ECO105 MACRO > chapter 6 > Flashcards

chapter 6 Flashcards

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1
Q

Nominal GDP

A

the value at current price of all final products and services produced annually in a country → measured as a flow, AKA an amount per unit time

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2
Q

Value

A

The worth, in Canadian dollars, of all the products and services produced

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3
Q

Real GDP

A

value at constant price of all final products and services produced annually in a country

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4
Q

What does nominal GDP count

A

Nominal GDP for any year counts only the products and services produced in that year

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5
Q

What causes increases in nominal GDP

A

Price increases

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6
Q

Why is the value of intermediate products not included in nominal GDP

A

because it is already included in the value of the final products

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7
Q

Which type of GDP is better for judging living standards?

A

Real GDP

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8
Q

Real GDP per person

A

Real GDP divided by population

  • The best measure of a country’s ability to meet the material needs of its citizens
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9
Q

How to measure Real GDP

A

Calculated by adding up the value of all final products and services produced annually in a country

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10
Q

Value added

A

value of output minus the value of intermediate products and services bought from other businesses

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11
Q

Income (Y)

A

consumers earn income by selling inputs to businesses

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12
Q

Consumer spending

A

consumers use their income to buy products and services from businesses

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13
Q

Business Investment Spending (I)

A
  • When businesses build new factories or buy new machinery
  • Businesses are spending on products/services produced by other businesses
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14
Q

Government Spending

A

When governments build highways or hire the services of accounting firms, those are purchases of products and services in output markets

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15
Q

Rest of World (ROW) Exports and Imports

A

Other countries also spend money on Canadian products and services or produce products that are imported into Canada

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16
Q

Connection between aggregate income and aggregate spending in a formula

A

Y = C + I + G + (X - IM)

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17
Q

Why do we subtract imports in Y = C + I + G + (X - IM)

A

some consumption spending is on imports, and some business investment spending is on imported machinery

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18
Q

Consumer choices

A

consumers can choose to spend their income or save it

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19
Q

Disposable income

A

aggregate income minus taxes; income that consumers can spend or save

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20
Q

Net taxes

A

taxes minus transfer payments

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21
Q

Business choices

A
  • Businesses must invest in building factories and buying the equipment necessary to start production
  • Sometimes because of the time lag between when businesses build factories and when sales revenue start to flow in, businesses usually need to borrow money for investment spending
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22
Q

Government choices

A
  • Governments collect taxes, make transfer payments, and spend money to buy products and services in output markets
  • Governments also borrow money from the banking system, and can deposit or lend money to the banking system
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23
Q

ROW Choices

A
  • The rest of the world can choose to buy Canadian exports and sell their own products/services to us as Canadian imports
  • ROW can also choose to invest money in Canada or borrow money from Canada
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24
Q

Banks

A

take deposits from consumers, businesses, government, and ROW, and make loans to all of the players

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25
Potential GDP
- real GDP when all inputs (labor, capital, land, and entrepreneurship) are fully employed - outcome if Adam Smith’s invisible hand works perfectly
26
Potential GDP per Person
potential GDP divided by the population
27
Potential GDP and PPF
- An economy that realizes its potential GDP is at a point on the PPF - Points inside the PPF represent unemployed inputs - consumer goods (horizontal axis) and capital goods (vertical axis)
28
Economic growth
the expansion of the economy’s capacity to produce products and services
29
What causes economic growth
increases in the quantity/quality of a country’s inputs (land, labor, capital, entrepreneurship)
30
What does economic growth increase
potential GDP per person and shifts the macro PPF outward
31
Factors that Contribute to Economic Growth
1. Labour 2. Capital 3. Land and Other Natural Resources 4. Entrepreneurship
32
Human capital
increased earning potential from work experience, on-the-job training, and education
33
Capital
- the factories and equipment businesses use to produce products and services - more equipment to produce output increases the quantity of capital, which allows workers to produce more
34
Land
- Potential GDP increases with an increase in the quantity of land that can contribute to production - Technological change also contributes to increases in the quantity/productivity of land and resources
35
Entrepreneurship
Entrepreneurs improve management techniques, corporate organization, and worker/management relations that increase productivity, which in turn increase potential GDP
36
How does potential GDP increase?
by bringing new inputs into the circular flow of markets
37
Economic growth rate
annual percentage change in real GDP per person
38
Real GDP per person growth rate formula
((Real GDP/person this year) - (Real GDP/person last year)/Real GDP per person last year) x 100
39
Rule of 70
number of years it takes for the initial investment to double is roughly 70 divided by annual percentage growth rate
40
Productivity
- measured as quantity of real GDP produced by an hour of labor - Key source of our improving standard of living
41
What increases labor productivity?
Increases in the quantity/quality of inputs
42
Two Ways to Increase GDP per Person:
1. Put a larger fraction of the population to work → increase the labor force participation rate 2. Increase productivity so that each worker produces more
43
Creative destruction
competitive business innovations generate profits for winners, improving living standards for all, but destroy less productive/desirable products and production methods
44
Business cycles
up and down fluctuations of real GDP around potential GDP
45
Expansion
period during which real GDP increases
46
Peak
maximum expansion, real GDP stars decreasing after the peak
47
Contraction
any period during which real GDP decreases
48
Trough
lowest point of the cycle
49
Recession
two or more successive quarters of contraction of real GDP
50
Recessionary gap
real GDP below potential GDP; vertical distance between potential GDP and real GDP
51
Inflationary gap
real GDP above potential GDP, can cause inflation
52
Output gap
real GDP minus potential GDP, positive for inflationary gaps
53
Limitations of real GDP per person as measure of well-being:
1. Non-market production 2. Underground Economy 3. Environmental Damage 4. Leisure 5. Political Freedoms and Social Justice
54
Non-market production
many productive activities that contribute to our well-being happen outside of markets
55
Underground Economy
illegal activities or legal activities that avoid taxes
56
Environmental Damage
- Productive economic activity produces undesirable negative externalities like pollution, climate change, and resource depletion - Costs of environmental damage are not included in GDP - Higher GDP is often associated with greater environmental damage
57
Leisure
The more leisure time people take, the lower real GDP will be
58
Political Freedoms and Social Justice
There is no necessary connection between higher real GDP per person and benefits of democracy and political freedom
59
Human Development Index
weighs equally life expectancy, educational achievement, and income
60
Top 5 Countries HDI
Norway, Australia, United States, Netherlands and Germany
ECO105 MACRO
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