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ES10002- Introductory Macroeconomics > Topic 1- The Measurement & Structure of The Economy > Flashcards

Topic 1- The Measurement & Structure of The Economy Flashcards

1
Q

What is a business cycle?

A

Irregular short-term fluctuations in economic activity

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2
Q

What is a contraction?

A

The period of time during which aggregate economic activity is falling

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3
Q

What is an expansion?

A

The period of time during which aggregate economic activity grows

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4
Q

What does the business cycle being recurrent mean?

A

The pattern of contraction-trough-expansion-peak occurs again and again

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5
Q

What does the business cycle not being periodic mean?

A

That it does not occur at regular predictable intervals

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6
Q

What are endogenous variables?

A

The variables that are the object of analysis in an economic model can be explained using economic principles

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7
Q

What 2 main assumptions do economic models make?

A

Simplifying and critical

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8
Q

What is a simplifying assumption?

A

A way of making a model simpler without affecting any of its important conclusions

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9
Q

What is a critical assumption?

A

An assumption that affects the conclusions of the model in important ways

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10
Q

What is positive analysis?

A

Examines the facts and the economic consequences of a policy

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11
Q

What is normative analysis?

A

Examines what should be; determines whether a policy should be used

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12
Q

What is the main assumption of the Classical Approach?

A

People pursue their own self-interests and prices adjust reasonably quickly to get to the market equilibrium

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13
Q

What is the conclusion of the Classical Approach?

A

Government should only have a limited role in the economy as their policies will be ineffective or counterproductive

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14
Q

What are the 3 main approaches to measuring GDP?

A
  • Product approach
  • Income approach
  • Expenditure approach
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15
Q

What are National Income accounts?

A

Accounting framework used in measuring current economic activity

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16
Q

What is the definition of GDP?

A

The total value of all final goods and services which are produced for the marketplace during a given time period and within the nation’s borders

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17
Q

What are intermediate goods?

A

Goods used up in the process of producing something else

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18
Q

What is a final good?

A

A product sold to its final user

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19
Q

Describe the Product (Values added) approach

A

Add up the market values of goods and services produced, excluding any goods and services that are used up in the intermediate stages of production

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20
Q

Describe the Income approach

A

Add up all the forms of income generated by production. Aggregate Income = total wages + total profit + total tax

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21
Q

Describe the Expenditure approach

A

Add up the amount spent by all the final users of domestically produced goods and services

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22
Q

What are the 4 main categories of spending?

A
  • Consumption
  • Private Investment
  • Government purchases
  • Net exports
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23
Q

What is a capital good?

A

A long-lasting tool used in production

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24
Q

What is capital stock?

A

The total value of all capital goods in the economy

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25
Q

What are inventories?

A

Stocks of unsold finished goods, goods in process and raw materials held by firms

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26
Q

What is inventory investment?

A

The amount by which inventories increase during the year

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27
Q

Describe Consumption

A

Spending by households on final goods and services. Includes imports and house rent but excludes Buying houses and financial assets

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28
Q

Give the 3 main components of Private Investment

A
  • Business fixed investment purchases of capital goods
  • Planned residential investment purchases of new homes by households
  • Unplanned changes in firms’ inventory stocks
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29
Q

What are the 2 components of Government Purchases

A

Government investment and consumption

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30
Q

Describe Net Exports

A

Exports - Imports

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31
Q

What is Government Investment?

A

Capital goods purchased by the government

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32
Q

What is Government Consumption?

A

Spending on goods & services that are used up in the period

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33
Q

What is the difference between Government Purchases & Expenditure?

A

Expenditure includes Transfer Payments (TR)

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34
Q

What is the income-expenditure identity?

A

Y≡C+I+G+X-M

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35
Q

What is the Fundamental Identity of National Income Accounting?

A

The fact that: total production=total income=total expenditure

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36
Q

What is a Stock Variable?

A

A variable representing a quantity at a moment in time

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37
Q

What is a Flow Variable?

A

A variable representing a process that takes place over a period of time

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38
Q

Give 3 economic examples of flow variables

A
  • GDP
  • Income
  • Expenditure
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39
Q

Give 2 economic examples of stocks

A
  • Wealth

- Capital

40
Q

How are stocks and flows mathematically related?

A

The rate of change of a stock is a flow e.g dK/dt=I

41
Q

What is Gross National Product (GNP)?

A

The total value of goods and services produced for the market by domestic factors of production during a given time period

42
Q

What are Net Factor Payments from abroad (NFP)?

A

Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors by home economy

43
Q

What is the equation linking GNP, GDP and NFP?

A

GNP = GDP + NFP

44
Q

What is Net National Product (NNP)?

A

NNP = GNP - Depreciation

45
Q

What is depreciation in a macro context?

A

The value of the capital that wears out during the period over which economic activity is measured

46
Q

What are the 3 types of Income that make up National Income?

A
  • Wages
  • Proprietors’ Income (income of self-employed)
  • Rental income of persons
47
Q

What is Private Disposable Income (Ypvt)?

A

The income that the private sector (households and businesses) has available to spend

48
Q

What is the formula for Ypvt?

A

Ypvt = GDP + NFP + TR + INT - T

49
Q

What does INT stand for?

