater economic prosperity than his parents
2) growth is not steady, the upward climb is sometimes interrupted by recessions (after two consecutive quarters of falling real GDP)
94
Foreign direct investment (FDI): A graph showing bars under zero of the net amount of foreign direct investment in Canada indicates what?
- that Canadians now own more foreign firms than foreigners own of Canadian firms
- growth in FDI is evidence that globalization is resulting in “selling of Canada” to foreign interests
95
What are the downfalls of GDP and why we care about GDP? Why is it not a perfect measure of well-being?
1) does not measure health, but nations with higher GDP can afford better health care
2) does not measure quality of education, but nations with higher GDP can afford better educational systems
3) GDP does not measure the beauty of our poetry, but nations with a higher GDP can afford to teach more of their citizens to read and enjoy poetry
4) GDP does not take into account our intelligence, integrity,courage, wisdom, or devotion, but are all easier to foster when people are less concerned about being able to afford the necessities to live
* *GDP does not directly measure those things that make life worthwhile but it does measure our ability to obtain the inputs into a worthwhile life
5) leisure: if everyone started working and not doing anything fun, more goods and services would be produced, GDP would rise, but not everyone will be better off
6) excludes the value of all activities taking place outside of markets (like at home a chef produces a meal to his wife is not counted in GDP or childcare provided by parents at home or volunteer work is also not counted in GDP)
7) excludes quality of the environment (deterioration of poor air quality and water would more than offset the gains from greater production)
8) says nothing about income distribution (only an average, could be 3 rich people, or 20 poor and rich people)
96
True or false? If a large GDP leads to a higher standard of living, then we should observe GDP to be strongly _______ with measures of the quality of life.
Strongly correlated
97
A nation’s ____ is closely associate with its citizen’s standard of living.
GDP
98
Define Consumer Price Index (CPI).
- a measure of the overall cost of goods and services bought by a typical consumer
- turns dollar figures into meaningful measures of purchasing power
- used to monitor changes in the cost of living over time
- when CPI rises, the typical family has to spend more dollars to maintain the same standard of living
- measures changes in the cost of living (tries to gauge how much income must rise in order to maintain a constant standard of living)
* *not a perfect measure of the cost of living
99
What are the steps taken when calculating the CPI?
1) Determine the basket
2) Find the prices
3) Compute the basket’s cost
4) choose a base year and compute the index
5) compute the inflation rate
CPI=(price of basket of goods and services in current year/price of basket in base year)*100
100
A basket of 4 hot dogs, 2 hamburgers.
2013: $1 per hot dog, $2 per hamburger
2014: $2 per hot dog, $3 per hamburger
2015: $3 per hot dog, $4 per hamburger
A) Calculate the cost of the basket of goods in each year.
B) Base year is 2013. Compute the CPI.
C) Compute the inflation rate from previous year.
```
A)
2013: (1*4 + 2*2)= 8
2014: (2*4 + 3*2)=14
2015: (3*4 + 4*2)=20
B)
2013: (8/8)*100=100
2014: (14/8)*100=175
2015: (20/8)*100=250
C)
2014: (175-100)/100 *100=75%
2015: (250-175)/175 *100=43%
```
101
The rate of core inflation excludes what?
Excludes the most volatile components from the CPI basket of goods and services, like fruits, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, tobacco products
102
Define core inflation.
-a measure of the underlying trend of inflation as measured by changes in the consumer price index (CPI)
103
Name the categories in order from largest percentage to lowest percentage that are in a typical consumer’s basket.
1) shelter
2) transportation
3) food
4) household operations and furnishings
5) recreation, education and reading
6) clothing and footwear
7) health and personal care
8) alcoholic beverages and tobacco products
104
What are the three issues with the CPI?
1) commodity substitution bias:
when prices change from one year to the next, they do not all change proportionately and some rise more than others, so consumers respond by buying less of the expensive good and more of the other cheaper option; the CPI is calculated by assuming a FIXED basket of goods=overstates the increase in cost of living from one year to the next (bias remains within each four year period)
2) introduction of new goods:
When new good is introduced, consumers have more variety to choose from, since each dollar becomes more valuable consumers need fewer dollars to maintain any given standard of living; since CPI is based on a fixed basket it does not reflect the increase in value of the dollar
3) unmeasured quality change: if the quality of a good deteriorates from one year to the next, the value of a dollar falls even if the price of the good stays the same, and if the quality rises the value of the dollar rises; it overstates the CPI
105
How can the GDP deflator and CPI differ even though they both are used to gauge how quickly prices are rising?
