168 Cards in this Set
| Front | Back |
|---|---|
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spending by households on goods and
services, with the exception of
purchases of new housing
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Consumption
|
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spending on capital equipment,
inventories, and structures, including
household purchases of new housing
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Investment
|
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the study of economy-wide
phenomena, including inflation,
unemployment, and economic growth
|
Macroeconomics
|
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the market value of all final goods and
services produced within a country in a
given period of time
|
GDP
|
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the study of how households and firms
make decisions and how they interact in
markets
|
Microeconomics
|
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spending on domestically produced
goods by foreigners (exports) minus
spending on foreign goods by domestic residents (imports)
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Net exports
|
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a measure of the price level calculated
as the ratio of nominal GDP to real GDP
times 100
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GDP deflator
|
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the production of goods and services
valued at constant prices
|
real GDP
|
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spending on goods and services by local,
state, and federal governments
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Government purchases
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the production of goods and services
valued at current prices
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nominal GDP
|
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most closely watched economic statistic because it is thought to be the best single measure of a society's economic well-being
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GDP
|
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For an economy as a whole, income must equal
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expenditure
|
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The government includes owner-occupied housing in GDP by ____ by assuming that the homeowner is _____.
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estimating its rental value; renting the house to himself
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GDP excludes
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illicit goods (like drugs); goods produced and consumed at home (vegetable garden)
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Goods intended for the end user are
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Final Goods
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goods used as components or ingredients in the production of other goods
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Intermediate goods
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In the Circular Flow Diagram, payments to factors of production (wages, rent) are called
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Factor Payments
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In the CF Diagram, GDP is illustrated as
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spending, revenue, factor payments, and income
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In the CF Diagram, the omitted role of government in regards to the GDP are
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taxes, buying G&S
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In the CF Diagram, the omitted role of the financial system in regards to the GDP is
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matching savers supply of funds with borrowers demand for loans
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In the CF Diagram, the omitted roles of the foreign sector in regards to the GDP are
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trades G&S, financial assets, and currency with the country's residents
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the MARKET value of all final goods and services produced within a country in a given period of time is the
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technical definition of GDP
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GDP includes both ____ ____ (like DVDs, mountain bikes, beer)
and ____ ____ (dry cleaning, concerts, etc.)
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tangible goods; intangible services
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GDP includes only _____ produced goods
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currently
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Does GDP measure goods produced elsewhere but sold in a particular economy?
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No
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When are intermediate goods counted towards GDP?
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when an intermediate good is produced and, rather than being used, is added to a firm's inventory of goods for use or sale at a later date. (Thus, additions to inventory add to GDP, and when the goods in inventory are later used or sold, the reductions in inventory subtract from GDP.)
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When can used goods be included in GDP?
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never
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What are the four components of GDP (Y)?
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C- Consumption
I- Investment
G- Governmental Purchases
NX- Net Exports
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What are examples of each components of GDP?
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-sum of expenditures by households on durable goods, nondurable goods, and services. Examples include clothing, food, and health care.
-sum of expenditures on capital equipment, inventories, and structures. Examples include machinery, unsold products, and housing.
-sum of expenditures…
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Y= ?
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C+I+G+NX
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For renters, consumption includes ____ ____.
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rental payments
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For homeowners, consumption includes...?
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the imputed rental value (rent value of equitable house being rented) of the house (but not the purchase price or mortgage payments)
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Investment includes spending on:
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-capital equipment (machines, tools, technology)
-structures (factories, office building)
-inventories (capital stock, only counted going out [goods produced, not yet sold])
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Another type of Investment in structures is (called residential fixed investment)
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on brand new, never lived in, recently constructed houses (the one form of household spending categorized as investment rather than consumption)
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How is the word investment used differently from how you might hear the term in everyday conversation in regards to GDP?
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investment means purchases of goods (such as capital equipment, structures, and inventories) used to produce other goods
does not mean the purchase of financial assets like stocks and bonds (b/c it is simply a transfer of ownership, nothing being produced)
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Specifically, G (Governmental Purchases) refers to
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salaries of government workers as well as expenditures on public works (federal, state, and local)
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G (Governmental Purchases) excludes transfer payments, such as
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SS or unemployment insurance (not products) (macroeconomically, treated like negative taxes)
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Imports are the portions of C I and G that are spent on G&S that are...?
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produced abroad
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Net Exports include goods and services produced abroad (with a minus sign) because these goods and services are included in ____, ____, & ____.
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C; I; G
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Nominal GDP is not...?
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corrected for inflation
|
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We calculate real GDP by first designating one year as a...?
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base year
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Real GDP is always also the nominal GDP of the....?
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base year (never a trick question)
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The change in nominal GDP reflects both ___s & ___s?
