econ midterm 20b uci

Nominal GDP

the production of goods and services valued at current prices

Real GDP

the production of goods and services valued at constant prices

GDP Deflater

Nominal GDP/Real GDP x 100

C

consumption

I

Investment

G

government expenses

NX

net exports (exports-imports)

economic growth

growth in the economy represented by the % change in real GDP between 2 periods

inflation rate

the % change in the price level from one year to the next

Bureau of Labor Statistics (BLS)

An agency in the Department of Labor that reports inflation data and estimates overall price level/inflation. Determines price of all goods and services a typical consumer buys.

inflation

index of average prices of goods and services (so it's a good measure of overall price level).

CPI (Consumer Price Index)

Consumer price index which uses a fixed market basket of goods and services purchased by the typical consumer. (cost of fixed basket in current year/cost of fixed basket in base year) x 100.

CPI basket

The BLS tries to include all goods and services that the typical consumer buys, and weighs according to how much consumers buy of each item.

New product bias

New tech like phones or computers provide variety for consumers and raise the standard of living while lowering its cost. This makes the dollar more valuable, although CPI with a fixed basket doesn't reflect an increase in dollar values because of new goods.

Change in quality bias

quality of goods generally increases over time, making higher quality provoke higher prices. If CPI didn't account for quality changes, it would have an upward bias. BLS uses an adjustment method to account for quality changes.

Substitution bias

when prices of goods change differently consumers substitute towards cheaper goods, which alters the weight of goods in the basket. CPI with a fixed basket overstates effect of price increases.

GDP Deflater vs. CPI

GDP deflator uses currently produced goods and services domestically. Doesn't include imports but would include the price of airplanes produced domestically. A CPI Fixed Basket includes good and services bought by a typical consumer, includes imported goods.

Comparing dollars figures in different times

(value in year T dollars) x (price today/price in year T) OR (CPI today/CPI in year t)

Indexation

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

Nominal interest rate

Shows how fast your dollars grow in your bank account

real interest rate

shows how fast the purchasing power of your money in your account rises. (Nominal interest rate - inflation rate)

Compounding Growth Equation

Yt= Y1 (1+g)^t which means that real GDP per person in year t is equal to real GDP per person in year 1, times 1 plus the growth rate, raised to t, the number of years.

Yt

Real GDP per person in year T

Y1

Real GDP per person in year 1

G in compounding growth formula

growth rate

t in compounding growth formula

time

Rule of 70

If the annual growth rate of a variable is x%, the size of that variable doubles every 70/x years.

Real income per person

real GDP/population which compares how much one person can consume on average

productivity

total production in a given time/ (total working hours x total workers)

what are the 4 determinants of productivity

human capital, tech knowledge, natural resources, physical capital

Human capital

the skills and knowledge gained by a worker through education and experience. (job training, skills, etc.)

Technological knowledge

society's understanding of the best ways to produce goods and services. (research and development)

Natural resources

land, forests, minerals, water, and other things that are not made by people.

physical capital

the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services. (how to increase is through saving, which then causes more saving and loans to be made, which directs investment into greater physical capital.)

physical capital per worker

K/L

diminishing return

Idea that a supplier will reach a point when increased production will not increase profits because machinery has broken down or due to other reasons.

catch up effect

initially countries that have lower capital/worker can grow faster because of marginal returns on additional capital of the developing country is higher than that of a developed country.

FDI (Foreign Direct Investment)

Investment made by a foreign company in the economy of another country.

FPI (Foreign Portfolio Investment)

a. purchase of equity in companies in other countries for financial gain, not control.

b. Stockholders in Ford Motor Company—they do not control the company, but they gain financially by owning stock.

c. Though portfolio investment does not involve direct control of operations in another country, it does represent an increase in cooperation between foreign investors and national/multinational companies which contributes to economic globalization.

natural resources per worker

(N/L where N are inputs into production that nature provides)

Human capital per worker

(H/L where H equals the knowledge each worker has and L is for labor.)

financial system

The group of institutions in the economy that help to match one person's saving with another person's investment. Uses the savings of savers (those who spend less than what they earn) moving the money through the system to match money to the investments of borrowers, or those who spend more than what they earn.

intermediaries

Businesses involved in selling the goods and services of producers to consumers and other businesses. (Banks and mutual funds)

Key to productive workers

A large real GDP and a high standard of living

Banks

Financial institutions that accept deposits from savers, paying them an interest rate, and using the money to make loans to borrowers while making them pay a higher rate.

Mutual funds

sell shares to savers and then use the funds to buy a portfolio of stocks, bonds, mortgages, and other financial securities.Allows people with small amounts of money to diversify their holdings. Provides people with the skills of a professional money manager.

GDP equation in a closed economy

C+I+G

national saving/total saving (S)

(S=I) which equals =Y-C-G, and where saving = investment

Sprivate, or private saving

Y+TR-C-T (govt. revenue through taxes.) where Y is GDP, TR is transfers paid to the govt. by consumers, C is consumption and T is govt. revenue earned through taxes.

Spublic, or public saving

T-G-TR

Government budget

IF T>G+TR then govt. is a saver and has a budget surplus. If T

Govt. budget deficit reduces national saving and...

lowers investment in the economy.

Bond

A financial security that represents a promise to repay a fixed amount of funds. (Formal IOU)

term

length of time until the bond matures

credit risk

risk borrower wont make some or all of their payment for the bond

tax treatment

the way the tax laws treat the interest earned on the bond

stock market

Stocks represent ownership in a firm and a claim to the firms profits. You would get high profits on your stock if the firm is doing well. prices will fluctuate with supply and demand.

equity finance

selling stock to raise money

debt finance

the sale of bonds to raise money

stock

Claim to a product of the firm and an expectation of future profitability, reflected in the stock price that fluctuates with the business cycle.

bond

a certificate of indebtedness, and if the firm encounters financial difficulties, the bondholders will be paid out first.

household level investors can save by

Buying bonds, buying stocks. or a government issued treasury bond, which is riskless with a low interest rate.

markets of LF's

The price of a loanable fund equals its interest rate, where higher rates mean higher return for savings, a higher supply, and an upward sloping S curve. On the supply side, lenders would be able to find loaners with a high IR. however, the same borrowers wouldn't borrow at that higher IR.

budget deficit

Occurs in the market for Loanable funds if T

How do entrepreneurs start a business?

Savings of households are invested into a bank/financial system where they earn interest and are asisted with the matching process. Then they get an investment/loan and will hopefully earn profit.

Households

supply labor and capital, usually people and workers in general.

Firms

Produce goods and services

Use factors of production (inputs). usually storefronts or companies that hire workers.