Flashcards: Macroeconomics Topics Part One — 85 cards

What is gross domestic product (GDP)?

The market value of all final goods and services produced within a country in a given period.

What does GDP count regarding final and intermediary goods?

GDP counts final goods and services but counts intermediary goods only once.

Who can carry out domestic production counted in GDP?

Domestic production may be carried out by nationals or foreigners in firms owned by nationals or foreigners.

What is the formula decomposing GDP?

GDP is decomposed as $Y = C + I + G + NX$.

What does consumption include?

Household spending on goods and services except purchases of new housing.

What is investment in GDP terms?

Spending on capital equipment, inventories, structures, and household purchases of new housing.

How are net exports calculated?

Net exports equal spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents.

What is the formula for net exports?

Net exports are calculated as $NX = X - M$.

How is Real GDP computed?

Real GDP uses actual quantities valued at reference year prices.

What formula defines the GDP deflator?

GDP deflator equals nominal GDP divided by real GDP.

What was nominal GDP in 2016 in the example?

Nominal GDP was 3.7 in 2016.

What was real GDP at 2015 prices in 2017 in the example?

Real GDP was 3.2 in 2017 at 2015 prices.

Why is GDP not a perfect proxy for economic well-being?

Because it excludes intrinsic value, house production, leisure, environmental harm, and inequality.

What does the Consumer Price Index measure?

The overall cost of goods and services bought by a typical consumer.

How is the CPI calculated regarding basket prices and quantities?

By valuing the same reference basket with prices from different dates while keeping quantities fixed.

What does the inflation rate represent in terms of the consumption basket?

The percentage change in the price of the consumption basket from the preceding period.

What can bias the measurement of the Consumer Price Index?

Substitution, newly introduced goods, and unobserved quality changes or technical progress.

How do you calculate real value from nominal value and inflation?

Real value equals nominal value divided by inflation.

What is indexation in terms of money amounts and inflation?

Automatic correction of a money amount for inflation effects by law or contract.

What does the Gini index measure in inequality?

The area between the equality line and the Lorenz curve divided by total area under the equality line.

How are percentiles formed in income distribution?

By sorting people according to income levels into equal-sized groups.

What was the top-to-bottom income ratio in France in 2011?

8

What was the average after-tax monthly income for the bottom decile in France 2011?

522 dollars per adult.

Why is consumption inequality lower than income inequality?

Because consumption is shared within households and smoothed over time.

What factors smooth consumption inequality over time?

Borrowing, transitory shocks, and life-cycle smoothing.

What is the average gender pay gap in the European Union?

15%.

What is the gender pay gap for the same work in the European Union?

10%.

What is productivity in economic terms?

The quantity of goods and services produced per hour of a worker's time.

How is the growth rate expressed using output values?

As $g_t = \log\left(\frac{y_t}{y_{t-1}}\right)$.

What is the alternative expression for growth rate on a semi-log graph?

The slope $\Delta\log(y)/\Delta t$.

What does the production function represent?

Output as $Y = F(L,K,H,N)$ combining labour, capital, human capital, and resources.

What is technological knowledge?

Society's understanding of the best ways to produce goods and services.

How does technological knowledge affect production?

It affects the production function.

What are diminishing returns?

The declining benefit from an extra unit of input as its quantity increases.

What is the catch-up effect in economic growth?

Poor countries tend to grow faster than rich countries.

What are financial markets?

Institutions where savers directly provide funds to borrowers.

What distinguishes a bond from a stock?

A bond has unconditional repayment and guaranteed interest, a stock represents partial ownership with dividends.

What are financial intermediaries?

Institutions where savers indirectly provide funds to borrowers, acting as both borrower and lender.

What is the formula for aggregate saving in a closed economy?

$S = Y - C - G$ and it equals investment, so $S = I$.

What is the difference between private and public saving?

Private saving is household saving; public saving is government saving.

When is public saving positive or negative?

Public saving is positive with a budget surplus and negative with a budget deficit.

In the loanable-funds market, what roles do saving and borrowing play?

Saving supplies funds and borrowing demands funds.

What effect does a saving incentive have on the loanable-funds market?

It shifts supply right, lowers equilibrium interest rate, and increases loans.

Who qualifies as unemployed according to the definition?

A person without a job, available and ready to work at current wages.

How does the Labour Force Survey define an unemployed person?

Someone without a job willing to start within two weeks who has recently looked for work or is waiting to start.

How does the Labour Force Survey define an employed person?

Someone who worked more than one hour in the previous week.

What distinguishes frictional from structural unemployment?

Frictional is due to job search time; structural is due to no jobs in the market.

What adverse effect can poorly designed unemployment insurance cause?

It can create adverse incentives for workers.

How can governments improve job matching besides unemployment insurance?

By providing vacancy information and training schemes.

What are efficiency wages?

Wages above equilibrium paid to increase worker productivity.

What main theories explain efficiency wages?

Worker health, turnover, effort, and quality via adverse selection.

What is a union in labor economics?

A worker association bargaining collectively over wages and conditions.

How do union wage increases affect labor-market segmentation?

They create insiders with good conditions and outsiders without representation.

How can unions affect efficiency through bargaining power?

They can worsen efficiency or correct employer bargaining power imbalance.

Why do firms pay efficiency wages despite unemployment risk?

To increase worker productivity voluntarily.

Name one efficiency-wage mechanism related to worker health.

Better worker health improves productivity.

How do efficiency wages reduce worker turnover?

They lower turnover by making hiring and training costly to replace workers.

Why do efficiency wages improve worker quality?

Low wages discourage high-skill applicants, so higher wages attract better workers.

What are the three functions of money?

Medium of exchange, store of value, and accounting measure through public prices.

What does wealth consist of?

All the stores of value a person owns.

What is liquidity?

The ease of converting a store of value into a medium of exchange.

What distinguishes commodity money from fiat money?

Commodity money has intrinsic value; fiat money does not.

What is fiat money declared as?

Legal tender.

Which type of money includes bitcoin?

Peer-to-peer money.

What is a central bank?

A financial institution controlling money via monetary policy.

How much was M1 in the Eurozone?

9,705 billion euros.

What components made up Eurozone M1?

Currency and overnight deposits.

How do central banks inject money?

By helicopter drops and open-market operations.

What assets do central banks buy in open-market operations?

Less-liquid assets, typically government bonds.

What does fractional-reserve banking allow?

Banks to lend with reserves less than deposits.

What limits money creation in fractional-reserve banking?

Bank runs, prudence, and minimum reserve requirements.

What is the classical dichotomy in economics?

It is the separation of nominal variables from real variables.

What does monetary neutrality propose about money supply changes?

They do not affect real variables.

What is the quantity equation formula?

$MV = PY$

In the quantity equation, what does M represent?

Money supply.

What condition maintains price stability in money growth and production?

Money growth should equal production growth.

How is price stability expressed in the quantity equation?

$(M(1+g))V = P(Y(1+g))$

What is the Fisher relationship formula?

$1+r = \frac{1+i}{1+\pi}$

What is the approximate Fisher equation relating real and nominal interest rates?

$r = i - \pi$

What monthly inflation rate defines hyperinflation?

Inflation exceeding 50% per month.

When does an inflation tax occur?

When a government prints money or forces debt purchases to finance spending.

What mistaken belief does the inflation fallacy involve?

That overall purchasing power decreases during inflation.

What does purchasing power equal by definition?

Production.

What are shoeleather costs?

Time and effort spent moving wealth to avoid holding cash during inflation.

What are menu costs?

Costs firms face when frequently adjusting prices.