Macro exam 1 -chapter 6
What does the research by Stevenson and Wolfers suggest about the relationship between income and life satisfaction?
The research suggests a positive relationship between income and life satisfaction, with increases in income generally leading to higher levels of life satisfaction or happiness.
Macroeconomics
The study of the economy of an entire nation or society.
What are the three primary uses of GDP data?
The three primary uses of GDP data are to measure living standards, economic growth, and business cycles.
Why do some individuals lament the shift towards a service-dominated economy in the U.S.?
They believe manufacturing industries are necessary for future growth.
How are consumption goods categorized?
durable- goods are consumed over a long period of time nondurable- Goods are consumed over a short period of time
The underground economy
encompasses transactions that are not reported to the government and therefore are not taxed
In macro, we examine
the total output in an economy, total employment, and consider all prices
How can the growth rate of nominal GDP be decomposed into its components?
using the formula: Growth rate of nominal GDP ≈ Growth rate of real GDP + Growth rate of the price level.
How is economic growth defined in relation to GDP data?
Economic growth is defined as changes in living standards over time, which is evident in GDP data showing increases in real per capita GDP.
How is economic growth measured?
Economic growth is measured as the percentage change in real per capita GDP, which adjusts for both population growth and inflation.
What is a business cycle?
A business cycle is a short-run fluctuation in economic activity characterized by alternating periods of expansion and contraction.
What is Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a nation's borders during a specific period, typically a year.
Why is per capita GDP a better indicator of living standards for a typical person than total GDP?
Per capita GDP is a better indicator of living standards for a typical person because it accounts for differences in population size, providing a more accurate representation of the average income available to each individual within a nation.
What does per capita GDP measure?
Per capita GDP measures the average GDP or income per person within a country by dividing the total GDP by the population.
Microeconomics
Considers the behavior of individual people, firms, and industries
What is the definition of "consumption" in macroeconomics?
Consumption refers to the purchase of final goods and services by households, excluding new housing.
Why are output and income discussed together in this chapter?
Output and income are discussed together because they represent the same concept: the wealth of nations and individuals.
What does "domestic" signify in "gross domestic product"?
"Domestic" in "gross domestic product" refers to goods and services produced within a nation's borders, regardless of ownership.
What key results did Stevenson and Wolfers find in their research on income and life satisfaction?
1. Wealthier individuals report greater life satisfaction than poorer people within the same country. 2. Wealthier nations report greater life satisfaction than poorer nations.
Can you explain the challenge of adding different goods and services to compute GDP?
Adding different goods and services to compute GDP presents a challenge because the items vary greatly in value, and simply adding their quantities would lead to incorrect conclusions about their economic significance.
What is the significance of adjusting GDP for inflation?
Adjusting GDP for inflation is important to compute real GDP, which accounts for changes in the overall level of prices over time, ensuring that GDP changes accurately reflect changes in the quantity of goods and services produced.
What is the difference between nominal GDP and real GDP?
Nominal GDP reflects current market values, while real GDP adjusts for changes in price levels over time.
How do economists compute GDP for goods and services?
Economists compute GDP for goods and services by using market values, which include both the quantity data and the price of the good or service.
Why do economists measure the total output of an economy?
Economists measure the total output of an economy as a gauge of its overall health.
How do economists view a healthy economy in terms of output?
Economists view a healthy economy as one that produces more and more valuable output over time.
What are examples of consumption goods mentioned in the passage?
Examples include groceries, automobiles, haircuts, doctor's visits, and help from a real estate agent.
Give examples of investment mentioned in the passage.
Examples include purchases of shovels, tractors, personal computers, construction of large factories, and building new houses.
What are expansions and contractions in the context of a business cycle?
Expansions occur from the bottom of a trough to the next peak, characterized by increasing economic activity, while contractions occur from the peak downward to the next trough, characterized by declining economic activity.
How does GDP computation address the issue of adding goods and services with different values?
