ecn1b

International data on GDP and socioeconomic variables

leave no doubt that a nation's GDP is closely associated with its citizens' standard of living

real interest rate formula

nominal interest rate - inflation rate

Productivity formula

output/input or output/ (#of workers x hours worked)

What is "per person"?

per capita

Consumption does not include

purchases of new housing

foreign portfolio investment

an investment that is financed with foreign money but operated by domestic residents

In the simple circular- flow diagram, with households and firms, GDP can be computed

as the income received by households, in the form of wages, rent, and profit

net exports

exports minus imports

GDP is not a perfect measure of well-being; for example,

GDP fails to amount for the quality of the environment

per capita

GDP/population

Inflation Formula

GDPDeflator(current year)- GDPDeflator(past year)/GDPDeflator(past year) x100

Foreign Direct Investment (FDI)

Investment made by a foreign company in the economy of another country.

Each day Sue works 8 hours and produces 7 units of goods and services. Mary works 10 hours each day and produces 10 units of goods and services. It follows that

Mary's productivity is higher than Sue's

GDP deflator formula

Nominal GDP/Real GDP x 100

Is Nominal or Real GDP the better measure of production in the economy?

Real GDP

What does GDP include?

goods and services that are sold to the end user

Inward-oriented policies

include imposing tariffs and other trade restrictions

imported consumer goods

included in CPI, excluded from GDP deflator

Personal Income

income received by households

Harry spent $39,000 in 2009 and $42,000 in 2014 on goods and services. The consumer price index was 220 for 2009 and 231 for 2014. Harry's 2009 spending in 2014 dollars is about

$40,000

In 2015, output per capita (or GDP per capita) in the U.S was approximately equal to

$55,000

In a given year, suppose a company spends $100 million on intermediate goods and $200 million on wages, with no other expenses. Also assume that its total sales are $800 million. The value added by this company equals

$700 million

CPI formula

(Cost of living in Year T/ Cost of living in Base Year)x100

Value added

(final price x quantity produced) - (price of intermediate x quantity intermediate)

Problems with CPI

1) Substitution bias - fixed basket we does not account for how consumers substitute away from products whose relative price increases (2) Introduction of new goods lags in inclusion of new good into CPI basket (3) Unmeasured quality change - hard to measure

What are the 5 steps to calculate CPI?

1. fix the basket 2. find the prices 3. compute basket's cost 4. choose a base year and compute index 5. compute inflation

In 2010, the imaginary nation of Bovina had a population of 5,000 and real GDP of 600,000. In 2011, it had a population of 5,200 and real GDP of 636,480. During 2011, real GDP per person in Bovina grew by

2 percent, which is the same as average U.S growth over the last one-hundred years

If nominal GDP rises from $100 trillion to $120 trillion, while GDP deflator rises from 2.0 to 2.2, the percentage change in real GDP is

9.1%

CPI inflation rate formula

CPI this year- CPI last year/ CPI last year x100

Sophia puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year,

Sophia will have 5% more money, which will purchase 3% more goods

In an imaginary economy, consumers buy only razors and cologne. The fixed basket consists of 6 razors and 4 bottles of cologne. A razor cost $20 in 2009 and $25 in 2010. A bottle of cologne cost $30 in 2009 and $40 in 2010. Using 2009 as the base year, which of the following statements is correct?

The rate of inflation is 29.17% in 2010

A Minnesota farmer buys a new tractor made in Iowa by a German company

U.S investment and GDP increase, but German GDP is unaffected

GDP Formula

Y=C+I+G+NX (consumption + investment + government purchases + net exports)

What is CPI based on?

a fixed basket of purchases

Other things the same, a country that increases its savings rate will have

a higher future capital and higher future real GDP per person

Comparing dollar figures from different times

amount in today's dollars = amount in year T dollars x (CPI today/CPI in year T)

For The U.S economy, which of the represents the largest component of GDP?

consumption

What are the four expenditures of GDP?

consumption, investment, government purchases, and net exports

capital goods

excluded from CPI, included in GDP deflator (if produced domestically)

Country A and Country B are the same except Country A currently has more capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then

output in country A increases by less than in country B

What are the determinants of productivity?

physical capital, human capital, natural resources, technological knowledge

If there are diminishing returns to capital, then

poor countries grow faster than rich countries increases in the capital stock increase input by even smaller amounts

what is included in investments?

production of "real things" ex: machines NOT purchases of financial assets like stocks

The one variable that stands out as the most significant explanation of large variations in living standards around the world is

productivity

What do we exclude from GDP?

sale of used items that were produced (and counted) in a previous period

What is technological knowledge?

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

Which of the following is included in the investment component of GDP?

spending on new residential construction but not spending on stocks and bonds

An important difference between the GDP deflator and the consumer price index is that

the GDP deflator reflects prices of all final goods and services produced domestically, whereas CPI reflects the prices of goods and services bought by consumers

Disposable Personal Income (DPI)

the income of households after taxes have been paid

What are natural resources?

the inputs into production that nature provides (land, rivers, and mineral deposits)

Real GDP

the production of goods and services valued at constant prices

The catch- up effect

the property whereby countries that start off poor tend to grow more rapidly than rich ones

What is human capital?

the skills and knowledge gained by a worker through education, training, and experience

What is physical capital?

the stock of equipment and structures that are used to produce goods and services

Nominal GDP

the value of final goods and services evaluated at current-year prices

Which of the following is included in Singapore's GDP?

the value of production by an American working in Singapore

What does GDP measure within a country?

the value of production within geographic borders of a country

National Income

total income earned by everyone in the economy

Net National Product (NNP)

total production of a nation's residents (GNP) minus depreciation

Period of time

usually a year or a quarter (3 months)