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prices; quantities
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The change in real GDP is the amount that GDP would change if...?
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prices were constant (to the base year)
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GDP Deflator=
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(Nominal GDP/Real GDP)*100
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The GDP for a base year always =
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100
|
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If P rise over time but the QP stay the same, nominal GDP rises but real GDP remains the same, so the GDP deflator _____.
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rises (as well)
|
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The GDP deflator reflects what's happening to ____, not _____.
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P; Q
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A situation in which the economy's overall price level is rising is called ____?
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inflation
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The ____ ____ is the percentage change in some measure of the price level from one period to the next.
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inflation rate
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Rate of Inflation of year 2 vs. prior year (new)=
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(new-old)/old*100
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MEMORIZE THIS (but dont)
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[Gross domestic product] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. …
|
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_______________ is the main indicator of the average person's standard of living.
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Real gdp per capita
|
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GDP does not value:
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-quality of the environment
-leisure time
-non-market activity, such as the child care a parent provides his or her child at home
an equitable distribution of income
|
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Having a large GDP enables a country to have the means to afford to:
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have better schools, a cleaner environment, health care, etc.
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Many indicators of the quality of life are positively correlated with gdp, i.e.:
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Life expectancy
Literacy
Internet Usage and Tech
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The automatic correction by law or
contract of a dollar amount for the
effects of inflation:
|
Indexation
|
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A measure of the overall cost of the
goods and services bought by a typical
consumer (cost of living):
|
Consumer Price Index
|
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The interest rate as usually reported
without a correction for the effects of
inflation:
|
Nominal interest rate
|
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The automatic correction by law or
contract of a dollar amount for the
effects of inflation:
|
Indexation
|
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The percentage change in the price
index from the preceding period:
|
Inflation Rate
|
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The interest rate corrected for the
effects of inflation
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Real interest rate
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What is the basis of cost of living allowance (COLAs) in many contracts & laws,
(▲example of indexation)
which automatically raises the wage.
|
CPI
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BLS:
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U.S. Bureau of Labor Statistics
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How to calculate CPI (5 steps)
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1. Fix the "basket" (done by BLS, weighting)
2. Find the prices
3. Compute the basket's cost (uses of each year the prices to calculate the total cost of the basket)
4.Choose a base year and compute the index for each year [100*(cost of basket in current year/cost of basket in base ye…
|
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Largest item in US basket?
|
Housing (then transportation, then food)
|
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One problem with the CPI is ________: over time, some prices rise faster than others.
|
substitution bias
|
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Consumers substitute toward goods that become relatively _______.
|
cheaper
|
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The CPI misses substitution bias because...?
|
it uses a fixed basket of goods
|
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Because CPI misses substitution bias, it overstates increases in...?
|
the cost of living
|
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One problem with the CPI is ________, which increases variety & allows consumers to find products that more closely meet their needs.
|
Introduction of New Goods
|
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Because of the introduction of new goods, dollars become ____ _____- which the CPI misses because it uses a fixed basket of goods.
Thus, the CPI overstates increases in the cost of living.
|
more valuable
|
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One problem with the CPI is ____ ____: improvements in the quality of goods in the basket- which raises the value of the dollar (if positive).
|
Unmeasured Quality Changes
|
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Problems the CPI cause it to...?
|
overstate the cost of living increases.
|
|
The CPI probably still overstates inflation by about ~...?
|
.5% per year
|
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Problems the CPI are significant because...?(2)
|
-SS payments
-many contracts have COLAs tied to the CTL
|
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CPI, GDP Deflator, or both: imported consumer goods?
|
CPI, not GDP Deflator
|
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CPI, GDP Deflator, or both: capital goods?
(good used in production of G&S)
|
excluded from CPI,included in GDP Deflator (if produced domestically)
|
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CPI, GDP Deflator, or both affected: Starbucks raises price of coffee.
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CPI and GDP Deflator
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CPI, GDP Deflator, or both affected: Caterpillar raises the price of industrial tractor made in Illinois.
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GDPD, not CPI
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CPI, GDP Deflator, or both affected: Armani raises price of Italian jeans sold in US
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only CPI (imports)
|
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CPI vs GDP Deflator basket: CPI uses _________; GDPD uses _______.
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fixed basket:
basket of all currently produced goods and services (this matters if different prices are changed by different amounts)
|
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CPI vs GDP Deflator basket: GDPD's basket updates (in regards to base year) ________, CPI updates _______.
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automatically;
roughly every five years
|
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Correcting variables for inflation: (where year T is being converted)
price in today's $=
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amount in year T dollars*(Price level today/price level in year "T")
where each price level is given by that year's CPI
so
amount in year T dollars(100(cost of basket in current year/cost of basket in base year) today/100*(cost of basket in current year/cost of basket in base year) in …
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The brackets of the federal income tax—the income levels at which the tax rates change—are also indexed for _____.