A

Interest payments on government debts

50
Q

What is Net Government Income (Ygvt)?

A

The part of GDP that is not at the disposal of the private sector

51
Q

What is the formula for Ygvt?

A

Ygvt = T - TR - INT

52
Q

What is wealth?

A

The value of everything an individual owns minus their liabilities

53
Q

What is the formula for Saving (S)?

A

S≡Y+NFP-C-G

54
Q

What is the saving rate (s)?

A

The proportion of GDP saved

55
Q

What is the saving rate formula?

A

s = S/Y

56
Q

What is the formula for Private Saving (Spvt)?

A

Spvt = Ypvt - C

57
Q

What is the formula for Government Saving (Sgvt)

A

Sgvt = Ygvt - G > 0

58
Q

What is the formula for national savings?

A

S = Spvt + Sgvt

59
Q

What is the Current Account Balance (CA)?

A

The payments that a country receives from abroad in exchange for currently produced goods and services minus the payments made to foreigners by the domestic economy

60
Q

What are the 2 components of the CA we look at?

A
  • Net exports

- Net income from abroad

61
Q

What is the equation linking CA and S?

A

S = I + CA

62
Q

What are the 3 things private saving is used to finance?

A
  • Private Investment (I) in new capital
  • The government budget deficit
  • The current account balance
63
Q

What are the 2 components of national wealth?

A
  • The country’s domestic physical assets

- Net foreign assets

64
Q

What are net foreign assets?

A

A country’s foreign assets, foreign stocks, bonds and factories owned by domestic residents minus its foreign liabilities

65
Q

What are foreign liabilities?

A

Domestic physical and financial assets owned by foreigners

66
Q

What is an index?

A

A series of numbers each one representing a different period

67
Q

What is the formula for an index number in period t?

A

It = (Value of measure in period t/Value of measure in base period)x100

68
Q

What does the consumer price index (CPI) take into account?

A

Includes prices of used and imported goods but leaves out prices of exports, goods purchased by businesses and the government as well as financial assets

69
Q

What is a GDP deflator?

A

Price index constructed from the cost of the goods and services included in GDP

70
Q

What is the inflation rate (π)?

A

The percentage rate of change of the price level from one period to the next

71
Q

What is the formula for inflation rate (π)?

A

πt = (Pt - Pt-1)/Pt-1

72
Q

What is a nominal variable?

A

An economic variable measured using current market prices or that is not adjusted for the currency’s changing value

73
Q

What is a real variable?

A

A variable measured using the prices of a base year or one that has been adjusted for the currency’s changing value

74
Q

What is the formula for a real value in t?

A

Real value in t = (Nominal value in t/price index in t)x100

75
Q

What is the formula for GDP deflator in t?

A

GDP deflator in t = (Nominal GDP in t/real GDP in t)x100

76
Q

What does the GDP price index take into account?

A

The opposite of CPI: prices of goods purchased by the government, of goods purchased by businesses and of exports but ignores used goods and imports

77
Q

Give 4 main problems with GDP

A
  • Environmental quality not accounted for
  • Inequality not accounted for
  • Quality changes are not accounted for
  • The underground economy
78
Q

What are the 2 main types of bonds?

A

Coupon and discount bonds

79
Q

What is a coupon bond?

A

A bond that pays the owner of the bond a fixed interest payment every year until the maturity date, when a specified final amount is repaid

80
Q

What is a discount bond?

A

A bond bought below its face value and then the face value is repaid at the maturity date

81
Q

What is the yield to maturity (i)?

A

The interest rate that equates the present value of cash flow payments received from a bond with its value today

82
Q

What is coupon rate (cr)?

A

The cash amount of the yearly coupon payment (C) expressed as a percentage of the face value of the bond (F)

83
Q

What is the equation linking the price of a perpetual bond (Pb) and its yield to maturity (i) and what does it show?

A

i = C/Pb

it shows a negative relationship between the price of a bond and its yield to maturity

84
Q

What is the formula for yield to maturity?

A

Pb = F/(1+i)^n

85
Q

What is the rate of return (R)?

A

The amount of each payment to the owner plus the change in the security’s value, expressed as a fraction of its purchase price

86
Q

What is the formula for rate of return?

A

R = current yield + capital gain

87
Q

What is capital gain?

A

The change in a bond’s price

88
Q

What is nominal interest?

A

The rate at which the nominal value of an interest-bearing asset changes over time

89
Q

What is real interest rate?

A

The rate at which the real value of an interest-bearing asset changes over time

90
Q

What is the formula for real asset value in t?

A

Real asset value in t = Nominal asset value in t/Price level in t

91
Q

What is the Fisher equation?

A

Real interest rate (r) = nominal interest rate (i) - inflation(π)

92
Q

How do you calculate the expected/exante real interest rate?

A

expected real interest rate = nominal interest rate - expected inflation rate

93
Q

What is the ex post real interest rate?

A

The interest rate that is adjusted for actual changes in the price level

94
Q

How would you calculate the growth rate of variable w = x/y

A

%change w = %change x - %change y

95
Q

Describe Private Investment in relation to capital stock

A

Private investment is the rate of change of capital stock (dk/dt)

ES10002- Introductory Macroeconomics (6 decks)

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