GDP computation addresses the issue by valuing goods and services at their market prices, allowing for a more accurate reflection of their economic contribution.
How are GDP data used to measure business cycles?
GDP data are used to determine whether an economy is expanding or contracting in the short run, providing insights into the phases of the business cycle, such as recessions and expansions.
What does GDP data reveal about business cycles?
GDP data helps determine whether an economy is experiencing recession or expansion by analyzing fluctuations in the total output of goods and services over time.
How does GDP data reflect differences in living standards between nations?
GDP data reflects differences in living standards by indicating the ability of individuals within a nation to afford basic necessities and desired goods and services based on their income.
Why is using GDP alone to compare the well-being of citizens in different countries unsound?
GDP does not account for negative environmental side effects or the quality of life beyond material goods and services, leading to an incomplete assessment of well-being.
Can you explain how GDP helps in measuring economic growth?
GDP helps in measuring economic growth by tracking the increase or decrease in the total value of goods and services produced within a nation over time.
How does GDP differ from GNP?
GDP includes goods and services produced domestically, while GNP includes output produced by residents of the nation, regardless of location.
How is GDP calculated using market values?
GDP is calculated by adding the market values of all goods and services produced within a country during a specific period. This involves multiplying the quantity of each good or service produced by its respective price.
How is GDP calculated?
GDP is calculated by summing up the total spending on goods and services within a nation's borders.
Why is GDP considered a useful measure for estimating living standards across time and place?
GDP is considered a useful measure for estimating living standards across time and place because it tracks changes in both output and income, providing an indication of improvements or declines in living standards.
How is GDP defined?
GDP is defined as the market value of all final goods and services produced within a country during a specific period.
How is GDP accurately measured in relation to intermediate goods?
GDP is measured either by final selling price or value added at each production step, but not both, to avoid double counting.
How does GDP measure living standards?
GDP measures living standards by assessing the ability of individuals within a nation to afford basic necessities and a comfortable lifestyle based on their income.
What does GDP measure from a particular time period?
GDP only counts goods and services produced during a given time period, excluding goods produced in earlier years and sales of financial assets like stocks and bonds.
How does GDP fail to capture differences in leisure time among countries?
GDP only counts market activity and does not account for differences in the number of hours worked per week, resulting in a misleading comparison of GDP across countries with varying work hours.
What is the significance of GDP in measuring the economy?
GDP serves as a vital indicator of the economy, as an increase indicates higher national output and income, while a decrease signifies a decline in both output and income.
How are growth rates calculated in macroeconomics?
Growth rates are calculated as percentage changes in a variable. For example, the growth of GDP can be computed as the percentage change in GDP from one period to another.
Why are growth rates useful in macroeconomic analysis?
Growth rates convey additional helpful information about economic performance, such as whether an economy is expanding or contracting, and at what rate.
Why do imports not directly contribute to GDP, even though they are accounted for in the equation?
Imports are accounted for in the GDP equation, but they do not directly contribute to GDP because our goal is to measure domestic production accurately.
What are intermediate goods, and why are they not included in GDP?
Intermediate goods are used in production but not sold directly to consumers, to avoid double counting.
What is included in the definition of "investment" in macroeconomics?
Investment refers to private spending on tools, plant, and equipment used to produce future output.
Why is it important to consider both price and quantity information when calculating GDP?
It is important to consider both price and quantity information when calculating GDP because market values reflect both aspects, allowing for a more accurate representation of the economic contribution of goods and services.
Why is it necessary to compute GDP in terms of market values rather than quantities?
It is necessary to compute GDP in terms of market values because nations produce a wide variety of goods and services measured in various units, and simply adding quantities would not accurately reflect their relative economic importance.
Why is it necessary to use "real" GDP when analyzing data over several years?
It is necessary to use "real" GDP when analyzing data over several years to adjust for price changes caused by inflation, ensuring accurate comparisons of GDP across different time periods.