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inflation
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The nominal interest rate is _____ for inflation; the real interest rate is ______ for inflation.
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not corrected; corrected
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The nominal interest rate measures the rate of growth in ______________ of a deposit or debt.
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the dollar value
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The real interest rate measures the rate of growth in ______________ of a deposit or debt.
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purchasing power
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The real interest rate is found by calculating ___________.
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nominal interest rate minus inflation
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The difference in nominal and real interest rates does not account for a change in __________ over a certain period of time, but rather a change in _________.
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dollar amount; purchasing power with the same dollar amount (can purchase less goods and services)
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The total income in the economy that
remains after paying for consumption
and government purchases.
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National Saving
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The market in which those who want to
save supply funds and those who want
to borrow to invest demand funds
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The Market for Loanable Funds
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an institution that sells shares to the
public and uses the proceeds to buy a
portfolio of stocks and bonds
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Mutual Fund
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a claim to partial ownership in a firm
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Stock
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the tax revenue that the government
has left after paying for its spending
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Public Saving
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a certificate of indebtedness
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Bond
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the income that households have left
after paying for taxes and consumption
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Private Saving
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the group of institutions in the
economy that help to match one
person's saving with another person's
investment
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Financial System
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a decrease in investment that results
from government borrowing
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Crowding Out
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a shortfall of tax revenue from
government spending
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Budget Defecit
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the total income in the economy that
remains after paying for consumption
and government purchases
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(National) Saving
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an excess of tax revenue over
government spending
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Budget surplus
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financial institutions through which
savers can indirectly provide funds to
borrowers
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Financial intermediaries
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financial institutions through which
savers can directly provide funds to
borrowers
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Financial markets
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Both ____s and _____s are examples of how borrowers borrow money DIRECTLY from savers in Financial Markets
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stock (a claim to partial ownership in a firm);
bond (a certificate of indebtedness)
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_______ and _______ are examples of financial intermediaries.
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banks; mutual funds (institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds)
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Because a closed economy (for the purposes of Ch. 13 on financial institutions) does not engage in international trade, imports and exports are exactly ___, which gives the formula for GDP (Y) as Y= __________.
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zero (therefore, NX=0); C+I+G;
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Based on the formula for GDP in a closed economy, solving for I gives _=______, which is the formula for National Saving (S), where I=S, because I=S=Private Saving (given by the identity (_____)) plus Public Saving (given by the identity (_____) ).
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I=Y-C-G;
Y-T-C;
T-G
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Investment equals ____.
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saving
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In Economics, investment is NOT the purchase of ________. Investment is the purchase of ________.
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stocks and bonds; new capital
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Examples of investment as the purchase of new capital include:
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-equipment (for a business)
-buildings
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Examples of private saving:
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-buying corporate bonds or equities
-purchasing a certificate of deposit (CD) at the bank
-buy shares of a mutual fund
let accumulate in savings or checking accounts
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The purchase of a _______ is the one form of household spending that is investment rather than consumption.
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new house
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If __ exceeds __ , the government runs a budget surplus because it receives more money than it spends.
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T;G
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In a budget surplus, Public Saving is given by the identity (____).
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T-G
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If __ exceeds __ , the government runs a budget deficit because it receives less money than it spends.
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G;T
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In a budget deficit, the Public Saving identity (____) becomes negative, making it rearranging it into (____).
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T-G;
G-T
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The Market for Loanable Funds
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a supply/demand model of the economic system
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The Market for Loanable Funds helps to understand
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-how the fin. system coordinates saving and investment
-how government policies and other factors affect saving, investment, and the interest rate
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The Market for Loanable Funds assumes that.
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all savers deposit their saving in this market
all borrowers take out loans from this market
there is one interest rate, which is both the return to saving and the cost of borrowing
|
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the supply of loanable funds comes from _____
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saving (households with extra income can loan it out and earn interest)
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public saving, if ______, adds to national saving and the supply of loanable funds
if _____, it reduces national saving and the supply of loanable funds
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positive; negative
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_____ is the source of the supply of loanable funds
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Savings
y axis is interest rate
x is (((loanable funds))
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The slope of the supply of loanable funds (SAVING) angles(slope) _______. an increase in the interest rate makes saving ____ attractive, which _____ the quantity of loanable funds supplied
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upwards;more, increases
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The supply of loanable funds comes from people who have some extra income they want to save and lend out. This lending can occur directly, such as when a household buys a bond from a firm, or it can occur indirectly, such as when a household makes a deposit in a bank, which in turn uses t…
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true
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the slope of the demand of loanable funds represents _____
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(INVESTMENT)
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in the slope of the demand of loanable funds (INVESTMENT), firms borrow the funds they need to pay for new equipment, factories, etc
households borrow the funds they need to buy new supplies
slopes _____:a fall in the interest rate ______ the cost of borrowing, which______ the quantity …
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Downward; decreases; increases
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the EQ of the S&D of loanable funds is the ____ interest rate is determined by supply and demand of ______ funds
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real; nominal
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a shifter of the M of L funds, __________ are
tax incentives for saving increase the supply of LF
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Savings incentives
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Savings incentives shift supply (savings) to the _____
______ the equilibrium interest rate and______ the EQ of LF
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right; reduces; increases
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______ are an investment tax credit _____ the demand (investment) for LF
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Investment Incentives, increases moves to right
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Investment Incentives raises the E I rate and E Q of LF
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raises
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Our analysis: ____ in budget deficit causes ____ in investment
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increase;falls
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when the govt borrows to finance its deficit, leaving less funds for investment
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crowding out
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I is important for long-run economic growth. hence, budget deficits _____ the economy's growth rate and future standard of living.
