Econ Ch.8/9/10 Test

Chapter 8/9/10 Econ review

GDP

can be used to measure the economic growth of a country in current dollar value, level of GDP indicates the size of economy and changes determine whether it is contracting or expanding

Income approach vs expenditure

Expenditure: c +g + I+ (x-m)

Income: uses 3 income items in addition to depreciation and taxes

Depreciation

The loss of value that an asset faces overtime

Depreciation = gross investments- net investments

Final and intermediate products

Final: do not need further processing, accounted in GDP

Intermediate: purchased by businesses manufacturing, not accounted in GDP

Nominal GDP

Final value of GDP expressed in current dollar value

N= R x D

Real GDP

final value of GDP expressed in base year value. Discounts inflation, base year is 2002 for GDP calculations

R= N/ D

GDP per capita

GDP is total value of goods and services in a nations border

GDP per capital indicates the changes in trends and a nation's living standards over time, helps resolve misleading GDP

GDP per capita = GDP / population

Exclusions from GDP

GDP involves market value which can overlook other productive activities

1. Non market value activities: volunteering, renovating own home

2.underground economy: smuggling, services paid in cash, activities that are kept off the books

Same GDP, different standards of living, how?

GDP can be understated or overstated based on countries underground activities, population, debt, income distribution

Limitations

EPCILE

Excluded activities, product quality, composition of output, income distribution, leisure, environment

Inflation

Increase in prices for an entire economy

Hyperinflation: price increases are out of control

Inflation rate

Rate = ((CPI current year / CPI previous year)/ CPI previous year ) x100

CPI

Consumer price index, a device used to measure inflation, it surveys the consumer spending habits based on their shopping baskets

CPI = price of basket current/ price of basket base x100

CPI limitations

CCSP

Consumer difference: not always same as urban

Charges in spending patterns

Size of household

Product qualify / New product

Nominal income/ Real

Nominal income: income in current dollar

Real income: income in base year dollar, inflation adjustment

Real income= nominal income / CPI (in hundredths)

Rationale behind using Real GDP

In order to compare economic growth and well being of countries,it has to be done without inflation, which why you use real GDP

Economists also assess the changes in outputs which cannot be assessed with inflation

GDP deflator

Indicator of price changes/ falls for all goods and services, measure of inflation

GDP deflator = nominal/ real X 100

Unemployment rate

Number of unemployed people / number of people in labour force

Employment

# of ppl unemployed = unemployed ppl that are looking for jobs actively (4 weeks)

I of ppl in labour force= employed ppl + ppl looking for work

4 types: FSCS

Frictional

Structural

Cyclical

Seasonal

Natural rate of unemployment

= full employment

= frictional + structural

AD

Aggregate Demand is total demand for a good or service in an economy

Factors: CIGN

consumption

Investments

Government

Net exports

AS

Aggregate supply is the total supply of a good or service in an economy

Factors: IRPG

Input cost prices

Resource supplies

Productivity

Government regulations

Inflationary Gap

Gap between aggregate demand and full employment equilibrium, characterized by high inflation, low unemployment and high, GDP growth

Recessionary gap

Gap between I could get demand and full employment, equilibrium, characterized by low inflation, high unemployment, and low GDP growth