Macroeconomics Exam #2

Front 1

Interdependence

Back 1

When countries depend on each other for gods or services, helps out both countries

Front 2

Gains from Trade

Back 2

Consumption with trade minus consumption without trade, should be positive if it is an efficient trade

Front 3

Absolute Advantage

Back 3

The ability to produce a good using fewer inputs than another producer, can measure the cost of a good in terms of the inputs required to produce it

Front 4

Comparative Advantage

Back 4

The ability to produce a good at a lower opportunity cost than another producer, gains from trade arise from this

Front 5

Macroeconomic Indicators

Back 5

GDP, CPI, and Unemployment Rate

Front 6

What does GDP not value?

Back 6

Quality of the environment, leisure time, non-market activity, and equitable distribution of income

Front 7

Gross Domestic Product

Back 7

The market value of all goods and services currently produced within a country over a certain period of time

Front 8

Market Value

Back 8

Current price times the current quantity

Front 9

Final Goods

Back 9

Intended for the end user

Front 10

Intermediate Goods

Back 10

Used as components or ingredients in the production of other goods

Front 11

What does GDP include?

Back 11

Currently produced goods, tangible and intangible, and occurs within a country's borders

Front 12

Factor Income Approach

Back 12

Wages+Rent+Interest+Profits

Front 13

Spending (Expenditure) Approach

Back 13

C+I+G+NX= Y

Front 14

Components of GDP

Back 14

Consumption (C), Investment (I), Governmental Purchase (G), and Net Exports (NX)

Front 15

Consumption (C)

Back 15

Total spending by households on goods and services, housing is the biggest contributor (for renters not homeowners)

Front 16

Investment (I)

Back 16

Total spending on goods that will be used in the future to produce more goods, does NOT include actual investments such as stocks and bonds

Front 17

Capital Equipment Investment

Back 17

Investment spending that includes machines, tools, etc.

Front 18

Structure Investments

Back 18

Investment spending that includes buildings and structures

Front 19

Inventory Investments

Back 19

Investment spending that includes goods produced but not sold

Front 20

Governmental Spending (G)

Back 20

All spending on goods and services purchased by the government at the federal, state, and local levels (does not include transfer payments like social security or unemployment benefits)

Front 21

Net Exports (NX)

Back 21

Exports (X) minus imports (m)

Front 22

Nominal GDP

Back 22

Values output using current prices, it is NOT corrected for inflation

P(current year) x Q(current year)

Front 23

Real GDP

Back 23

Values based on output using the prices of a base year, it IS corrected for inflation

P(base year) x Q(current year)

Front 24

Percentage Change for any Variable

Back 24

(New-Old/Old) x 100

Front 25

GDP Deflator

Back 25

A measure of the overall levels of prices, can be used to accurately measure inflation by computing the % increase in GDP Deflator from year to year, will always be 100 in the base year

100 x (Nominal GDP/Real GDP)

Front 26

Ways of Measuring the Inflation Rate

Back 26

CPI, PPI, CII, and the GDP Deflator

Front 27

Consumer Price Index

Back 27

An important/most common measure on inflation, measures the typical consumer's cost of living

Calculated by the "fixing the basket", finding the prices, computing the basket, choosing a base year and computing the index, and compute inflation rate

Front 28

Inflation Rate Formula

Back 28

CPI this year-CPI last year/CPI last year x 100

Front 29

CPI Formula

Back 29

100 x Cost of basket in current year/Cost of

basket of the base year

Front 30

What are some problems with CPI?

Back 30

Substitution bias, introduction of new goods increases variety and allows customers to find products that more closely meet their needs, and improvements in the quality of goods increase the value of the dollar

Front 31

Substitution Bias

Back 31

Customers substitute towards goods that become cheaper

Front 32

Correcting Variables for Inflation Formula

Back 32

Amount in year T x (Price level today/Price level in year T)

Front 33

Indexation

Back 33

A dollar amount is indexed for inflation if is automatically corrected for inflation by law or in a contract

Front 34

Nominal Interest Rate

Back 34

Interest rate not corrected for inflation, rate of growth in $ (debit or credit)

Front 35

Real Interest Rate

Back 35

Interest rate corrected for inflation, rate of growth in the purchasing power of a deposit or debit

Front 36

Real Interest Rate Formula

Back 36

Nominal Interest Rate - Inflation Rate