Macro Exam 2 (Ch. 5-7)

Capital Income

Any form of payment that compensates people for their work.

Labor Income

Any form of payment that derives from owning physical or financial capital.

Economic Institutions

Aspects of a society that concern economic transactions.

Political Institutions

Aspects of a society's rules that concern the allocation of political power and the constraints on the exercise of political power.

This identity is the key conceptual point of chapter 5 and the foundation on which most macroeconomic analysis is built.

Production = Expenditure = Income

GDP is released (monthly/quarterly)

Quarterly

___________________ GDP is what is often discussed in headlines.

Real GDP

What does real GDP help us focus on?

Real GDP helps us focus on how much the economy is producing at different points in time without letting price movements muddy up the comparison.

Foreign factories ____________________ (do/don't) count towards GDP.

do

(GDP/GNP) includes production of a worker abroad who normally resides in the U.S. and excludes U.S. production owned by foreigners.

GNP

What can greater inequality lead to?

Greater inequality can lead to more social polarization and more crime.

Growth Equation

Growth of t, t + 1 = (y(of t+1) - y(of t))/y(of t)

Proximate Causes of Prosperity

High levels of factors such as human capital, physical capital, and technology that result in a high level of GDP per capita. Doesn't explain WHY these levels are high though.

Extractive economic institutions (foster/impede) entrepreneurship.

Impede

What is excluded from GDP?

- Capital Deprecation - Underground Economy - Secondary/Secondhand Sales - Home Production - Overseas Production - Unreported Transactions (Tips)

What do exchange-rate-based measures fail to show us?

- Exchange-rate-based measures don't tell us how much that money can buy. They fail to account for the fact that prices vary across countries. - Exchange rates fluctuate for a variety of reasons that aren't related to differences in the cost of living.

Poverty can be reduced by:

- Increasing international trade - Reducing tariffs on poor countries - Improving technology and globalization.

Inclusive Economic Institutions _______________________.

- foster economic activity, productivity, growth, and economic prosperity.

All four of these types of transactions must be ____________________ (different/the same) in market value.

the same

The estimated value of US home production is ______________________ (20% of the production overlooked by GDP).

$3.5 Trillion

(Positive/Negative) externalities occur when an economic activity has a spillover BENEFIT that does not directly affect those engaged in the activity.

Positive

Only ______________________ purchases are included in GDP.

Primary

____________________ represents the goods and services that are produced by firms.

Production

Two main possible implications of extractive economic institutions are _______________________.

1) By creating insecure property rights and limiting legal backup, they make entrepreneurship less profitable and shift the return-to-entrepreneurship schedule leftwards. 2) By erecting entry barrieres, they make entry more costly and shift the opportunity cost schedule upwards.

Expenditure-based national income account purchases can be assigned to five categories:

1) Consumption 2) Investment 3) Government Expenditure 4) Exports 5) Imports

Three important elements of institutions:

1) They are determined by individuals as members of society 2) They constrain behavior 3) They shape behavior by determining incentives.

Similarities between GDP and CPI

1. Both use target year prices in the numerator and base-year prices in the denominator. 2. Both formulas have the same interpretation: a higher ration implies a greater price increase from the base year to the target year. 3. Both formulas contain a ratio that compares what it would cost to buy a particular set of goods in the target year (numerator) to what it would've cost to buy the same goods using base-year prices (denominator).

What are the three main differences between the GDP basket and the consumer basket?

1. The GDP basket includes things households don't purchase (subway, power plants, etc.). Consumers don't directly buy these. 2. The consumer basket includes things that are in consumer basket but not in GDP (i.e. a Chinese laptop bought by a U.S. consumer). 3. Products can have different "weights" in each basket (i.e. housing costs are higher in a consumer basket)

Deprecation tends to equal about _______% of GDP

10-20%

The Malthusian cycle is a good representation of the ______________ world.

1800s

What is an accounting​ identity? (Can choose more than one) A. It is an equality that must be true regardless of the value of its variables. B. It is a statement that by definition must be true. C. It is a technique accountants employ in the preparation of income statements.

A and B An accounting identity is an equality that must be true regardless of the value of its variables and a statement that by definition must be true.

Which of the following pieces of information are needed for national income​ accounting? ​(Select all that​ apply). A. The government would need information on both quantities produced and market​ prices, for every good produced in an economy. B. The government would need information on the spillover cost of an economic activity on society. C. The government would need information on all​ sales, including the size of all inventories in every company. D. The government would need information on the quantities produced and sold in an underground economy.

A and C

Production-based accounting is used to estimate GDP by which of the following? (can be more than one) A. Computing for each firm the difference between sales revenue and the purchase of intermediate​ products, then summing this difference across all firms. B. Adding up the incomes received by all the resources that contributed to production. C. Summing each​ firm's value added to the production process.

A and C Production-based accounting is used to estimate GDP by computing for each firm the difference between sales revenue and the purchase of intermediate products, then summing this difference across all firms and by summing each firm's added value to the production process.

Geography Hypothesis

A claim that differences in geography/climate/ecology are ultimately responsible for the major differences in prosperity observed across the world. Some people claim that people are more motivated in cool climates.

