GDP vs. GNP and Credit Demand Concepts

These flashcards cover the differences between GDP and GNP, the concepts of nominal vs. real growth rates, interest, and the dynamics of the credit demand curve.

When would a country's GDP exceed its GNP?

A country's GDP would exceed its GNP if foreign firms earn more inside the country than domestic firms earn abroad.

What components are included in GNP?

GNP includes income made by residents abroad but subtracts money made by foreigners inside the country.

What happens to GNP if foreign companies earn significantly inside the country?

GNP decreases as it subtracts the income earned by foreigners inside the country.

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

Nominal growth rate uses current prices including inflation, while real growth rate adjusts for inflation to show actual economic growth.

Why is it important to differentiate between nominal GDP and real GDP?

Differentiation is important because nominal GDP may appear larger due to inflation, while real GDP shows actual economic growth.

What is nominal interest?

Nominal interest is the original interest rate that does not account for inflation.

What is real interest?

Real interest is the interest rate that accounts for inflation, reflecting the actual cost of borrowing.

Why does the credit demand curve slope downward?

The credit demand curve slopes downward because lower interest rates encourage more borrowing.

What factors can shift the credit demand curve?

Changes in housing preferences and government policies can shift the credit demand curve.

If the government offers incentives like tax cuts or student loan forgiveness, it can increase borrowing and shift the demand curve to the right

What does GDP leave out?

• Household work like babysitting and cooking

• Undergroud economy

  • Cash jobs not reported / illegal

• Leisure

• Any production outside of a country’s borders

Why does credit supply curve slope upward?

The credit supply curve slopes upward because higher interest rates make lending more profitable, so lenders are willing to supply more credit.

• When the interest rate is low, lending isn’t very exciting
  → banks lend a little

• When the interest rate is high, lending feels worth it
  → banks lend a lot

So as the interest rate (y-axis) goes up, the amount of credit supplied (x-axis) goes up.

If aggregate income is ________, what is aggregate income?

Total spending; the total income earned in the economy, and it equals aggregate expenditure because all spending becomes someone else’s income

What causes shift in credit supply curve?

• Risks. If banks think people are too risky, shift left. Vice versa

• If banks get more deposits, they can lend mire, shift right

• If banks expect a market crash, lend less, shift left

Economics

The study if how agents choose to allocate scarce resources and how those choices affect society.

Market

Where economic agents come to sell and trade

Perfectly Competitive Market

• Lots and lots of people sell the same thing, at the same bring and lots of buyers buy it

• No one can control the price

Ex. 100 kids selling lemonade. If oen kid charges more, no one buys from them, so everyone charges the same.

Positive Economics

Describes what is happening

• Facts that can be tested

• Ex. If gas prices go up, people drive less. Unemployment is 5%.

• No opinions, just data

Normative Economics

What should happen

• Opinions or value judgements

• Ex. The government should raise minimum wage. Healthcare should be free

• Cannot prove with data alone

Equilibrium

Everyone is doing the best they can and nobody wants to change their choice.

• Buyers are happy with how much they buy

• Sellers are happy with how much they sell

• Ex. Kids are trading snacks. Everyone agrees on trade, and no one wants to swap again

Empiricism

Learning from real world data and evidence, not just theories.

• Look at numbers, run experiments, and study real behavior

• Ex. Instead of saying “kids like chocolate”, you count how many choose chocolate