1) GDP deflator reflects the prices of all goods and services produced domestically, CPI reflects the prices of all goods and services bought by consumers
2) CPI compares the price of a fixed basket to the price of the basket in the base year, but GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year (group of goods changes automatically over time)
106
What happens to the GDP deflator and the CPI? The price of an airplane produced by Bombardier and sold to the Canadian Forces rises.
-price increase shows up in the GDP deflator but not in the CPI (not part of a consumer’s typical basket)
107
What happens to the GDP deflator and the CPI? Volkswagen raises the price of its cars.
- Volkswagens are made in Germany so it is not part of the Canadian GDP, but is part of CPI since it is part of a typical Canadian’s basket
- an imported consumption good
108
How often does Statistics Canada change the basket of goods?
Every two years
109
What is the formula for turning dollar figure from different years?
Amount in todays’ dollars=Amount in year T dollars* (Price level today/Price level in year T)
110
The 1957 Price of 9.5 cents per litre and 1.30 per litre in 2014 price. The CPI for 1957 is 14.8 and for 2014 is 125.2. Measure the 1957 price of gasoline in year 2014 dollars.
1957 gas price in 2014 dollars=1957 gas price*(CPI in 2014/CPI in 1957)
=9.5 cents*(125.2/14.8)
=80.4 cents
The price of gas in 2014 (1.30) is much higher than 1957 (80.4).
The price of gas has on average increased somewhat faster than the price of all other goods and services.
111
Define indexation.
- the automatic correction of a dollar amount for the effects of inflation by law or contract
- Canada Pension Plan and Old Age Security benefits are adjusted every year to compensate the elderly for increases in prices
- brackets of federal income tax (income levels at which the tax rate changes) is also indexed for inflation
112
Define cost-of-living allowance (COLA)
- many long term contracts between firms and unions include partial or complete indexation of the wage to the consumer price index (a provision)
- it automatically raises the wage when the CPI rises
113
Define interest rates.
- interest: a payment in the future for transfer of money in the past
- always involves comparing amounts of money at different points in time
114
```
Suppose that Sally deposits $1000 in a bank account that pays an annual interest rate of 10%. After a year passes, Sally has accumulated $100 in interest. Sally the withdraws her $1100. Is Sally richer than she was when she made the deposit a year earlier? It depends on what has happened to the price of CDs. When Sally made her deposit, a CD cost $10. Her deposit of $1000 was equivalent to 100 CDs. A year later, how many can she buy if the following happens to the CDs?
A) zero inflation
B) 6% inflation
C) 10% inflation
D) 12% inflation
E) 2% deflation
```
A) price of CDs is still $10 so she can buy 110 CDs now (10% increase in number of dollars means 10% increase in her purchase power)
B) price of CD increased from $10 to 10.60, she can buy 104 CDs (purchasing power increased by 4%)
C) price increased from $10 to $11, she can only buy 100 CDs (purchasing power is the same as it was a year earlier)
D) price increased from $10 to 11.20, she can only buy 98 CDs (purchasing power decreased by 2%)
E) price falls from 10 to 9.80, she can buy 112 CDs (her purchasing power increases by about 12%)
* the higher the rate of inflation, the smaller the increase in Sally’s purchasing power
* if the rate of inflation exceeds the rate of interest, her purchasing power actually falls
* if there is deflation, her purchasing power rises more than the rate of interest
115
Real vs Nominal Interest Rates and the rate of inflation
Real interest rate: interest rate corrected for inflation, tells you how fast the purchasing power of your bank account rises over time
Nominal interest rate: the interest rate that measures the change in dollar amounts
Rate of inflation: tells you how fast the prices of things you want to buy with those dollars are rising
*Nominal interest rate always exceeds real interest rate, is the one usually reported
*the higher the rate of inflation, the bigger the gap between nominal and real interest rates
Real interest rate= Nominal interest rate-Inflation rate
116
Why was there a low value of the real interest rate during the 2000s in Canada?
- a housing boom
- low real interest rates mean that people find the interest rates they must pay on their mortgage when compared to the rate of inflation is small and affordable
- this makes people buy a home relatively inexpensive and causes people to bid up the price of housing
117
In Canada over the past century, average income as measured by real GDP per person has grown by what percentage?
2%, implies that average income doubles every 35 years
- average Canadian enjoys much greater economic prosperity than did his parents, grandparent and great-grandparents
- the 2% ignores short-run fluctuations around the long-run trend and represents an average rate of growth for real GDP per person over many years
118
Define productivity
- the amount of goods and services produced for each hour of a worker’s time
- a nation’s standard of living is determined by the productivity of its workers
- key determinant of living standards and that growth in productivity is the key determinant of growth in living standards
119
Who is John D. Rockefeller?
