Midterm 3 Flashcards
(45 cards)
Define absolute advantage
Ability to produce a good using fewer inputs than anther producer
Define comparative advantage
Ability to produce a good at a lower opportunity cost than another producer
Define GDP
GDP = Gross Domestic Product
Market value of all finished goods/services produced within a country in a year
What is the difference between nomial and real GDP?
Nomial measures production at current prices, while real GDP references goods and services at constant prices
What are the two ways to count market transaction?
National Expenditure Approach
and
Factor Income Approach
What are the factor incomes in National Expenditure Approach?
- Consumption
- Investments
- Government Purchases
- Net Exports
What are the factors for Factor Income Approach?
- Employer Compensation
- Rent
- Interest
- Profit
What is the equation of GDP?
GDP = C + I + G + NX
C = household consumption I = firm investments G = government purchases NX = net exports
What is a GDP deflator?
Measure of the prices level calculated as the ratio of nominal GDP to real GDP times 100
Nominal GDP / Real GDP x 100
Define CPI?
CPI (Consumer Price Index) = measure of the overall cost of the goods and services bought by a typical consumer
What are the steps to calculate the CPI?
- Fix the basket
- Find the prices
- Compute the basket cost
- Choose a base year and compute the index
CPI = Price of basket of goods and services in current year / price of basket in base year x 100 - Compute the inflation rate
Inflation rate = CPI in year 2 - CPI in year 1 / CPI in year 1 x 100
Define Core CPI
Core CPI = measure of the overall cost of consumer goods and services excluding food and energy
Define Producer Price Index
Producer Price Index = measure of the cost of a basket of goods and services bought by firms
What are some of the problems with measuring CPI?
- Substitution bias
- Introduction of new goods
- Unmeasured quality change
How do you find the value of money back then to today?
Amount in today’s dollars = Amount in year T dollars x price levels today / price level in year T
Define indexation
Automatic correction by law or contract of a dollar amount for the effects of inflation
Define Nomial interest rate
the percentage increase in money you pay the lender for the use of the money you borrowed
Real interest rate equation
Real interest rate = Nomial interest rate - inflation rate
What two things does GDP measure
- Total incomes earned by everyone in the economy
- Total expenditure in the economy
Define Physical Capital
Physical Capital = stock of equipment and structures that are used to produce goods and services
Define Human Capital
Human Capital = Knowledge and skills that workers acquire through education, training, and experience
Define financial system
Financial System = group of institutions in the economy that help to match one person’s saving with another person’s investment
Define financial market
Financial Market = financial institutions through which savers can directly provide funds to borrowers
What are the two most important financial markets?
Stock and bond market