GDP Deflator

A measure of how prices of goods/services produced in a country have risen since the base year.

Malthusian Cycle

A pre-industrial pattern which increases in aggregate income tend to lead to an expanding population, which in turn reduces income per capita and ultimately puts downward pressure on the population.

Sustained Growth

A process whereby GDPPC grows at a positive and relatively steady rate for long periods of time.

Catch-Up Growth

A process whereby poorer nations increase their incomes by taking advantage of knowledge and technologies already invented in more technologically advanced countries.

Exponential Growth

A situation in which the growth process can be described by an approximately constant growth rate of a variable (in GDP).

A worker is unemployed if ____________.

A worker is unemployed if he/she doesn't have a job, has actively looked for a job in the past four weeks, and is currently available for work.

The level of economic activity is calculated by using the income method by which of the following? (can be more than one) A. Adding together the income payments received by the various agents in the economy. B. Summing labor income and capital income. C. Tracking the flow of funds from firms to the owners of the factors of production.

All of the above

Recession

An economic downturn lasting at least 2 quarters (6 months)

In deriving GDP using​ expenditure-based national income​ accounts, transfer payments are excluded. This is because​ ____________. A. They can only be used for government spending. B. They are already included as part of consumption spending. C. They are already included as part of export spending. D. They are not spent in the economy.

B

Consumer Price Index (CPI) Equation

CPI = (Cost of buying a particular basket of consumer goods using target year prices)/(Cost of buying a particular basket of consumer goods using base-year prices)

Purchasing Power Parity (PPP)

Constructs the cost of a representative basket of commodities in each country and uses relative costs for comparing income across countries.

The larges part of U.S. GDP tends to be ______________________.

Consumption

Extractive Economic Institutions _______________________.

Do not protect property rights, don't uphold contracts, and interfere with the workings of the markets. They also erect significant barriers to businesses and occupations.

GDP per capita (does/doesn't) include those who cannot or do not work.

Does include. GDP per worker doesn't, however.

Value Change Equation

EXAMPLE Value in 2015 $ = (Price Index 2015/Price Index 1909) x Value in 1909 $

The expected relationship between GDP and GDI is that GDP is (twice/equal to/half of) GDI.

Equal

What do exchange-rate-based measures allow us to do?

Exchange-rate-based measures allow us to compare how much money the average citizens of different countries make.

____________________ represents the payments for goods or services.

Expenditure

____________________ measure the purchases of goods and services produced in the domestic economy.

Expenditure-based national income accounts.

The ___________________(inventory/expenditure) method of calculating GDP yields exactly the same answer as the production-based method. Even if some goods don't get sold, they are ___________________(owned/produced) by a firm, and those goods are considered part of the firm's inventory.

Expenditure; Owned

____________________ growth results because new growth builds on past growth.

Exponential Growth

Fundamental Causes of Prosperity

Factors at the root of the differences in the proximate causes of prosperity. Usually comprised of geography, culture, and institutions.

____________________ represent the productive resources that are owned by households and used by firms in the production process.

Factors of Production

What does fear of creative destruction make many rulers do?

Fear of creative destruction makes many rulers explicitly ban the adoption of new technologies and block the process of economic development.

National Income Accounting Identity

GDP (Y) = C + I + G + X - M =

GDP Deflator Equation

GDP Deflator = (Nominal GDP/Real GDP) x 100

____________________ represents the payments that are made from firms to households to compensate the households for the use of their physical capital and labor.

Income

The distribution of GDP between different factions within an economy most closely relates to the ________________(income/expenditure) method of aggregate accounting. The fact that the value of GDP remains equal regardless of whether GDP is measured by what people are earning or what they are producing is referred to as an ________________ (equilibrium/identity).

Income; Identity

GDP can be (increased/decreased) by removing monopolies and entry barriers.

Increased.

Inflation Rate Equation

Inflation Rate Year X = (Price Index Year X - Prince Index Year Y(usually X-1))/Price Index Year Y

What appears to be the biggest fundamental cause of poverty?

Institutions

What does productivity emphasize?

It emphasizes that you have to look at the production side to understand huge differences in GDP.

The two main components of technology are ____________________ and ____________________.

Knowledge and efficiency of production

The salary paid to a financial advisor would be considered (labor/capital) income. On a national​ level, the (sum/difference) of labor income and capital income is equivalent to aggregate expenditure.

Labor; sum

__________________ explains past economic activity and tries to predict future changes.

Macroeconomic Analysis

CPI is released (monthly/quarterly).

Monthly

How do you find the market value of goods produced in the economy that year?

Multiply the production quantities (during a particular year) by the corresponding market prices.

(Positive/Negative) externalities occur when an economic activity has a spillover COST that does not directly affect those engaged in the activity.

Negative

Does GDP take account of capital deprecation?

No, GDP does not take account of capital deprecation.

Does inequality equal poverty?

No, inequality does not equal poverty. Some societies have less inequality but far more poverty.

Is leisure included in GDP?

No, leisure is not included in GDP (although it is important).

