Macro Test

GDP measures 2 Things

1. The total Income of everyone in the economy
2. The total expenditure on the economy's output of goods and services
For an economy as a whole income must equal expenditure

Gross Domestic Product

The market value of all final goods and services produced within a country in a given period of time

Gross National Product (GNP)

The market value of all final goods and services produces by a country's permanent residents wherever located in a given time period

GDP equation

GDP= C + I + G + NX
consumption + investment + government +net exports

Consumption

Spending by households on goods and services with the exception of purchases of new housing
Household spending on education is also included in consumption of services

Investment

The purchase of goods that will be used in the future to produce more goods and services
Sum of purchases of capital equipment, inventories, and structures
Includes expenditure on new housing

Government Purchases

Spending on goods and services by local, state, and federal governments
Includes the salaries of government workers as well as expenditure on public works (social security and unemployment is a transfer payment and are not included)

Net Exports

The foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports)
Imports- Exports

Nominal GDP

The production of goods and services valued at current prices
(Price x quantity) + (Price x Quantity)
Uses current prices to place a value on the economy's production of goods and services

Real GDP

The production of goods and services valued at constant prices
Must designate a base year- keep prices constant when figuring out the GDP, but quantity changes
Uses constant base year prices to place a value on the economy's production of goods and servic

GDP Deflator

A measure of the price level- measures the current level of prices relative to the level of prices in the base year
Nominal GDP / Real GDP x 100
GDP deflator in base year is always 100

Inflation Rate

The percentage change in some measure of the price level from one period to the next
(GDP Deflator year 2 - GDP Deflator Year 1) / GDP Deflator Year 1 (x 100)
(CPI year 2 - CPI year 1) / CPI year 1 (x 100)

What is Not included in GDP

Underground Economy- illegal or underground market transactions
Illegal- drugs, counterfeit DVD's, ect.
Underground- getting paid under the table- Legal activities paid for under the table to avoid taxation
Used goods- because used goods aren't new produc

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment and economic growth

Microeconomics

The study of how households and firms make decisions and how they interact in the market

Consumer Price Index

A measure of the overall cost of goods and services bought by a typical consumer

How is CPI calculated

Fix the basket
Find the Prices
Compute the baskets cost
Choose a base year and compute the index

Consumer Price Index Equation

Price of basket in Current year / Price of basket in base year (x 100)

Producer Price Index

A measure of the cost of a basket of goods and services bought by firms

Problems with CPI

Substitution Bias
The Introduction of new products
Unmeasured quality change

Substitution Bias

Not all prices change proportionally from one period to another. Consumers respond by substituting towards goods that have become relatively less expensive

Introduction of New Products

Takes time for them to be incorporated into basket

Unmeasured Quantity Change

Because quality is hard to measure, CPI has a hard time keeping up with quality changes even though it tries to measure a constant change in quality

Differences between GDP and CPI

GDP deflator reflects the prices of all goods and services produced domestically, whereas CPI reflects the prices of all goods and services bought by consumers
GDP deflator includes production for export
CPI include imports consumed by consumers
CPI measu

Indexation

The automatic correction by law or contract of a dollar amount for the effects of inflation

Cost of Living Allowance (COLA)

A COLA automatically raises the wage when consumer price index rises

Nominal Interest Rate

Usually exceeds the real interest rate
the interest rate not adjusted for inflation, it measures the change in dollar amounts

Real Interest Rate

The interest rate corrected for the effects of inflation
measures the change in purchasing power

How to measure GDP

Income Approach
Expenditure Approach

Fisher Equation

Real Interest Rate = Nominal Interest Rate- Inflation Rate

Income Approach

Add all the components of national income
GDP= Wages + Rent + Interest + Profit

Expenditure Approach

Measures GDP by adding up all the market values of all final goods and services
GDP= Consumption + Investment + Gov. Spending + Net Exports

Unemployment Rate

Percentage of those in the labor force without jobs
Measured by the BLS- survey each month of 60000 households

Cyclical Unemployment

Year to year fluctuations in unemployment around its natural rate- associated with the business cycle

Frictional Unemployment

Unemployment that results because it takes time for workers to search for the jobs that best suit their tasks and skills

Structural Unemployment

Joblessness created by structural changes in labor demand
People who lack marketable skills and whose jobs have become obsolete

Medium of Exchange

An item buyers give when they want to purchase goods or services

Store of Value

Item that people can use to transfer purchasing power from the present to the future

Liquidity

The ease with which an asset can be converted into the economy's medium of exchange

Reserves

Deposits that banks have received but have not loaned

Money Multiplier

The amount of money the banking system generates with each dollar of reserves

Reserve Ratio

The fraction of deposits that banks hold as reserves

Discount Rate

The interest rate on loans the Fed makes to banks

Federal Funds Rate

The short term interest rate that banks charge one another for loans