V2 Flashcards
V2 (33 cards)
What is the division in economics?
- Microeconomics: Study of individual households and firms making decisions and interacting in markets.
- Macroeconomics: Study of the economy as a whole, explaining changes affecting many households, firms, and markets at once.
How do we measure a nation’s well-being?
- Total income earned by everyone in the economy.
- Income must equal expenditure because every transaction has a buyer and a seller.
- The equality of income and expenditure can be illustrated with the circular-flow diagram.
What is Gross Domestic Product (GDP)?
- GDP measures the income and expenditure of an economy.
- Adding up total income or total expenditure
- It is the total market value of all final goods and services produced within a country in a given period of time.
What is included and excluded in GDP?
- Included: All items produced and legally sold in markets.
- Excluded: Home-produced items, illegal goods, intermediate goods (to avoid double-counting).
What are the tangible and intangible components of GDP?
- Tangible goods: Food, clothing, cars.
- Intangible services: Haircuts, housecleaning, doctor visits.
How is GDP measured? 3 Approaches
Alle drei können genutzt werden für den selben outcome
-
Expenditure approach (demand side):
− GDP = consumption + investment +
government spending + net exports -
Production approach (supply side):
− GDP = ∑(Gross Output− Intermediates) -
Income approach (income side):
− GDP = Wages+Rents+Interest+Profits
What are the demand-side components of GDP?
- Consumption (C): Household spending on goods/services.
- Investment (I): Capital equipment, inventories, structures, and new housing.
- Government spending (purchases) (G): Spending on goods and services.
-
Net Exports (NX =X-M): Exports minus Imports.
for = foreign
dom = domestic
What is the difference between Nominal and Real GDP?
- Nominal GDP: Values production at current prices.
-
Real GDP: Values production at constant prices to reflect actual output changes. We fix prices from the first year (=base year) of measuring.
Im ersten Jahr sind die beiden GDP daher gleich.
What are practical issues in measuring GDP?
- Under-reporting to avoid taxes.
- Changes in goods and services over time make base year comparisons difficult.
- Annual chain linking can address these issues by updating the base year every year.
Is GDP a good measure of economic well-being?
- GDP per person indicates average income.
- Higher GDP per person means higher standard of living.
- However, GDP does not account for leisure, environmental quality, or income distribution, all activity that takes place outside of
markets (time parents spend with
their children and the value of volunteer work).
What is the GDP Deflator?
- A measure of the price level, calculated as (Nominal GDP / Real GDP) × 100.
- It shows how much of GDP’s increase is due to price rises, not increased production.
What is the Consumer Price Index (CPI)?
- A measure of the overall cost of goods and services bought by a typical consumer.
- It helps monitor changes in the cost of living over time.
- When the CPI rises, the typical consumer has to spend more money to maintain the same standard of
living.
How is the CPI calculated?
- Fix the basket: Identify key goods and services.
- Find prices: Collect prices of items for each point in time.
- Compute basket cost: Calculate total cost of the basket.
- Choose base year and compute the index: Compare costs to the base year.
- Calculate CPI rate: Change in CPI from one period to the next.
What are the problems with measuring the cost of living via CPI?
- Substitution bias: Consumers shift to cheaper goods. -> consumers substitute
- Introduction of new goods: New goods provide more variety. -> Consumers need less money to maintain any given standard of living.
-
Unmeasured quality changes: Quality of goods changes over time, the value of a euro rises, even if the
price of the good stays the same.
What is the difference between the GDP Deflator and the CPI?
- The GDP deflator reflects the prices of all goods and services produced domestically, whereas…
…the consumer price index reflects the prices of all goods and services bought by consumers. - The consumer price index compares the price of a fixed basket of goods and services to the price
of the basket in the base year (only every five years does the SFSO change the basket)…
…whereas the GDP deflator compares the price of currently produced goods and services to the
price of the same goods and services in the base year.
How do we adjust for inflation in economic variables?
- Use price indexes like CPI to adjust money figures from different times.
- Example: Adjusting a salary from 1947 to 2020 using the change in CPI.
What is Indexation?
- Automatic correction of a money amount for inflation by law or contract.
- Example: Government transfer payments and tax brackets adjust for inflation using indexation.
What are Real and Nominal Interest Rates?
- Nominal interest rate: The reported interest rate, not adjusted for inflation. = current prices
- Real interest rate: Nominal interest rate minus the inflation rate. = constant prices
Define:
“GDP is the Market Value. . .”
“. . . Of All. . .”
“. . . Final . . .”
“. . . Goods and Services . . .”
“. . . Produced . . .”
“ . . . Within a Country . . .”
“. . . In a Given Period of Time.”
− Output is valued at market prices (only things which have a price tag!).
− Includes all items produced in the economy and legally sold in markets
− It records only the value of final goods and services, not intermediate goods
(the value is counted only once, only when finished for final consumption).
− It includes both tangible goods (food, clothing, cars)
and intangible services (haircuts, housecleaning, doctor visits).
− It includes goods and services currently produced,
not transactions involving goods produced in the past.
− It measures the value of production within the geographic confines (Grenze) of a country.
− It measures the value of production that takes place within a specific interval of time,
usually a year or a quarter.
How does Government safes money?
Taxes (T) - Spending of Government (G) = Surplus (positive)
Measurement Issues in Practice
In most western countries the statistical offices produce a single measure of GDP and they do this by
combining income, expenditure and output approaches.
− In theory these measures should produce the same result (in practice they don’t).
MEASURING THE COST OF LIVING
Pt = today prices
Pt-1 = yesterday prices
CPI and Inflation Rate Example Step 3-5
CPI and Inflation Rate Example Step 1-2
