Macro 2

What is GDP?

The total market value of all final goods and services produced within a country during a given period.

GDP expenditure equation

GDP = C + I + G + NX

What does C represent in the GDP equation?

Consumption: household spending on goods and services.

What does I represent in the GDP equation?

Investment: spending on new capital goods, new housing, and inventory changes.

What does G represent in the GDP equation?

Government purchases of goods and services; transfer payments are excluded.

What does NX represent in the GDP equation?

Net exports = exports − imports.

What are exports?

Goods and services produced domestically and sold to other countries.

What are imports?

Goods and services produced abroad and purchased domestically.

What is a final good?

A good purchased for final use rather than for resale or further production.

What is an intermediate good?

A good used to produce another good or service.

Why are intermediate goods excluded from GDP?

To avoid double-counting their value.

Are used goods included in current GDP?

No, because they were counted when originally produced; current resale does not represent new production.

Are stocks and bonds counted as GDP investment?

No. Buying existing financial assets is not the production of new goods or services.

Are transfer payments included in government purchases in GDP?

No. Examples include Social Security benefits and unemployment benefits.

What is nominal GDP?

The value of production calculated using current-year prices.

What is real GDP?

The value of production calculated using base-year prices to adjust for price changes.

Why is real GDP useful?

It allows comparisons of production over time without the effect of changing prices.

GDP deflator formula

GDP deflator = (Nominal GDP ÷ Real GDP) × 100.

How do you calculate real GDP using nominal GDP and the deflator?

Real GDP = (Nominal GDP ÷ GDP deflator) x 100.

How do you calculate nominal GDP using real GDP and the deflator?

Nominal GDP = Real GDP × (GDP deflator ÷ 100).

What does a GDP deflator of 100 mean?

The current price level equals the base-year price level for domestically produced final goods and services.

What does a GDP deflator of 120 mean?

The measured price level is 20% above the base year.

What is GDP per capita?

GDP divided by the population; a measure of average economic output per person.

What is one limitation of GDP?

GDP does not fully measure income distribution, unpaid work, leisure, environmental quality, or overall happiness.

What is GNP?

Gross national product: the value of final goods and services produced using factors of production owned by a country's residents, regardless of location.

What is purchasing power parity (PPP)?

A method of comparing currencies based on the prices of similar goods and services in different countries.

What is the business cycle?

Fluctuations in economic activity around its long-run growth trend.

What is an expansion?

A period when economic activity and real GDP generally increase.

What is a recession?

A significant decline in economic activity lasting more than a brief period.

What is a depression?

An especially severe and prolonged economic downturn.

What is a boom?

A period of unusually strong economic activity.

What is economic growth?

An increase in an economy's productive capacity or real output over time.

What is productivity?

The amount of output produced per unit of input, such as output per worker-hour.

Who is classified as unemployed?

A person without a job who is available for work and actively seeking employment, according to the official definition.

Who is classified as employed?

A person who worked for pay or profit during the reference period, or met the applicable temporary-absence criteria.

What is involuntary part-time employment?

Working part-time while wanting and being available for full-time work.

What are two costs of unemployment?

Lost income and production, plus potential skill loss and psychological or social costs.

What is inflation?

A sustained increase in the overall price level.

What is deflation?

A decrease in the overall price level.

What is disinflation?

A decline in the rate of inflation while the overall price level continues to rise.

What is the Consumer Price Index (CPI)?

A measure tracking the cost of a representative basket of consumer goods and services over time.

CPI formula

CPI = (Cost of basket in current year ÷ Cost of basket in base year) × 100.

Inflation rate formula using an index

Inflation rate = [(New index − Old index) ÷ Old index] × 100%.

If CPI rises from 100 to 175, what is the inflation rate?

[(175 − 100) ÷ 100] × 100 = 75%.

If CPI rises from 120 to 126, what is the inflation rate?

[(126 − 120) ÷ 120] × 100 = 5%.

What does a CPI of 150 mean relative to the base year?

The basket costs 50% more than it did in the base year.

How is a CPI basket used?

Researchers price a representative basket in different periods and compare its cost with the base-year cost.

What is the Producer Price Index (PPI)?

An index measuring changes in prices received by domestic producers for their output.

What is core inflation?

Inflation measured after excluding food and energy prices, which can be volatile.

What is the Personal Consumption Expenditures (PCE) price index?

A measure of prices for goods and services consumed by households, using a broader and differently weighted spending measure than CPI.

What is one limitation of CPI?

It may not fully account for substitution, quality changes, or the introduction of new products.

What is substitution bias in CPI?

When consumers switch to relatively cheaper goods, a fixed basket may overstate the increase in their cost of living.

How do you adjust a past dollar amount into today's dollars using CPI?

Past amount × (CPI today ÷ CPI in the past year).

Convert $32 from a year with CPI 166.2 to a year with CPI 212.2.

$32 × (212.2 ÷ 166.2) ≈ $40.85.

What is the difference between inflation and a high price level?

Inflation is the rate at which the price level changes; a high price level is the accumulated level of prices.

What happens to purchasing power when prices rise and nominal income does not?

Purchasing power falls.

How do you calculate real income from nominal income and a price index?