Is foreign aid the solution to world poverty?

Overall, foreign aid has been ineffective in alleviating poverty. It doesn't really raise GDP or improve technology, is often given to corrupted groups/people, and doesn't fix the fundamental causes of poverty.

Productivity

Refers to the value of goods/services that a worker generates for each hour of work.

What rights are essential in promoting productivity?

Secure property rights

What does technology determine?

Technology determines how efficiently an economy's inputs are utilized.

GDP Per Capita

The GDP divided by the total population.

Efficiency of Production

The ability of a society to produce the maximal amount of input at a given cost for given levels of the factors of production and knowledge.

Research and Development (R&D)

The activities directed at improving scientific knowledge, generating new innovations, or implementing existing knowledge in production to improve the technology of a firm or economy.

Income per Capita

The average income per person. Found by dividing aggregate income by population. Often referred to as GDP per capita.

Culture Hypothesis

The claim that different values and cultural beliefs fundamentally cause the differences in prosperity around the world.

Institutions

The claim that the formal and informal rules governing the organization of a society, including its laws and regulations.

Demographic Transition

The decline in fertility in fertility and the number of children per family that many societies undergo as they transition from agriculture to industry.

What happens to GDP when A increases and K and H stay the same?

The economy produces more GDP.

Growth Rate

The exchange in a quantity (in GDPPC) between two dates relative to the baseline quantity.

The fact that an economy is growing (does/does not) imply that all citizens are benefitting equally from that growth.

The fact that an economy is growing does not imply that all citizens are benefitting equally from that growth.

Growth/Economic Growth

The increase in GDP per capita of an economy.

Factors of Production

The inputs to the production process. They come in two key forms: capital and labor.

Capital Deprecation

The loss of physical capital (sunken ship)

Law of Diminishing Marginal Product

The marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production (holding all other factors constant).

Exports

The market value of all domestically produced goods and services that are purchased by foreign households, firms, and governments.

Imports

The market value of all foreign-produced goods/services that are sold to domestic households, firms, and governments.

Consumption

The market value of consumption goods/services that are bought by domestic households.

Government Expenditure

The market value of government purchases of goods and services.

Investment

The market value of new physical capital that is bought by domestic households.

Gross National Product (GNP)

The market value of production generated by the factors of production - both capital and labor - possessed or owned by the residents of a particular nation. It includes production of a worker abroad who normally resides in the U.S. and excludes U.S. production owned by foreigners.

Gross Domestic Product (GDP)

The market value of the final goods and services produced in a country during a given period of time.

Subsistence Level

The minimum level of income per person that is generally necessary for the individual to obtain enough calories, shelter, and clothing to survive.

What is the key difference between GDP and CPI?

The particular basket of goods being bought: whereas the GDP deflator studies the basket PRODUCED domestically, the CPI studies the basket of things BOUGHT by U.S. consumers.

Creative Destruction

The process by which economic growth destabilizes existing regimes and reduces the political power of rulers.

Technological Change

The process of new technologies and new goods/services being invented, introduced, and used in the economy, enabling the economy to achieve a higher level of GDP.

Inflation Rate

The rate of increase in prices.

Physical Capital Deprecation

The reduction of the value of physical capital due to obsolescence, wear and tear, or destruction.

Nominal GDP

The total market value of production (final goods/services) using the current market prices to determine the value of each unit that is produced.

Real GDP

The total market value of production of final goods/services using market prices from a specific base year to determine the value of each unit that is produced.

Why are moderate levels of inequality useful?

They motivate people to work harder.

Underground Economy

Transactions etc. that are intentionally hidden from government statisticians. Ie. tax avoidance, black market, and drug deals. About 10% of GDP in developed countries

Identity

Two variables are related by this when the two variables are defined in a way that makes them mathematically identical.

Productivity (varies/stays the same) across different countries.

Varies

The Aggregate Production Function is represented as ____________________.

Y = A x F(K, H) Where Y = GDP, K = nation's physical capital stock; H = efficiency units of labor; A = technology index.

Is GDP per capita a strong predictor of life satisfaction?

Yes, GDP per capita is a strong predictor of life satisfaction?

Can technological change increase life expectancy?

Yes, technological change can increase life expectancy.

Is there an optimal level of saving in a society?

Yes, there is an optimal level of saving in a society.

Firms (are/aren't) owned by households - they (can/can't) own themselves.

are; can't

The two key forms for factors of production are ____________________.

capital and labor

National Income Accounts/National Income and Product Accounts

measure a country's aggregate economic activity.

Externalities are usually ___________________ (included/omitted) in GDP calculations.

omitted

International trade has a (positive/negative) effect on poverty.

positive

GDP is a measure of ________________ (sales/production), not (sales/production)

production; sales.

To measure aggregate economic activity, take both __________ and ______________ into account.

quantities and prices

A firm's value added is ____________________.

the firm's sales revenue minus the firms purchases of intermediate products from other firms.

Production-based accounts measure each firm's ____________________ (value added/value lost), which is the firm's sales revenue minus the firms purchases of intermediate products from other firms.

value added