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)