- richest American of all time (from 1839 to 1937)
- was an oil entrepreneur
- worth $200 billion today (more than Bill Gates)
- however he did not get to enjoy the conveniences of today (television, video games, Internet, e-mail, planes, cars, AC, medicines)
- because of technological advances, the average American today is arguably “richer” than the richest American a century ago
120
True or false? The richest countries will always stay the richest in the world.
False. The world’s richest countries have no guarantee they will stay the richest and that the world’s poorest countries are not doomed forever to remain in poverty.
121
What are the determinants of productivity?
1) physical capital per worker
2) human capital per worker
3) natural resources per worker
4) technological knowledge
122
Productivity determinant: Physical Capital per Worker
- the stock of equipment and structures that are used to produce goods and services
- more tools allows more work to bed done more quickly and more accurately
- a produced factor of production (an input into production that once was an output)
123
Productivity determinant: Human Capital per Worker
- the knowledge and skills that workers acquire through education, training and experience
- raises a nation’s ability to produce goods and services
- a produced factor of production
- resources expended transmitting this understanding to the labour force
124
Productivity determinant: Natural Resources per Worker
- the inputs into the production of goods and services that are provided by nature, such as land, rivers and mineral deposits
- two forms: renewable (forest) and non renewable (oil, produced by nature over many thousands of years with only a limited supply)
- Japan is one of the richest in the world but have few natural resources, but can with International Trade (imports)
125
Productivity determinant: Technological knowledge
- society’s understanding of the best ways to produce goods and services (understanding of how the world works)
- farming used to require a high input of labour to produce enough to feed everyone, now only a couple of farms needed due to technology which greatly increases technology (now others can produce other goods and services)
- after technology is used by one person, everyone becomes aware of it
- patents allow pharmaceutical companies to discover a new drug and temporarily have the right to be its exclusive manufacturer (once it expires it is fair game for other companies)
126
Are natural resources a limit to growth?
- arguments that a fixed supply of non renewable natural resources will cease the growth over time of population, production and living standards
- won’t supplies of oil and minerals run out?
- economists are less worried due to technological progress which helps to avoid these limits
- modern cars with better gas consumption, new houses with better insulation, allow access to resources previously though to be too difficult to extract, recycling, ethanol instead of gasoline, solar power instead of electricity (substitute renewable for non renewable resources)
- if natural resources were running out, prices would rise, but the opposite is true today (they are falling or staying constant)
127
What is one way to increase future productivity?
- one way to raise future productivity is to invest more current resources in the production of capital
- because resources are scarce, devoting more resources to producing capital requires devoting fewer resources to producing goods and services for current consumption
- must consume less and save more of its current income
128
How can the government encourage growth and in the long run raise the economy’s standard of living?
- encouraging saving
- encouraging investment
- maintaining well-functioning financial markets
129
Define diminishing returns.
- the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
- as the stock of capital rises, the extra output produced from an additional unit of capital falls
- when workers already have a large quantity of capital to use in production, giving them an additional unit of capital only increases productivity slightly
* in the long run, the higher saving rate leads to a higher level of productivity and income, but not to higher growth in these variables
130
Define the catch-up effect.
- the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
- poor countries have low productivity, but with small amounts of capital investment, it would substantially raise these workers’ productivity
131
Define foreign direct investment
-a capital investment that is owned and operated by a foreign entity
132
Define foreign portfolio investment
-an investment financed with foreign money but operated by domestic residents
133
Why do foreign investment?
- they expect to earn a return on their investment
- additional income in the form of profit
- one way for a country to grow
- even though this investment flows back to the foreign owners, the investment increases the economy’s stock of capital, leading to higher productivity and higher wages
- one way for the poor countries to learn the state of the art technologies developed and used in richer countries
- World Bank obtains funds from Canada and US to use these resources to make loans for less developed countries (invest in roads, sewer systems, schools)=promote economic prosperity around the world to prevent wars
134
Why have education?
- at least as important as investment in physical capital for a country’s long-run economic success
- each year of schooling=raise a person’s wage by 10%
- opportunity cost of students attending schools, forgo the wages they could have earned not going to school (in poor countries, dropping out is common due to having to help out the family financially even though it is more beneficial to stay in school)
- school is more beneficial for society than the individual
135
Define externality
- the effect of one person’s actions on the well-being of a bystander
- ex) an educated person might generate new ideas and these ideas enter society’s pool of knowledge so everyone can use them
136
Define brain drain
- the emigration of many of the most highly educated workers to rich countries for a higher standard of living
- makes people staying poorer than they otherwise would be
- Canada benefits from this from the brains of poor countries
- Canada also experiences this due to losing people to higher wages in United States (maybe cut taxes to make it comparable to the United States, improve Canada’s social programs, invest in better education, improve health care)
137
How can health and nutrition improve productivity?