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reduce (less suplly due to less govt saving)
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Labor force stats
Produced by ___ , in US dept of _____
based on regular survey of ____ households
based on adult population (age?)
|
Bureau of Labor Statistics;labor
60,000
16+
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paid employees, self-employed, and unpaid workers in a family business, full-time and part time workers, and those not working because of a temporary absence from a job (vacation, health, seasonal)
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employed
|
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people not working who have looked for work during previous four weeks, also includes temporary layoffs who are waiting to be recalled for a job
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unemployed
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everyone else (minors, retirees, inmates, full-time students, disabled, discouraged workers, illegal immigrants)
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Not in the labor force
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is the total number of workers, including the employed and unemployed
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-The labor force
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% of labor force that is unemployed
|
unemployment rate ("u-rate"):
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urate=
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100* (# unemployed/labor force)
|
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percent of the adult population that is in the labor force
|
Labor force participation rate:
|
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lfpr=
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(100* labor force/adult population)
|
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The unemployment rate is not a perfect indicator of joblessness or the health of a labor market:
|
It excludes discouraged workers
Does not distinguish between full time and part time work, or people working part time work, or people working part time because full time jobs not availible
some people misrepresent their work status in the BLS survey (Phantom worker)
it does not includ…
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Most spells of unemployment are short: typically __ of the unemployed have been unemployed under 5 weeks, __ have been unemployed under 14 weeks
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⅓;⅔
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only ___ have been unemployed over 6 months
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20%
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most observed unemployment is ____, which has little turnover
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long term
|
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the normal rate of employment around which the actual unemployment rate fluctuates
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The Natural Rate of Employment
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deviation of unemployment from its natural rate associated with business cycles
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Cyclical Unemployment
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occurs when workers spend time searching for the jobs that best suit their skills and tastes and is short term for most workers
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Frictional Unemployment:
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is the process of matching workers with appropriate jobs
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job search
|
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provide information about job vacancies to speed up the matching of workers with jobs
|
Government employment agencies
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aim to equip workers displaced from declining industries with the skills needed in growing industries
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public training programs
|
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are changes in the composition of demand across industries or regions of the country
displace some workers, who must search for new jobs appropriate for their skills and tastes
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sectoral shifts
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a govt program that partially protects workers incomes when they become unemployed, increases Fric u-rate, reduces incentives to take a job and quit taking checks
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Unemployment insurance:
|
|
reduces uncertainty over incomes
gives the unemployed more time to search, resulting in better job matches and thus higher productivity
|
Benefits of Unemployment insurance:
|
|
fewer jobs than workers
long term
|
Structural Unemployment:
|
|
min wage may exceed the equilibrium wage for the least skilled of experienced workers, causing _____________
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structural unemployment
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but, increasing min wage raises structural unemployment by ___ the QS of labor and ______ the QD of labor
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increasing; decreasing
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the Qd of labor is _____ and the qs is _____
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employers (those hiring); workers
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worker asscn that bargains collectively with employers over wages, benefits, and working conditions
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Unions
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the typical union worker earns __% higher wages and gets more benefits than a nonunion worker for the same type of work
|
20
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when unions are succesful, wages ___ the market E. as a result, the Qs of labor __ and the Qd of labor falls and unemployment ____
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exceed; rises, falls, rises
|
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-govt eliminates the minimum wage
a new law bans labor unions
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these affect structural
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govt increases unemployment insurance benefits
sectorial shifts become more frequent
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these increase frictional unemployment
|
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more w post their resumes on monster.com, more employers find e's on m.co
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likely to speed up process of matching workers and jobs, which would reduce frictional unemployment
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the short term fluctuations in unemployment associated with business cycles (deviation of unemployment from typical rate)
|
cyclical unemployment-
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EC 111: Exam 3