Macroeconomics Exam 1

Why can't GDP be used to measure well-being?

GDP fails to account for nonmarket and illegal transactions, changes in leisure and in product quality, the composition and distribution of output, the environmental effects of pollution, and economic activity at earlier stages of production and distribution.

How has GDP changed since 1950?

GDP has grown 3.1%

nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation.

nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation. Compare with real gross domestic product (real GDP).

How has GDP per capita changed since 1950?

GDP per capita has grown 2%

inventory

Goods that have been produced but remain unsold.

infrastructure

The interconnected network of large-scale capital goods (such as roads, sewers, electrical grids, railways, ports, and the Internet) needed to operate a technologically advanced economy.

human capital

The knowledge and skills that make a person productive.

expenditures approach

The method that adds all expenditures made for final goods and final services to measure the gross domestic product.

income approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.

labor-force participation rate

The percentage of the working-age population that is actually in the labor force.

expansion

The phase of the business cycle in which real GDP. income, and employment rise.

value added

The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product.

base year

The year with which other years are compared when an index is constructed; for example, the base year for a price index.

What are criticisms of growth?

it degrades the environment, increases human stress, and exhausts the earth's finite supply of natural resources.

What are the benefits of growth?

primary path to higher living standards, that it need not debase the environment, and that there are no indications that we are running out of resources.

What key statistics do Macroeconomics focus on?

real GDP, unemployment, and inflation

business cycle

recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.

Economic growth

An outward shift in the production possibilities curve that results from an increase in resources supplies or quality or an improvement in technology; an increase of real output (gross domestic product) or real output per capita

price index

As index number that shows how the weighted-average price of a "marked basket" of goods changes over time relative to its price in a specific base year.

follower countries

As it relates to economic growth, countries adopt advanced technologies that previously were developed and used by leader countries.

leader countries

As it relates to economic growth, countries that develop and use the most advanced technologies, which then become available to follower countries.

increasing returns

An increase in a firm's output by a larger percentage than the percentage increases in its inputs.

What questions does Macroeconomics help clarify?

Macroeconomic models help to clarify many important questions about government economic policy.

What does macroeconomics study?

Macroeconomics studies long-run economic growth and short-run economic fluctuations.

What is National income (NI)?

National income is all income earned through the use of American-owned resources, whether located at home or abroad. NI also includes taxes on production and imports.

What is Net domestic product (NDP)?

Net domestic product (NDP) is the market value of GDP minus consumption of fixed capital (depreciation).

information technology

New and more efficient methods of delivering and receiving information through the use of computers, Wi-Fi networks, wireless phones, and the Internet.

How do you find real GDP?

Nominal GDP can be transformed into real GDP by dividing the nominal GDP by the GDP price index expressed in the hundredths.

What is Personal income (PI)

Personal income is all income received by households, whether earned or not.

disposable income (DI)

Personal income less personal taxes; income available for personal consumption expenditures and personal saving.

How do economies adjust to demand shocks in the long-run?

Prices become increasingly flexible so that demand shocks lead more to price changes than output and employment changes.

flexible prices

Product prices that freely move upward or downward when product demand or supply changes.

inflexible prices ("sticky prices")

Product prices that remain in place (at least for a while) even through supply or demand has changed; stuck prices or sticky prices.

intermediate goods and services

Products that are purchased for resale or further processing or manufacturing.

final goods and services

Products that have been purchased for final use (rather than for resale or further processing or manufacturing)

business cycle

Recurring incease3s and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases

Gross Domestic Product (GDP)

The total market value of all final goods and final services produced annually within the boundaries of a nation.

nondurable goods

A consumer good with an expected life (use) of less than three years service.

durable good

A consumer good with an expected life (use) of three or more years.

rule of 70

A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.

taxes on production and imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.

start-up firms

A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.

recession

A period of declining real GDP, accompanied by lower real income and higher unemployment.

inflation

A rise in the general level of prices in an economy; an increase in an economy's price level.

learning by doing

Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.

service

An (intangible) act or use for which a consumer, firm, or government is willing to pay.

How does an economy grow?

An economy can only grow if it invests, and it can only invest if it saves some of its current output. Thus saving is crucial to increasing investment and, consequently, future output.

consumption of fixed capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.

What happens to household savings?

Banks and other financial institutions channel household savings toward businesses, which invest in equipment, factories, and other capital goods as well as in the development of new productive technologies.

Why weren't there any sustained increases in living standards before the Industrial Revolution?

Before the Industrial Revolution, living standards did not show any sustained increases over time because any increase in output was usually offset by an equally large increase in population.

What is Disposable income (DI)

Disposable income is all income received by households minus personal taxes.

saving

Disposable income not spent for consumer goods; equal to disposable income minus personal consumption expenditures; saving is a flow compare with savings.

government purchases (G)

Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services.

gross private domestic investment (Ig)

Expenditures that increase the nation's stock of capital, which is the collection of physical objects and intangible ideas that help to produce goods and services. Includes spending on final purchases of plant machinery, and equipment by business enterprises, residential construction; changes in inventories; expenditures on the research and development (R&D) of new productive technologies; and money spent on the creation of new works of art, music, writing, film, and software.

