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ECON 2105: Test 2
Gross Domestic Product (GDP)
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is the market value of all final goods and services produced within a nation during a specific period of time—typically, a year.
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Per capita GDP
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GDP per person
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Inflation
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is the growth in the overall level of prices in an economy
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Real GDP
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is GDP adjusted for changes in prices (inflation)
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Recession
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are short-term economic downturns that typically last about 6 to 18 months.
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Services
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are outputs that provide benefits without the production of a tangible product
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Nominal GDP
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GDP calculated from current prices is called
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Price Level
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an index of the average prices of goods and services throughout the economy
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Federal Debt
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the total public debt as a percent of the GDP. Direct correlation.
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Per capital GDP
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GDP/Population
Compares the people within an economy more accurately than regular GDP
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Methods to Calculate GDP
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1) Market Value
2)Expenditure Method
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Market Value Method
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Defining GDP by the market value of all final goods and services produced in a country during a given period.
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Market Value =
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price x the quantity of all goods
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"final goods and services"
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focus on not counting a product twice in the GDP calculation by waiting till dec 31st to count merchandise inventory
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"produced in a country"
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A product is not counted in the GDP unless it is the country's product made in that country.
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"during a given period"
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GDP can only be calculated for a specific time period. Typically a year or a quarter (3 months)
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The Expenditure Method (=)
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(C) Consumption
(I) Investment
(G) Government Purchases
(NX) Net Exports
= GDP (Y)
Y= C+I+G+NX
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Consumption
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spending by household that can be a Durable good, Nondurable good, or a service.
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Durable goods
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things that are expected to last over a year
Ex. Furniture
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Nondurable goods
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things that are either consumed immediately or not expected to last for a year.
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Services
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when one person pays another to do something. Usually the largest part of consumption
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Investment
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spending by firms which include Business Fixed investments, residential investments, and inventory
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Business Fixed Investments
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machines, factories, etc.
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Residential Investments
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new homes and apartments
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Inventory
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things not sold to consumers
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Government Purchases
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purchases by local, state, and federal government
Ex. Buildings, tanks , missiles , teachers, trash cans.
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Net Export =
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exports- imports
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Exports
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goods produced domestically and sold abroad
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Imports
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goods produces abroad and sold domestically
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GDP Deflator
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is a calculation of price level used to determine the real GDP.
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Nominal GDP =
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price x quantity
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Real GDP=
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(Nominal GDP/ ((Nominal GDP)/(Price in base year x quantity) x 100)) x 100
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GDP Deflator =
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(Nominal GDP/ real GDP) x 100
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Nominal growth rate per year =
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(GDP (2015) - GDP(2014))/ GDP (2014)
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Price level changes per year=
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(GDP deflator(2015) -GDP(2014))/ GDP Deflator (2015) x 100
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Growth in nominal GDP =
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growth in real GDP+ growth in price level
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Issues with GDP
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1) Non- market Goods and Services
2) Underground or Illegal Markets
3)No Value for Standard of Living
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Non-Market Goods and Services
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Doing things yourself instead of paying services to do them for you does not count into the GDP
ex: not hiring someone to do a home project
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Underground Markets
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ex: Hiring a teenager instead of a lawn company to cut grass.
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Illegal Markets
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"it's the people's weed"
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No Value for standard of Living
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does higher GDP = better standard of living?/ what are the trade- offs of having a higher GDP
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Deflation
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decrease in overall price level
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Customer Price Index (CPI)
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the measure of the cost of a standard "basket" of goods and services, relative to the cost of said "basket" in the base year. (cost of living kinda)
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Included in "Basket"
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food an beverages, housing, apparel, transportation, medical care, recreation, education, and communication, etc.
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Excluded in "Basket"
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investments, bonds, real estate, life insurance, etc.
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Bureau of Labor Statistics
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keeps track of CPI by going all over the country and recording the price of goods and services
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CPI=
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(current year "basket" price) x Q of base year x100
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(Base year "basket price) x Q of base year
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Difference between CPI and GDP Deflator
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CPI only considers the "basket" of goods where as the GDP Deflator accounts for all the goods and services and CPI can be affected by the change in price of a foreign good.
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Inflation causes issues such as...
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1) price confusion
2) cost of holding money
3)Money illusion
4) menu costs
5) wealth redistribution and tax distortion
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Hyperinflation
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excessively high rates of inflation
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Inflation & Uncertainty
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uncertainty in future prices causes banks to increase interest rates making people less inclined to borrow.
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Menu Costs
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the prices for firms to change the costs of their goods
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CPI Flaws
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1)Substitution effect
2) Quality Changes
3)New Products
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Substitution Effect (CPI)
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CPI assumes no change in the amount bought when purchasing a substitute, which exaggerates the price effect
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Quality Changes (CPI)
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CPI makes no distinctions between paying for a better quality and higher priced product and inflation of that product.
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New Products (CPI)
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CPI is not quickly updated enough to account for new products or products purchased on the internet because the surveys are done in stores.
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Social Security & CPI
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A increased in inflation would benefit people on social security because the CPI is adjusted to the cost of living
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Basic groups in financial markets
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Lenders and Borrower
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Lenders
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Those that have funds that choose not to use at the present.
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Borrowers
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Those that have immediate need for capital to invest in an idea or project.
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Loanable funds market paths
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Direct- stocks and bonds
indirect- banks and otherrs.
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Bonds
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long or short term debt instruments with fixed instrument payments
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Stock Market
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borrowing and lending by selling the rights to potential profits
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Supply and Demand of Funds Markets
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Demand= people looking to spend money now
Supply= people looking to spend their money later but save today.
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Nominal Interest Rate
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interest rate without inflation adjustment
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Real Interest Rate=
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nominal - inflation
r=i - pi
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Causes for change in demand for funds
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expectations of investors
Expectations of Inflation rates
Productivity of Capital
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Changes in supply for funds
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Income (wealth changes )
Discount rates (time preference)
Consumption patterns (smoothing)
Relative Saving Options
Expectations of inflation rate
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(S) Savings =
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Y- C-G
(investments = savings + exports)
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Default risk
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the chance a borrower will not pay back your funds
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Fisher Equation
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Nominal (i) = Real interest (r) + Inflation (pi) + default risk (rho)
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Deficit Government funds
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the difference between taxes and costs
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Government Debt
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total of deficit
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Treasury Securities
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bonds sold by the government
T-Bill = sort term (less than 52 weeks)
T- notes= last for 1-10 years
T-bonds= last longer than 10 years
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Securitization
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combing different assets (mortgages) and then sell them to investors
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National wealth results from
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legal systems
banking systems
political systems
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Economic (population) growth =
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Y- P- Population
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Rule of 70
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estimates how long it takes to double, given a constant growth rate
70/ x
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Resources and Productions
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Natural Resources
Human Capital
Physical Capital
Technology & Production
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Institutions of Growth
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Private property Rights
Stable Government and Legal System
Trade ristrictions
Government regulations
tax regulations
Monetary Policies
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Production Function=
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q= f(K,L)
where K= Capital and L= labor
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Aggregated Product Function=
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Real GDP= f(K,L, Natural Resources )
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Marginal Product of Capital
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Q/K
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Diminishing MP
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marginal product falls as input (K) increases
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steady state
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no new net investments
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Convergence
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concept that over time, per capita GDP and Real GDP should be equal
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