ECN 001B: Macro Midterm 1

Circular-flow diagram

illustrates GDP as spending, rev., factor payments and income

GDP

measure of the total income in the economy

Market value

production is valued at the price paid for the output

Gross national product (GNP)

production of a nation’s permanent residents domestically or abroad and excludes production of foreign workers living in the USA

Net national product (NNP)

The total production of a nation’s residents (GNP) - depreciation

National Income

total income earned by a nation’s residents

Personal income

income of households

Disposable personal income

income of households after they pay their obligations to the government

Nominal GDP

value of output measured in the prices that existed during the year in which the output was produced

Real GDP

Value of output measured in the prices that prevailed in some arbitrary base year

GDP deflator

nominal GDP/real GDP x100

Fix the basket

Estimate the quantities of the products purchased by the typical consumer

Find the prices

Locate the prices of each item in the basket for each point in time

Compute the basket’s cost

Using the prices and quantities to calculate the cost of the basket for each year

Inflation

CPI this year - CPI last year/ CPI last year x100

Cost of living

amount by which incomes must rise in order to maintain a constant standard of living

Substitution bias

When consumers substitute toward goods that have become relatively less expensive

Introduction of new goods

When goods are introduced, a dollar has increased in value because it can buy a greater variety of products

Unmeasured quality of change

When the quality of a good rises from year to year then the value of a dollar is rising even if actual prices are constant

Amount in today’s dollars

Amount in year T dollars x Price level today/ price level in year T

Real interest rate

Nominal interest rate - inflation rate

Physical capital per worker

the stock of equipment and structures that are used to produce goods and services

Human capital per worker

the knowledge and skills that workers acquire through education, training, and experience

Natural Resources

Inputs provided by nature’s bounty

Technological knowledge

The understanding about the best ways to produce goods and services

Production function

est. the relationship between the quantity of inputs used in production and the quantity of output from other production

Economic growth

• encourage saving and investment

• encourage investment from abroad

Foreign direct investment

capital investment that is owned and operated by a foreign entity

Foreign portfolio investment

capital investment that is financed with foreign money but is operated by domestic residents

GDP does NOT value:

• quality of environment

• leisure time

• non-market activity, such as the child-care a parent provides at home

• equitable distribution of income

Constant Returns

the property whereby long-run average total cost stays the same as the quantity of output changes

Diminishing Returns

The property whereby the benefit from an extra unit of an input decline as the quantity of the input increases