-
Gross Domestic Product (GDP)
measures total income of everyone in the economy AND total expenditure on the economy's output of goods and services produced within the country (only final goods!)
-
What does the Circular-Flow Diagram depict?
illustrates GDP as spending, revenue, factor payments, and income
-
Preliminaries for Circular-Flow Diagram:
- Factors of Production
- Factor Payments
-
Factor Payments:
- payments to the factors of production
- (e.g., wages, rent)
-
What the Circular-Flow Diagram Omits:
- Government
- Financial system
- Foreign sectors
-
Market Value:
the price of something in currency
-
Final good:
intended for the end user
-
Intermediate good:
used as components to make other goods
-
Does GDP include produced goods of the past?
NO
-
GDP includes _____ goods and ______ services.
tangible; intangible
-
Is there a time limit for a GDP?
each GDP is only for a given period of time
-
Components of GDP (Y):
- Consumption (C)
- Investment (I)Government Purchases (G)
- Net Exports (NX)
-
GDP Component: Consumption
total spending by households and G&S
-
GDP Component: Investment
is total spending on goods that will be used in the future to produce more goods.
-
GDP Component: Governmnet Purchases
is all spending on the g&s purchased by govt at the federal, state, and local levels
-
GDP Component: NX
- export - import
- exports are foreign spending
- imports are portions of C, G, and I that are spent on things produced abroad
-
Nominal GDP:
not corrected for inflation, values output using current prices
-
Real GDP:
corrected for inflation, values output using base year prices
-
What does the GDP Deflator measure?
overall level of prices; uses currently produced goods and services
-
GDP deflator formula
100 x (nominal GDP / real GDP)
-
What is the main indicator of the average person's standard of living?
Real GDP per capita
-
GDP doesn't care about:
- quality of environment
- leisure time
- non-market activity (like child care)
- an equitable distribution of income
-
Why care about GDP?
- large GDP = better school, environment, etc.
- indicates quality of life
-
Consumer Price Index:
measures the typical consumer’s cost of living and is the basis of cost of living adjustments; uses a fixed basket!
-
5 steps to finding CPI:
- 1) determine what's in the "basket"
- 2) find prices of things in the basket
- 3) compute the basket's cost
- 4) chose a base year and compute index
- 5) compute inflation rate
-
CPI in any year fomula
100 x (cost of basket in current year / cost of basket in base year)
-
Inflation rate formula
[(CPI this year - CPI last year) / CPI last year] x 100
-
Substitution bias:
consumers substitute towards goods tha become cheaper
-
How does substitution bias, introduction of new goods, and unmeasured quality change effect CPI?
CPI misses these things because it uses only fixed goods/is hard to measure and overstates the increase in the cost of living
-
Effect of the Introduction of new goods:
increases variety, dollar becomes more valuable
-
Effect of Unmeasured quality change:
improvements in quality of goods in the basket increase the value of each dollar
-
Imported consumer goods are ______ in/from CPI and _______ in/from GDP deflator.
included; excluded
-
Capital goods are ______ in/from CPI and _______ in/from GDP inflator (if produced domestically).
excluded; included
-
Formula to compare dollar figures in different times:
amount in today's dollars = amount in year T dollars x (price level today / price level in year T)
-
Indexation:
A dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract.
-
Nominal interest rate:
the rate of growth in the dollar value of a deposit or debt; not corrected for inflation
-
Real interest rate:
the rate of growth in the purchasing power of a deposit or debt; corrected for inflation
-
Real interest rate formula
Real interest rate = nominal interest rate - inflation rate
-
Financial system:
the group of institutions that helps match the saving of one person with the investment of another.
-
Financial markets:
institutions through which savers can directly provide funds to borrowers.
-
Bond:
certificate of indebtedness
-
Stock:
a claim to partial ownership in a firm
-
Financial intermediaries:
institutions through which savers can indirectly provide funds to borrowers.
-
Mutual funds:
institutions that sell shares to the public and use the proceeds to buy stocks and bonds
-
Private saving:
and formula
- the portion of households’ income that is not used for consumption or paying taxes
- Y - T - C
-
Public saving:
and formula
- Tax revenue less government spending
- T - G
-
National saving:
and formula (is also Investment fomula)
- the portion of national income that is not used for consumption or government purchases
- Y - C - G
-
What is a saving?