How to calculate GDP?

GDP can be calculated as either the sum of all the money spent purchasing final goods and services (expenditures approach) or as the sum of all the incomes earned from providing the resources that went into producing those final goods and services (income approach).

investment

Expenditures that increase the volume of physical capital (roads, factories, wireless networks) and intangible ideas (formulas, processes, algorithms) that help to produce goods and services. Also known as economic investment. Not to be confused with financial investment.

net exports (Xn)

Exports minus imports.

What's the equation for the expenditures approach to GDP?

GDP = C + Ig + G + Xn (GDP = expenditure + gross domestic investment + government purchases + net exports)

real GDP (real gross domestic product

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal. Compare with nominal GDP.

real GDP

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as decimal.

net domestic product (NDP)

Gross domestic product less the part of year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock.

net private domestic investment

Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year.

Why are there large difference in standards of living today?

Large differences in standards of living exist today because technological leader countries like the United States have experienced up to 250 years of modern economic growth while technological follower countries have enjoyed modern economic growth for only a few decades.

network effects

Increases in the value of a product to each user, including existing users, as the total number of users rises.

What did nations experience after the Industrial Revolution?

Since the Industrial Revolution, many nations have experienced modern economic growth in which output grows faster than population so that living standards rise over time.

Why are prices inflexible?

Some prices are inflexible in order to please retail customers, others because rival firms are afraid that price changes may trigger a price war.

economic investment

Spending for the production and accumulation of capital, additions to inventories, or the research and development of new goods or services, including funds spent on the creation of new works of music, literature, or software. (For contrast, see financial investment).

supply shocks

Sudden, unexpected changes in aggregate supply.

shocks

Sudden, unexpected changes in demand (or aggregate demand) or supply (or aggregate supply).

demand shocks

Sudden, unexpected changes in demand.

expectations

The anticipations if consumers, firms, and others about future economic conditions.

growth accounting

The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.

efficiency factor

The capacity of an economy to achieve allocative efficiency and productive efficiency and thereby fulfill the potential for growth that the supply factors (of growth) make possible; the capacity of an economy to achieve economic efficiency and thereby reach the optimal point on its production possibilities curve.

gross output (GO)

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output.

personal income (PI)

The earned and unearned income available to resource supplier and others before the payment of personal taxes.

How does the economy's stock of private capital change?

The economy's stock of private capital expands when net investment is positive; stays constant when net investment is zero; and declines when net investment is negative.

personal consumption expenditures (C)

The expenditures of households for both durable and nondurable consumer goods.

unemployment

The failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.

supply factors

The four determinants of an economy's physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve. The four determinants are improvements in technology plus increases in the quantity and quality of natural resources, human resources, and the stock of capital goods.

modern economic growth

The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita.

WTF

The income approach to GDP sums compensation to employees, rent, interest, proprietors' income, corporate profits, and taxes on production and imports to obtain national income, and then subtracts net foreign factor income and adds consumption of fixed capital and a statistical discrepancy to obtain GDP.

peak

The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. At the peak, the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.

trough

The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. At the trough, the economy experiences substantial unemployment and real GDP is less than potential output.

financial investment

The purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as a house, land, or factories) in the expectations of financial gain.

catch-up growth

The rapid increases in real GDP per capita that can be achieved when a poor follower country adopts, rather than reinvents, cutting edge technologies that took leader countries decades to invent and implement.

demand factor

The requirements that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible.

economies of scale

The situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and, hence, its output).

national income accounting

The techniques used to measure the overall production of a country's economy as well as other related variables.

national income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes.

labor productivity

Total output divided by the quantity of labor employed to produce it; the average product or output per hour of work.

How do economies adjust to demand shocks in the short-run?

When prices are sticky, the economy adjusts to demand shocks mostly through changes in output and employment (rather than through changes in prices).

multiple counting

Wrongly including the value of intermediate goods in the gross domestic product, counting the same good or service more than once.

How do economists measure economic growth?

an increase in real GDP or an increase in real GDP per capita over time.

What are the determinants of economic growth?

four supply factors (increases in the quantity and quality of natural resources, increases in the quantity and quality of human resources, increases in the stock of capital goods, and improvements in technology), one demand factor (increases in total spending), and one efficiency factor (allocative and productive efficiency).

Why was there a low productivity growth rate after 2010?

high debt levels, overcapacity, the rise of "free" internet products, and a slowdown in technological progress.

real GDP per capita

inflation-adjusted output per person; real GDP/population

Why was there a high labor productivity growth rate between 1995 and 2010?

information technology revolution, start-ups, increasing returns, and heightened global competition.

What do institutional structures have that promote growth?

strong property rights, patents, efficient financial institutions, education, and a competitive market system.