Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
88 Cards in this Set
- Front
- Back
|
Gross Domestic Product
|
the total value of all goods and services legally produced within a nation per year
|
|
|
Gross National Product
|
any output made by an American company, even if they are abroad, and excluding foreign companies in the US
|
|
|
Exclusions to GDP
|
1. Intermediate Goods
2. Secondary (used) Goods 3. Payment-in-kind products 4. Things you make/do for yourself 5. Illegal stuff |
|
|
Inclusions/Distortions to GDP
|
1. Bads (hurricane cleanup)
2. Leisure is not valued 3. Environmental damage not included 4. Population growth = higher GDP not included (ceteris parabus) |
|
|
Per Capita GDP
|
PC GDP = $GDP/population
|
|
|
Recession
|
2+ consecutive quarters of declining GDP
|
|
|
Keynesian Model
|
GDP = C + I + G + (X-M)
output = household consumption + business investment + gvt spending - trade deficit (exports - imports) |
|
|
Household consumption
|
C = ~69%
|
|
|
Business Investments
|
I = ~16%
|
|
|
Government Spending
|
G =~18%
|
|
|
Trade Deficit
|
X-M = ~-3.5%
|
|
|
Good Measures of Well-being
|
1. Real Median Household Income
2. Real productivity growth |
|
|
"Ratchet Effect"
|
every time there is a crisis, the government increases its presence in the economy. after the crisis, the gvt doesn't return to pre-crisis levels
|
|
|
Automatic Fiscal Stabler
|
if UNE increases, UNE payments increase (sensitivities chart)
|
|
|
GDP Deflator
|
an index calculated for every year which shows how output prices change over time
|
|
|
GDP Deflator Construction
|
1. pick a base year for comparison (2000)
2. Calculate "nominal" GDP ∑ Pt · Qt 3. Calculate "real" GDP ∑ P base year · Qt 4. Calculate Deflator (nominal GDP/real GDP) x 100 |
|
|
Nominal GDP Calculation
|
∑ Pt · Qt
Prices times Quantities of all goods produced |
|
|
Real GDP Calculation
|
∑ P base year · Qt
use base year prices for current year quantities |
|
|
GDP Deflator Calculation
|
(Nominal GDP/Real GDP) x 100
|
|
|
Uses of the GDP Deflator
|
1. To calculate inflation statistics
2. To adjust historical/current data for comparisons across time |
|
|
Historical Recessions
|
'82: Reagan
'91: HW Bush '01: W Bush '08-'09: Bush/Obama |
|
|
Inflation π
|
a sustained increase in prices
~3% |
|
|
Deflation
|
a sustained decrease in prices
|
|
|
Hyper-Inflation
|
a super fast run up in prices
Classic ex: Weimar Republic Worst ex: 1/46-7/46 Hungary Current ex: Zim dollars, Zimbabwe |
|
|
Why do we have inflation?
