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30 Cards in this Set

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What is CPI
A measure of the overall cost of goods and services.
How is CPI calculated?
1. fix the basket
2. find the prices
3. compute the basket's cost
4. choose a base year and compute CPI
(Price of basket currently) / (Price in base year) X 100
5. Compute the inflation rate
(CPI year 2 - CPI year 1) / (CPI year1) X 100
What is the PPI?
Producer Price Index: a measure of the cost of a basket of goods and services bought by firms.
What are some problems with CPI?
1. Substitution bias- higher than it should be
2. Introduction of new goods
3. Unmeasured quality change
What is the GDP deflator?
Ratio of nominal GDP to real GDP
What does the GDP deflator reflect?
The prices of all goods and services produced domestically.
What does the CPI include that the GDP does not?
Imports
Formula to calculate an amount in today's dollars
Amount in year T dollars X (Price level today) / (Price level year T)
What is the nominal interest rate?
Interest rate as usually reported without a correction for the effects of inflation.
What is the real interest rate?
Interest rate corrected for the effects of inflation and equals nominal interest rate - inflation rate
What does the real GDP tell you?
Gives an idea of the standard of living for an economy.
What is the growth rate?
How rapidly real GDP per person grew in the typical time. It ranks countries by income change.
What is productivity?
The quantity of good and services produced for each unit of labor.

It is the key determinant of living standard.
An economy''s ________ is an economy's _________.
income; output
What are the determinants of productivity?
Labor
education/skills
natural resources
physical capital
technological knowledge
How do governments encourage saving?
tax breaks
increased interest rate
increase sales tax
What is the Catch-Up Effect?
Countries that are more poor tend to grow faster.
What is a foreign direct investment?
A capital investment that is owned and operated by a foreign entity.
What is a foreign policy investment
Investment financed with foreign money but operated by domestic residents.
For the poorest countries, what are inward-oriented policies?
To avoid interaction with the rest of the world.
For he poorest countries, what are outward-oriented policies?
To integrate into the world economy.
What is the financial system?
A group of institutions in the economy that help match one person's savings with another investment.
What financial intermediaries?
Mutual Funds- sells shares to the public and use proceeds to buy a portfolio of stocks and bonds.
Banks- take deposits from savers and give loans to borrowers.
What are some advantages of mutual funds?
Diversification
Access to professional money manager
What is the Gross Domestic Product
Y=C+G+I+NX
In a closed economy NX equals what?
Zero (0)
National Savings (S) equals what?
S=I
I= Y-C-G
What is Policy 1?
Saving Incentives; shelter some savings from taxation
What is Policy 2?
Investment Incentives; investment tax credit
What is Policy 3?
If government runs a surplus, saving curve shifts to right, interest goes down.