Real income = nominal income ÷ (current year CPI ÷ base year CPI)

What is the standard of living?

The material well-being of people, often assessed using real income or output per person alongside other measures.

What is the Human Development Index (HDI)?

A composite measure that includes health, education, and income-related dimensions of development.

What is disposable income?

Income available to households after personal taxes, including relevant transfers.

What is a government budget deficit?

When government spending exceeds government revenue over a given period.

What is a government budget surplus?

When government revenue exceeds government spending over a given period.

What is the circular-flow model?

A model showing how households and firms interact through markets for goods and services and factors of production.

What do households provide in the factor market?

Labor, land, capital, and entrepreneurial resources.

What do firms buy in the factor market?

Resources such as labor, land, and capital to produce goods and services.

What do firms provide in the product market?

Goods and services purchased by households and other buyers.

What do households provide in the product market?

Consumer spending on goods and services.

What are factor markets?

Markets where productive resources such as labor and capital are bought and sold.

What are product markets?

Markets where final goods and services are bought and sold.

In the circular-flow model, what flows from firms to households in the factor market?

Factor income, such as wages, rent, interest, and profit.

In the circular-flow model, what flows from households to firms in the product market?

Consumer spending on goods and services.

What is economic nationalism?

An approach prioritizing domestic industries and national economic interests, often through policies that restrict or manage international trade.

What is globalization?

The growing integration of countries through trade, investment, migration, technology, and information flows.

How can tariffs affect consumers?

Tariffs can raise the prices of imported goods and goods that compete with imports.

How can trade restrictions affect domestic producers?

They may protect some domestic firms from foreign competition but can raise input costs and reduce competitive pressure.

How can trade contribute to economic growth?

It can expand markets, encourage specialization, improve resource allocation, and increase access to goods and technology.

What is the difference between a budget deficit and national debt?

A deficit is a flow measured over a period; national debt is the accumulated stock of outstanding government borrowing.

Riverton has nominal GDP of $512 billion and a GDP deflator of 120. What is real GDP?

$512 billion ÷ (120 ÷ 100) = approximately $426.67 billion.

Nominal GDP is $231 billion and real GDP is $210 billion. What is the GDP deflator?

($231 ÷ $210) × 100 = 110.

Nominal GDP is $100 billion and real GDP is $80 billion. What is the GDP deflator?

($100 ÷ $80) × 100 = 125.

Year 1 has nominal GDP of $200 billion and real GDP of $200 billion. Year 2 has nominal GDP of $231 billion and real GDP of $210 billion. What is inflation from Year 1 to Year 2 using the GDP deflator?

Year 1 deflator = 100; Year 2 deflator = 110; inflation = 10%.

A basket contains 5 bananas and 3 apples. In 2006 bananas cost $4 and apples cost $1. What is the basket cost?

(5 × $4) + (3 × $1) = $23.

The basket contains 5 bananas and 3 apples. In 2007 bananas cost $4 and apples cost $2. What is the basket cost?

(5 × $4) + (3 × $2) = $26.

The basket contains 5 bananas and 3 apples. In 2008 bananas cost $5 and apples cost $3. What is the basket cost?

(5 × $5) + (3 × $3) = $34.

Using basket costs of $23 in 2006 and $26 in 2007, what is the inflation rate?

[($26 − $23) ÷ $23] × 100 ≈ 13.04%.

Using basket costs of $26 in 2007 and $34 in 2008, what is the inflation rate?

[($34 − $26) ÷ $26] × 100 ≈ 30.77%.

Year 1 has price $3 and quantity 400. What is nominal GDP?

$3 × 400 = $1,200.

Year 2 has price $4 and quantity 450. What is nominal GDP?

$4 × 450 = $1,800.

Year 3 has price $5 and quantity 500. What is nominal GDP?

$5 × 500 = $2,500.

Using Year 1 prices of $3 as the base year, Year 2 quantity is 450. What is Year 2 real GDP?

$3 × 450 = $1,350.

Using Year 1 prices of $3 as the base year, Year 3 quantity is 500. What is Year 3 real GDP?

$3 × 500 = $1,500.

Nominal GDP is $1,280 and the deflator is 100. What is real GDP?

($1,280 ÷ 100) x 100 = $1,280.

Nominal GDP is $1,480 and the deflator is 148. What is real GDP?

$1,480 ÷ (148 ÷ 100) = $1,000.

A salary was $80,000 when CPI was 15.2. If CPI is now 255.7, what is its equivalent in today's dollars?

$80,000 × (255.7 ÷ 15.2) ≈ $1,345,789.

What is the difference between real GDP growth and nominal GDP growth?

Real GDP growth measures changes in output adjusted for prices; nominal GDP growth includes both output and price changes.

If nominal GDP increases but real GDP does not, what may have happened?

The price level may have increased while real production stayed the same.

Why are only newly produced goods and services counted in GDP?

GDP measures current production, not the transfer of ownership of existing assets.

Is the purchase of a newly built house included in GDP?

Yes. New residential construction is counted as investment.

Is a household's purchase of a newly manufactured car included in GDP?

Yes, as consumption.

Is a firm's purchase of new machinery included in GDP?

Yes, as investment.