|
1. Psychological benefits
2. Stable, predictable business environment 3. Capitalizes banks |
|
|
Inflation helps ____ and hurts _____
Deflation helps ____ and hurts ____ |
Inflation: debtors, creditors
Deflation: creditors, debtors value of $ is going down |
|
|
Consumer Price Index
|
measure estimating the average price of consumer goods and services purchased by a household
(like GDP for expenditures) |
|
|
Consumer Price Index Construction
|
1. Fix a quantity of items ("basket")
2. Calculate Expenditures for all years ∑ Pt · Q 3. Calculate base year expenditure ∑ P base year · Qt 4. CPI = (Exp t/Exp by) x100 |
|
|
CPI Uses
|
1. Calculate consumer price inflation
2. Adjust historical/current data for comparison across time |
|
|
Inflation Formula
|
π = (CPI t - CPI t-1)/CPI t-1 x 100
|
|
|
Inflation Biases/Problems with CPI
|
in general, CPI-based inflation is overstated
1. Substitution Bias 2. Quality Bias 3. Technology Bias 4. Constant Basket Requirement |
|
|
Substitution Bias
|
based on the assumption that you'll always buy the same things
ex. if the price of apples go up, you'll buy more bananas |
|
|
Quality Bias
|
often times if price goes up its because the quality has gone up
|
|
|
Technology Bias
|
new technology alters our demand for consumption choices
|
|
|
Constant Basket Requirement (problem with CPI)
|
it's unrealistic, we change our consumption choices all the time
|
|
|
Unemployment Rate
|
UNE = # jobless jobseekers/total labor force
currently 10.2% |
|
|
Full/Natural Unemployment Rate
|
5%
|
|
|
Exclusions from the "Labor Force"
|
1. Discouraged workers
2. Institutionalized people 3. Real retirees 4. Home-stayers 5. Military 6. Children 7. Students that aren't working |
|
|
Types of Unemployment
|
1. Frictional
2. Structural 3. Cyclical (1 and 2 part of natural) |
|
|
Frictional Unemployment
|
"job search"; at any moment, some % of workers quit their jobs to seek new ones--labor is optimizing its situation
|
|
|
Structural Unemployment
|
"firm search"/ "job mismatch"; firm is searching for new employees
--at any time, some % of firms may leave a location and seek another one Structural UNE #2: technological progress creates a skill mismatch |
|
|
Cyclical Unemployment
|
according to the business cycle
|
|
|
Why does Aggregate Demand slope down?
|
1. Consumer Wealth Effect
2. Investor Interest Rate Effect |
|
|
Consumer Wealth Effect
|
If prices fall, we feel wealthier and buy more stuff
-Marginal Propensity to Consume ex. movie tix p falls, buy food |
|
|
Investor Interest Rate Effect
|
as prices fall, many save the difference
ex movie tix p falls, pocket the difference |
|
|
Marginal Propensity to Consume
|
amount that consumption changes in response to an incremental change in disposable income
~94% in America; with a dollar of disposable income, you will spend 0.94 |
|
|
Things that Shift Aggregate Demand
(∆Q at any given P) |
Fiscal Policy:
1. ∆s to gvt spending→ a direct ↑ in AD 2. ∆s to tax rate→ indirect ↑ in AD Monetary Policy 3. ∆s to interest rates (r); r ↓ leads to ↑ borrowing and ↑ AD Consumer Responses 4. Wealth Effect: as wealth is high, AD is high 5.Consumer Confidence: consumers are flaky |
|
|
Producer Price Index
|
a measure of the cost of a basket of goods and services bought by firms
|
|
|
Wealth Effect
|
as wealth (stock portfolios, housing values, etc) are high, AD is high
|
|
|
Aggregate Demand
|
expenditures: C + I + G + (X-M)
total stuff demanded at any P level |
|
|
Aggregate Supply
|
amount supplied by sellers at any given price level
|
|
|
Long Run Aggregate Supply
|
"potential Q"- the maximum amount of GDP we can produce with full employment
-vertical |
|
|
Short Run Aggregate Supply
|
amount of GDP we can produce in the short run (at least one input is fixed)
-upward sloping |
|
|
Why is SRAS upward sloping?