- healthier workers leads to higher productivity
- sufficient caloric intake substantially reduced the work effort they could put forth
- as people eat more, people get taller
- taller workers earn more
- poor countries are poor in part because their populations are not healthy, can’t afford adequate health care and nutrition
138
How is Brazil promoting human capital (education)?
- pays parents to help the poor go to school instead of working from home
- does this to break the cycle of poverty
- also takes the kids for regular medical checkups
- creates an incentive for families to invest in their own children’s futures
139
How is property rights and political stability used to increase production?
- market prices are the instrument with which the invisible hand of the marketplace brings supply and demand into balance in each of the many thousands of markets that make up the economy
- respect for property rights (authority over resources owned)
- courts serve to enforce property rights, discourage direct theft, ensure buyers and sellers live up to their contracts (civil justice system)
- in less-developed countries, the justice system does not work well, contracts are hard to enforce, fraud goes unpunished, infringing property rights
- to do business in some countries, you have to bribe powerful government officials=impedes the coordinating power of markets, discourages domestic saving and investment from abroad
- revolutionary governments confiscate capital
- threat of revolution can act to depress a nation’s standard of living
140
Define property rights
-the ability of people to exercise authority over the resources they own
141
Define inward-oriented policies
- policies aimed at raising productivity and living standards within the country by avoiding interaction with the rest of the world
- gets support from domestic firms which claim that they need protection from foreign competition in order to compete and grow
- led policymakers in less-developed countries to impose tariffs and other trade restrictions
142
Define outward-oriented policies
- poor countries are better off pursuing this that integrates countries into the world economy
- trade is a type of technology
- eliminates trade restrictions=major technological advance
143
Free trade and productivity
- countries with good seaports find trade easier (New York, London, Hong Kong)
- landlocked countries find international trade more difficult, tend to have lower levels of income
144
Why are countries split by wealth and poverty?
- fix incentives and you will fix poverty
- ex) Nogales (American-Mexican border) where he city is divided in two, should have same environment, ethnic, culture, language, but economically they are completely different (one poor and the other rich), the rich side enjoys law and order and dependable government services, but the poor side has institutions that perpetuate crime, graft and insecurity
145
How does research and development improve productivity?
- all started with the telephone, the transistor, the computer, the internal combustion engine
- is a public good, once one person discovers an idea, the idea enters society’s pool of knowledge and other people can use it
- government has a role to encourage research and development of new technologies with grants, tax breaks to firms, patent system (gives inventor exclusive right to make the product for a specified number of years=private good NOT public good=incentive)
146
what could be the reason for a fall in productivity?
-by increasing the cost of a key input in the production process of most manufacturers, the price shock made previous oil-dependent technologies obsolete, causing the fall in productivity during the transition to more energy-efficient technologies
147
How does population growth affect productivity?
-a large population means more workers to produce goods and services (China),but more people to consume those goods and services, does not mean a higher standard of living for a typical citizen
148
Who is Thomas Robert Malthus?
- wrote “An essay on the principle of population as it affects the future improvement of society”
- an ever-increasing population would continually strain society’s ability to provide for itself, mankind was doomed to poverty forever
- at the time his explanation was correct, but today this is not true
- world population has increased six-fold, living standards around the world are on average much higher (hunger and malnutrition are less common)
- famines are more of a result of an unequal income distribution or political instability than inadequate production of food
- Where did he go wrong? He never imagined the technological advances we have today
149
How is population affecting a country?
- in poor countries, rapid population growth makes it harder to provide workers with the tools and skills they need to achieve high levels of productivity, more kids means more strain on the education system
- China put in the law of having only one child per family otherwise a huge fine, to reduce the rate of population growth and raise the standards of living
- Canada has the opposite problem where the population growth rate is diminishing (only small families) where it is below the rate necessary to maintain population at current levels, working-age people will be insufficient to support a growing share of retired population (health care, pensions)
150
Who is Michael Kremer?
- “Population growth and technological change: one million BC to 1990”
- world growth rates have increased as world population has
- having more people induces more technological progress
- if technological progress is more rapid when there are more people to discover things, then larger regions should have experienced more rapid growth
- Flinders Island died out due to being isolated, so a large population is a prerequisite for technological advancement (more scientists and engineers)
