Macroeconomics chapt. 9-10

What is inflation?

a general and ongoing rise in the level of prices in an economy. This means that over time, money buys less than it used to.

How is inflation typically measured?

percentage change in a price index, such as the Consumer Price Index (CPI) or the GDP deflator, over a specific period.

What is the Consumer Price Index (CPI)?

a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

What are the main types of inflation?

Demand-Pull Inflation and Cost-Push Inflation.

Explain Demand-Pull Inflation.

occurs when aggregate demand in an economy outweighs aggregate supply, leading to upward pressure on prices. This can be caused by factors like increased government spending, a surge in consumer confidence, or expansionary monetary policy.

Explain Cost-Push Inflation.

occurs when the cost of producing goods and services rises, leading firms to increase prices to maintain profit margins. This can be caused by factors such as rising wages, higher raw material prices, or supply shocks.

What are some of the negative effects of high inflation?

leads to a decrease in purchasing power, uncertainty, and can distort relative prices and resource allocation.

What is the GDP deflator?

a measure of the level of prices of all new, domestically produced, final goods and services in an economy. It includes investment and government spending, unlike the CPI which focuses on consumer goods.

What is the difference between inflation, deflation, and disinflation?

• A general and sustained increase in the price level.

• A general and sustained decrease in the price level (negative inflation rate).

• A decrease in the rate of inflation; prices are still rising, but at a slower pace.

Who is typically hurt from unexpected inflation?

Savers (value of savings decreases), fixed-income earners (purchasing power falls), creditors (loans repaid with less valuable money).

who typically benefits from unexpected inflation?

Debtors (loans repaid with less valuable money), asset owners (value of assets may rise with inflation).

How is the inflation rate calculated?

\frac{\text{Price Index in Current Year} - \text{Price Index in Previous Year}}{\text{Price Index in Previous Year}} \times 100

What are the main components of international trade?

involves the exchange of goods and services across national borders. Key components include exports (goods and services sold to other countries) and imports (goods and services bought from other countries).

What is the balance of trade?

the difference between a country's total value of exports and its total value of imports over a specific period. A trade surplus occurs when exports exceed imports, and a trade deficit occurs when imports exceed exports.

Explain the concept of capital flows in macroeconomics.

refers to the movement of money for the purpose of investment, trade, or business operations from one country to another. These can be in the form of foreign direct investment (FDI), portfolio investment, or other financial movements.

What is the balance of payments?

a systematic record of all economic transactions between residents of one country and the rest of the world over a specific period. It consists of the current account, the capital account, and the financial account.

What is the current account in the balance of payments?

records a nation's net trade in goods and services (the balance of trade), net earnings on investments abroad, and net transfer payments (e.g., foreign aid, remittances).

What is the financial account in the balance of payments?

records transactions involving financial assets and liabilities, such as foreign direct investment, portfolio investment (stocks and bonds), and changes in official reserves.

How are current account and financial account related?

According to the balance of payments identity, the current account balance (CA) plus the financial account balance (FA) plus the capital account balance (KA) must sum to zero (approximately zero, due to statistical discrepancies): CA + FA + KA \approx 0 This implies that a current account deficit must be financed by a financial account surplus, and vice versa.

What is foreign direct investment (FDI)?

an investment made by an individual or company in one country into business interests located in another country, in the form of either establishing business operations or acquiring business assets, including controlling ownership in a foreign company.

What are exchange rates?

represents the value of one country's currency in terms of another country's currency. They play a crucial role in determining the competitiveness of a country's exports and the cost of its imports.

What factors influence international trade?

includes differences in production costs (comparative advantage), differences in resource endowments, technological progress, government policies (tariffs, quotas), and consumer tastes and preferences.

What are the benefits of international trade?

includes increased variety of goods and services, lower prices due to economies of scale and competition, greater efficiency through specialization (comparative advantage), and fostering innovation and economic growth.