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87 Cards in this Set
- Front
- Back
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Is there one macroeconomic variable that sums up everything we need to know about the economy? |
There is no one economic variable that we look at. Macroeconomists look at a whole bunch of data. |
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What sort of data do we look at to see how the economy is doing? |
Three main variables: 1. GDP 2. Unemployment 3. Inflation
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What institutions collect this data? |
Bureau of Labor Statistics (BLS) Federal Reserve
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Why are the data revised? |
We get data fairly regularly - data revisions are every 3 months. We look at growth rates of previous quarters. WHY? It is really hard to get in 2 months how much we produced, and its expensive - so we estimate periodically |
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How are empirical macroeconomists limited by the available data? |
Macroeconomists only have one data series. Our data only goes back to the 1940s |
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What is GDP? |
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a given region over a period of time |
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What does market value mean? |
It gives us a relative weight of importance. Market prices measures the amount people are willing to pay for different goods, reflect the value of those goods ASSUMES A PERFECT MARKET |
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What does GDP exclude? |
Illegal Goods - drugs, sex, illegal guns
Unpaid services
Environmental services |
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How can that lead to weird change in the level of GDP? |
CHILD CARE - In an example such as child care - GDP did not include it in the past since it was the mother's job to care for the child. However today child care is not included in GDP since we pay someone to do it
HOME GARDENING - More and more people have their own garden and grow their own vegetables - so it is not included in GDP
PRODUCTION CONTINUES REGARDLESS OF WHETHER IT IS COUNTED IN GDP OR NOT |
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What is an intermediate good? |
A good used for further production (something that comes in the middle e.g. flour)
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What is a final good? |
a good that is ultimately consumed: used for consumption by households
WHY? We only count the final good in GDP because the value of the intermediate good is already included in the prices of the final goods. Adding both market values would be double counting |
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How do inventories get factored into GDP? |
Intermediate goods get held as inventories. We add the change in inventories to GDP |
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Do we count all sales transactions in GDP? |
Not all sales count - only things produced in that time frame matter: - antiques - used cars HOWEVER: We account for value added (difference between old and new) |
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Why is it domestic and not national? |
If it is produced nationally we still look at GDP when sold w/in domestic borders
reporting domestic gross product- whats within our borders: states - we care about where people work
reporting national gross product - we care about where people live |
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What is seasonal adjustment? |
Period of time - typically annually - data is reported quarterly (Every 3 months) and then annualized |
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What is the equation that represents GDP? |
Y = C + I + G +NX |
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What is Y? |
Production, Spending, Income, Output
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What is (C) consumption? |
Adds up all the spending by households |
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What is (I) investment? |
Spending by firms - purchase of physical capital that increase production in the future i.e. property, buildings, etc
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How is the definition of investment for economics different than the investment in the business world? |
In the business world we want interest rate to increase to invest in stocks and bonds
In economics, when interest rates go up, firms invest less because its expensive to borrow |
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what are government expenditures (G)? |
Spending by federal, state, local governments ex. employee salaries (police, governors, etc) , highway building)
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What is a transfer payment? |
Money that is transferred across time or between tax payers tax returns, social security, unemployment insurance, welfare |
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What are net exports (NX)? |
Exports (things foreigners buy from US) -Imports (things produced by foreigners and bought by US) Spending by and to foreigners
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Why do we use prices ? |
We measure GDP with market value (price) because prices change over time and we want to measure the price level |
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What is Consumer Price Index (CPI)? |
a measure of the overall cost of the goods and services bought by a typical consumer (a unit free way of measuring prices) |
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How do we construct consumer price index? |
1. Fix a basket of goods - quantity needs to be constant in order to see change
2. Calculate the value of the basket in all time periods
3. Divide all values by the value of the base year (most of the time multiply by 100)
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How do we calculate inflation? |
1. Find CPI 2. Calculate inflation Rate of change of price index: today-yesterday/ yesterday *(100 for %)
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What are some problems of measuring the cost of living with CPI? |
substitution bias - a price index does not allow for behavior to change
introduction of new goods
unmeasured quality change |
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-What is a producer price index? |
a measure of the cost of a basket of goods and services bought by firms
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What is substitution bias? |
Consumers respond to these differing price changes by buying less of the goods whose prices have risen by relatively large amount and by buying more of the goods whose prices have risen less or perhaps have fallen. Consumers substitute towards goods that have become relatively less expensive. |
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How does the introduction of new good complicate the situation? |
introduction of new goods poses a problem - when a new good is introduced, consumers have more variety from which to choose, and this in turn reduces the cost of maintaining the same level of economic well-being *new things didn't have a price of 0 (can't divide by 0) |
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What about unmeasured quality change? |
unmeasured quality change - when the quality of a product improves without effecting the price, it understates inflation
when the quality of a product decreases without effecting the price, it overstates inflation |
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What is nominal GDP? |
Nominal GDP is GDP calculated at current prices (BOOK: the production of goods and services valued at current prices) |
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What is real GDP? |
GDP calculated using constant prices (fix the price and see the value of different quantities)
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What is an alternative to using CPI to calculate inflation? |
Inflation is a change in prices. We can use GDP deflator to also calculate change in prices |
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What is GDP deflator? |
GDP deflator = Nominal GDP /Real GDP (^P*^Q)/^Q =^P
A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 |
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How does GDP deflator differ from the CPI? |
CPI only accounts for a fixed basket
GDP deflator accounts for whole economy (gov't, businesses, etc), not just consumers
GDP deflator accounts for substitution bias
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How does the idea of nominal and real translate to interest rates? |
interest rate... |
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What is a nominal interest rate? |
The rate you pay in dollars to borrow money and does not account for changes in price
(Book def: the interest rate as usually reported without a correction for the effects of inflation)
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What is the real interest rate? |
The rate you pay in goods or services to borrow goods and services
(book def: the interest rate corrected for the effects of inflation)
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Inflation |
an increase in the overall level of prices in the economy
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Inflation rate |