investment in a closed economy
-
Budget surplus:
and formula
- an excess of tax revenue over govt spending
- T - G
-
Budget deficit:
and formula
- a shortfall of tax revenue from govt spending
- G - T
-
The supply of loanable funds comes from saving:
- households with extra income
- positive public saving
-
The demand for loanable funds comes from investment:
- firms borrow funds to pay for equipment
- households borrow funds to buy new houses
-
Crowding out:
government borrows to finance its deficit, leaving less funds available for investment
-
Employed:
paid employees, self-employed, and unpaid workers in a family business
-
Unemployed:
people not working who have looked for work during previous 4 weeks (MUST BE LOOKING FOR A JOB)
-
Everyone else that is not employed or unemployed is considered to be not ______.
in the labor force
-
Labor force:
total number of workers including the employed and unemployed
-
Unemployment rate:
and formula
- % of labor force that is unemployed
- (# of unemployed / labor force) x 100
-
Labor force participation rate:
and formula
- % of the adult population that is in the labor force
- (labor force / adult population) x 100
-
BLS
Beareau of Labor Statistics
-
Discouraged workers:
want to work, but have given up on finding job; classified as "not in labor force"
-
What is the flaw in the Unemployment Rate?
It doesn't always show improvement or worsening because it depends on how many people are actually applying for unemployment
-
Natural rate of unemployment:
the normal rate of unemployment around which the actual unemployment rate fluctuates
-
Cyclical unemployment:
the deviation of unemployment from its natural rate; associated with the business cycle
-
Frictional unemployment:
occurs when workers spend time searching for the jobs that best suit their skills and tastes; usually doesn't last long
-
Structural unemployment:
occurs when there are fewer jobs than workers; usually lasts a long time
-
Job search:
is the process of matching workers with appropriate jobs
-
Sectoral shifts:
are changes in the composition of demand across industries or regions of the country; this puts people out of work and they need to look for new jobs that fit their skills
-
Unemployment insurance:
a govt program that partially protects workers’ incomes when they become unemployed; increases frictional unemployment and this ends when the person gets a job
-
Union:
a worker association that bargains with employers over wages, benefits, and working conditions; exert market power
-
Efficiency wages:
Firms voluntarily pay above-equilibrium wages to boost worker productivity
-
Four reasons to use efficiency wages –
- 1) worker health
- 2) worker turnover
- 3) worker quality
- 4) worker effort
-
Money:
the set of assets that people regularly use to buy g&s from other people
-
Medium of exhange:
an item buyers give to sellers when they want to purchase g&s
-
unit of account:
the yardstick people use to post prices and record debts
-
Store of value:
an item people can use to transfer purchasing power from the present to the future
-
Commodity money:
takes the form of a commodity with intrinsic value
-
Fiat money:
money without intrinsic value, used as money because of govt decree
-
barter:
exchange of one good or service for another
-
double coincidence of wants:
the unlikely occurrence that two people each have a good the other wants
-
money supply:
the quantity of money available in the economy
-
currency:
the paper bills and coins in the hands of the (non-bank) public
-
demand deposits:
balances in bank accounts that depositors can access on demand by writing a check
-
central bank:
an institution that oversees the banking system and regulates the money supply
-
monetary policy:
the setting of the money supply by policymakers in the central bank
-
Federal Reserve:
the central bank of the U.S.
-
How many board of governors are there and where are they located?
7 and in Washington, D.C.
-
How many regional Fed banks are there?
12
-
Who does the Federal Open Market Committee?
board of governors and presidents of some of the regional banks
-
fractional reserve banking system:
banks keep a fraction of deposits as reserves and use the rest to make loans
-
reserve requirements:
regulations on the minimum amount of reserves that banks must hold against deposits
-
reserve ratio (R) –
- = fraction of deposits that banks hold as reserves
- OR
- = total reserves as a percentage of total deposits
-
T-account:
a simplified accounting statement that shows a bank's assets and liabilities
-
Does a fractional reserve banking system create wealth?
NO, only money
-
Money multiplier:
the amount of money the banking system generates with each dollar of reserves
-
Bank capital:
the resources a bank obtains by issuing equity to its owners
-
leverage:
the use of borrowed funds to supplement existing funds for investment purposes
-
Leverage ratio:
the ratio of assets to bank capital
-
Capital requirement:
a govt regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts.
-
credit crunch:
when banks don't a lot of capital and start lending less
-
Open-Market operations:
the purchase and sale of U.S. government bonds by the Fed.
-
discount rate:
the interest rate on loans the Fed makes to the banks
-
reserve requirements:
regulations on the minimum amount of reserves banks must hold against deposits
-
run on banks:
when people suspect their bank is in trouble and they run to the bank to withdraw all their money
-
federal funds rate:
interest rate on the loans that a bank with excessive reserves gives to the bank with very little reserves
|
|