|
1. Sticky Wages: as Ps ↑, wages are stuck and producers ↑q while they can
-contracts, annual salaries, etc. 2. (Sticky Prices) 3. (Misperceptions) |
|
|
Things that Shift Aggregate Supply
|
1. ∆s to Labor Supply
ex. immigration 2. ∆s to Technology: positive, rightward shift 3. ∆s to Raw Material Availability ex. oil shocks '70's |
|
|
Possible Aggregate Market Shifts
|
1. ↓ AD: remedy = ↓r,↓taxes,↑G
2. ↑ AS: remedy = let it go, keep monetary supply flexible 3. ↑AD: "inflationary gap" 4. ↓AS: "recessionary gap"/"stagflation" |
|
|
Inflationary Gap
|
when AD↑; real GDP surpasses potential GDP, causing inflation
|
|
|
Inflationary Gap Government Options
|
want to lower AD:
1. leave it alone and it will produce more π ↑AD →↑P, ↑G, ↓UNE→pressure on wages→ ↓SRAS→ ↓Q, ↑UNE, ↑π 2. Fiscal Policy: ↓G, ↑taxes to ↓AD 3. Monetary Policy: ↑r to ↓borrowing |
|
|
Recessionary Gap / Stagflation
|
when AS↓, real output is lower than potential output
|
|
|
Recessionary Gap Government Options
|
1. Leave it alone, eventually something will adjust to ↑SRAS
2. Fiscal Policy: ↓taxes, ↑G 3. Monetary Policy: ↓r (2 and 3 boost inflation to correct UNE) |
|
|
Financial Markets
|
bond market + stock market
|
|
|
Financial Intermediaries
|
Banks
|
|
|
Bond
|
a certificate of indebtedness; a contract with specific payment terms (time of payback, interest rate)
|
|
|
Bond Characteristics
|
1. Term-Length of time until maturity; r depends on term
2. Credit-Risk: the probability that the borrower will fail to repay some interest or principal 3.Tax-Treatment: they way the failure to pay/default tax laws treat the interest earned on the bond |
|
|
Types of Bonds
|
1. Corporate
2. US Treasury Bonds 3. State/Local Municipal Bonds |
|
|
Stocks
|
"equity financing"
|
|
|
Key Numbers for Stock Holders
|
1. Price
2. Dividend: corporations pay out some of profits to stock holders 3. Price:Earnings ratio P stock/Earnings per share over the last year |
|
|
What happens to savings as tax rates increase?
|
SR: private savings will fall, public savings is flat, government spending will increase
LR: private savings fall as GDP falls, public savings falls as tax revenue falls as GDP falls |
|
|
What happens to savings as tax rates fall?
|
SR: private savings is flat if C↑ with tax decreases, public savings will fall if G stays the same
LR: private savings increase as GDP increases, public savings may increase as GDP increases |
|
|
Crowding Out
|
with government deficits, G enters LF mkt on Demand side → ↑r →↓ private I
|
|
|
Crowding In
|
if (X-M) < 0, this means foreign sellers don't want our stuff
|
|
|
Budget Deficit
|
annual difference between government spending and taxes
~$400 bill annually $1.8 trillion in '09 |
|
|
Trade Deficit
|
annual difference between exports and imports
(X-M) |
|
|
Government Debt
|
Cumulative deficits over time
~$11 trill ~$2.7 to foreigners |
|
|
Future Value
|
Principle x (1+r) ^t
|
|
|
Present Value
|
FV/(1+r)^t
|
|
|
Role of the Federal Reserve
|
1. Regulate the banking system
2. Lend money to banks 3. Controls money supply a. can buy or sell bonds b. can change borrowing rate |
|
|
Money has to be...
|
1. Accepted as a medium of exchange
-counterfeit resistance -divisible for small transactions 2. Unit of Account- relative value 3.Store of Value: converts perishable assets into storable wealth (no protection for inflation) |
|
|
Types of Money
|
1. Commodity Money
2. Full Bodied/Commodity Backed Money 3. Fiat Money |
|
|
Commodity Money
|
money that has intrinsic value
ex. gold, silver, cigarettes in prison |
|
|
Full Bodied/Commodity Backed Money
|
paper money backed by some commodity
ex. silver certificates in the US before '71 |
|
|
Fiat Money
|
no intrinsic value, only backed by trust in the governments ability to regulate printing
ex. dollar money today |
|
|
High Powered Money
|
cash + coins
~$1.5 trillion |
|
|
M1/Liquid Money
|
cash + coins + checks + travelers checks
|
|
|
M2
|
M1 + savings, money mkt accts, etc
|
|
|
Fractional Reserve Banking
|
keep a fraction of deposits in reserve, lend out the rest for some r price
|
|
|
Reserve Rate
|
how much reserve banks must keep in the vaults
reserves held/deposits US: ~10% |
|
|
Money Multiplier
|
1/reserve ratio
|