the percentage change in the price index from the preceding period |
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What is a simple equation that explains the relationship between inflation and nominal and real interest rates? |
Fisher equation: real interest rate = nominal interest rate - inflation rate
nominal interest rate = real + inflation i_t = R_t + Pi_t |
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What organization measures unemployment? |
Bureau of Labor Statistics (BLS) prepares the reports
Conduct current population survey
Call 60,000 people every month (these people represent entire US population |
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Where do the data come from? |
The Bureau of Labor Statistics (BLS) asks multiple questions in the survey to put into 4 categories
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What categories are each adult placed into? |
1. Employed 2. Underemployed 3. Unemployed 4. Not in the labor |
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What does it mean to be employed? |
- Has a full time or part time job or works in family business for no pay
- Under the table payments count |
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What does it mean to be unemployed? |
- no job, were available for work, but actively searching in the past 4 weeks
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What does it mean to be underemployed? |
- relying on seasonal employment
- marginally attached, discourage workers, workers part-time for economic reasons (employers cut back on hours) |
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What does it mean to be not in the labor force ? |
Retirees, students, disabled, homemakers |
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What is the labor force? |
total number of workers, including both employed and unemployed
labor force = # of employed + # of unemployed
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What is the unemployment rate? |
The percentage of the labor force that is unemployed
unemployment rate = # of unemployed *100 /labor force
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What is the labor-force participation rate? |
The percentage of the adult population that is in the labor force
labor-force participation rate = labor force *100 /adult population |
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Who makes up the adult population? |
labor force + not in the labor force |
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What is a discouraged worker? |
A worked who is not in the labor force - they moved from unemployment to not in the labor force because they have given up on the job search
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Why are there always some people unemployed? |
There is a natural rate of unemployment. It is made up of frictional and structural unemployment |
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What is frictional unemployment? |
TIME - related to costs of job matching
- unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
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What is structural unemployment? |
# OF JOBS unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one |
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How does unemployment vary by gender and race |
Once in the labor force, men and women have similar rates of labor-force participation.
Black workers have similar rates of labor-force participation but higher rates of unemployment |
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Which country was the fastest growing country over the past 100 years? |
Japan is the fastest |
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Is it surprising that Japan is the fastest growing country over the past 100 years? |
Yes - We don't realize how poor Japan was before the World Wars
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Why are we interested in the growth of GDP? |
We care about GDP growth because we care about standards of living (which countries grow and with ones dont) |
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If GDP per capita grows at 2% a year, how many years does it take to double |
RULE OF 70 70/growth rate = time until double
70/1% = 70 years
70/2% = 35 years before GDP doubles
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What can international data tell us about economic growth? |
Just because you are poor doesn't mean you can't grow fast
GDP -> productivity
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Why is productivity important? |
Productivity determines standard of living |
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What are the four determinants of productivity? |
1. Physical capital per worker 2. Human capital per worker 3. Natural resources per worker 4. Technological knowledge
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Why is it important to put things in terms of per worker? |
Productivity is the amount produced per unit of labor. We want to look at what those laborers are working with and it is easier to know how many workers there are instead of hours of labor |
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What is physical capital? |
Stock of equipment and structures used to produce goods |
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What is human capital? |
The stock of knowledge and skills that workers acquire through education, training and experience.
*learning what that best way to produce a particular thing is |
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What are natural resources |
inputs to production provided by nature (land, rivers, minerals) |
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What is technological knowledge? |
societies understanding of the best (most efficient) way to produce goods |
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If growth is important what can we do to encourage growth? |
Public policy can increase economic growth if it can influence those 4 factors that determine productivity |
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Why is saving and investment important? |
- it helps improve human capital
- saving and investment cost consumption today for a payout in the future
-trade off - short term |
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How does the government encourage saving |
tax-free savings account FAFSA PELL grants Capital Gains Tax (low) Requirement of a HS diploma
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What are diminishing returns? |
When workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increase their productivity only slightly |
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What is the catch up effect? |
All other things being equal, it is easier for a country to grow fast if it starts out relatively poor.
Countries that are poor are naturally going to grow faster than rich countries |
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How should this temper our idea of effects government policy? |
In regards to the catch up effect, small amounts of capital investment can substantially raise these worker's productivity
Policies aimed at increasing a country's saving rate can increase investment and, thereby, long-term economic growth |
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What is foreign direct investment? |
A capital investment that is owned and operated by a foreign entity
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Why has Mexico experienced so much growth in the last 100 years? |
Lots of US companies are conducting foreign direct investments in Mexico because labor is cheaper |
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How doe education play into economic growth? |
Education is the easiest way for gov't to increase human capital |
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What externalities exist with human capital? |
increase education, increase technology, increase ideas and innovation
you might generate new ideas that increases productivity beyond human capital
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What is brain drain? |
Poor countries that educate their workers lose highly educated people
Highly educated people want to living in rich countries
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How can health and nutrition influence human capital? |
Increase health of workers, if you are healthier you are more likely to be more productive
(height can be used as a proxy for health - tall people tend to earn more) |
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How do property rights effect growth? |
Patents enforce property rights -They encourage production of new ideas - increase technology - ideas are a public good |
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what is a public good |
a good that is freely accessible by All
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Why might the government increase research and development? |
Standards of living are higher today that they were a century ago because technological knowledge has advanced. Gov't would want to increase research and development to increase our technology |
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Why is free trade an important component to economic growth? |
consumption free trade lowers prices which allows for more investment
investment free trade gives us physical capital without giving up consumption |