What is the importance of investment spending according to most economists?
Most economists agree that investment spending leads to greater future GDP.
How are net exports calculated, and what does a negative value indicate?
Net exports are calculated as total exports minus total imports. A negative value indicates that spending on imports is larger than spending on exports.
What types of purchases are included in government spending?
Purchases of final goods and services, buildings, equipment, supplies, and public works projects by all levels of government are included in government spending.
What is real GDP, and why is it important?
Real GDP is GDP adjusted for price changes caused by inflation. It is important because it allows for accurate comparisons of economic output over time by accounting for changes in the overall level of prices in an economy.
How is real GDP calculated?
Real GDP is calculated by adjusting nominal GDP using a measure of overall prices known as the price level. nominal gdp/ price level x 100
What term is sometimes used interchangeably with real GDP?
Real GDP may also be referred to as "GDP in constant dollars" or "GDP in base year prices" in economic discussions.
What is the purpose of using real GDP?
Real GDP provides a more accurate measure of economic growth by accounting for changes in the general level of prices over time.
Are recessions more common or less common today compared to the past, and why?
Recessions are less common today compared to the past. Figure 6.5 shows a decline in the frequency and duration of recessions over the last 150 years, with fewer months spent in recession in recent decades.
What are recessions, and how are they defined?
Recessions are short-term economic downturns that typically last about six to eighteen months. They are defined by a significant decline in economic activity, including falling income levels and increased unemployment rates
What analogy is used to explain the importance of measuring national economic output?
The analogy used is comparing measuring national economic output to using a thermometer to gauge overall health, where a decrease in output indicates a potential issue.
Why do some nations prefer GDP over GNP?
Some nations prefer GDP over GNP because it measures production within their borders, including output from foreign-owned firms, leading to a larger GDP than GNP.
What are some shortcomings of GDP data as a measure of economic well-being?
Some shortcomings include the failure to account for changes in prices (addressed by real GDP), the exclusion of nonmarket goods and services, and the lack of consideration for factors such as income distribution and environmental sustainability.
Why do purchases by businesses that add to their inventories count as investment?
Such purchases count as investment because they contribute to increasing output in the future.
Which U.S. government agency is responsible for tallying GDP data?
The Bureau of Economic Analysis (BEA) is responsible for tallying GDP data.
What has been the trend in the composition of U.S. GDP over time?
The U.S. GDP has shifted from manufacturing goods to services.
What are the four major categories into which GDP is broken down?
The four major categories are consumption (C), investment (I), government purchases (G), and net exports (NX).
What does the growth rate of the price level (GDP deflator) indicate?
The growth rate of the price level indicates the percentage change in the average prices of goods and services throughout the economy, reflecting inflation or deflation.
What is the primary goal of national income accounts according to the passage?
The primary goal is to keep a record of how people are buying the goods and services produced in a nation.
Underground transactions examples
Tips for waiting tables intending bars, lawn services, and even home renovations
Why do transfer payments not count as GDP?
Transfer payments do not count as GDP because they are not direct purchases of new goods and services.
What are two reasons why people today overestimate the occurrence of recessions?
Two reasons are that the effects of recessions can linger long after the recession is officially over, and bad news tends to attract media attention, leading to heightened awareness and reaction from the public.
What is the relationship between real per capita GDP and happiness according to economists Betsey Stevenson and Justin Wolfers?
Wealthier individuals and nations tend to report greater life satisfaction or happiness, as indicated by research findings by Betsey Stevenson and Justin Wolfers.
In micro, we examine
output of a single firm or industry, employment of a single firm or industry, and the price of one product
Services
outputs that provide benefits without producing a tangible product- visiting your doctor for a physical
Final goods
products that are purchased by their end users
In marco, you consider
the fuses and consequences of changes in the national employment levels, and other overall price level in an economy
What do you study in microeconomics
what ppl buy, what jobs they take, and how they distribute their income between consumption and savings