# Shared Flashcard Set

## Details

ECON MIDTERM 1
N/A
73
Economics
02/20/2012

Term
 NIPA
Definition
 National Income and Product Accounts (Issued by the Bureau of Economic Analysis - a division of the Dept. of Commerce)
Term
 National Income Accounting
Definition
 Process of Measuring GDP
Term
 The Expenditure Method (Method of Measuring GDP)
Definition
 A method of measuring GDP Calculates GDP by adding up the value of expenditures on all final goods and services in the economy
Term
 Expenditure Method Equation
Definition
 Y = C + I + G + NXY = Value of Total Output (GDP)C+I+G+NX = Aggregate ExpenditureC = Consumption I = InvestmentG = Government PurchasesNX = Net Exports
Term
 Consumption
Definition
 Makes up ~ 70% of GDP Includes durable and nondurable goods, and services
Term
 Investment (Gross Private Domestic Investment)
Definition
 Accounts for ~ 15% of GDP Includes Fixed Investment (Nonresidential such structures, equipment and software...or Residential) Change in private inventories
Term
 Government Purchases
Definition
 Accounts for ~20% of GDP Includes Federal spending for national defense and nondefense Also, state and local spending
Term
 Net Export of Goods and Services
Definition
 About -5% of GDP in 2010 Imports - Exports (negative value means more is imported than exported)
Term
Definition
 Calculates GDP by adding up the value added at each stage of the production process
Term
 Income Method (Measuring GDP)
Definition
 Calculates GDP by adding up the incomes generated at each stage in the production process
Term
 Per Capita GDP
Definition
 = GDP/Population
Term
 Potential GDP
Definition
 An estimate of what GDP would have been if all factors of production (ex: labor and capital) had been used at their 'normal' rates Measure of a country's capacity to produce, not it's actual production
Term
 Nominal GDP
Definition
 The value of all goods and services measured at current prices 2009 GDP = pN09*QN09
Term
 Real GDP
Definition
 The value of all goods and services measured at a constant price level Using 2005 as a base year... 2009 Real GDP = P05N*Q09N
Term
 Price Level
Definition
 P
Term
 Real GDP
Definition
 Y
Term
 Nominal GDP
Definition
 P*Y(Price Level * Real GDP)
Term
 GDP Deflator
Definition
 Measure of the Price Level Ratio of Nominal GDP to Real GDP times 100 =100 for the base year Measures the current level of prices relative to the level of prices in the base year
Term
 How to Calculate Inflation with the GDP Deflator
Definition
 = ((GDP deflator in later year-GDP deflator in earlier year) / GDP deflator in earlier year) X 100
Term
 The Consumer Price Index (CPI)
Definition
 Measures changes in the price of things that an average consumer buys The most closely watched indicator of what is happening to prices Release of a new CPI number can have a big impact on financial markets Calculated/Published by the Bureau of Labor Statistics (BLS) Released monthly in the middle of the month Uses - track changes in the typical household's cost of living, adjusts many contracts for inflation, allows comparisons of dollar amounts over time
Term
 How the BLS constructs the CPI
Definition
 Survey consumers to determine composition of the typical consumer's "basket" of goods Every month, collect prices of all items in basket; compute price of basket. Choose a base year (currently an avg. of prices between 1982-1984) Calculate CPI in a given month as follows:Cost of basket in that month/Cost of basket in that base period x 100
Term
Definition
 ~42% = Housing ~17% = Transportation ~15% = Food&Beverage ~6% = Medical Care ~6% = Recreation ~3% = Education ~3% = Communication ~3% = Other Goods/Services
Term
 Calculating Inflation Rate with CPI
Definition
 = ((CPI in later year - CPI in earlier year)/CPI in earlier year) x 100
Term
 GDP Deflator vs. CPI
Definition
 CPI includes only goods typically bought by consumers while GDP deflator includes all goods CPI includes imported goods while GDP deflator only includes domestic goods CPI uses a fixed basket of goods while GDP deflator uses a changing basket of goods
Term
 Substitution Bias(Reasons why CPI overstates inflation)
Definition
 The CPI uses fixed weights, so it cannot reflect consumer's ability to substitute toward goods whose relative prices have fallen
Term
 Increase in Quality Bias (Reason CPI overstates inflation)
Definition
 Some of the increase in the price of a product may reflect an increase in the product's quality, while the rest reflects true inflation. These two are hard to separate.
Term
 New Product Bias   (Reason CPI overstates inflation)
Definition
 The 'market basket' used in the CPI calculation is not updated frequently, so it fails to include new products whose prices tend to fall rapidly soon after their introduction.
Term
 Outlet Bias   (Reasons CPI overstate inflation)
Definition
 Increasingly, consumers buy from discount or lower-price-on-line retailers. BLS primarily collects data from full-price retail stores, not taking into account lower-price outlets.
Term
 Distributional Effects   (The costs of inflation)
Definition
 Some worker's incomes will not keep up with inflation
Term
 "Shoeleather Costs"   (The cost of inflation)
Definition
 the resources wasted when inflation encourages people to reduce their money holdings includes the time and transaction costs of more frequent bank withdrawals
Term
 Menu Costs   (The Cost of Inflation)
Definition
 The cost of changing prices ex: printing new menus, mailing new catalogues, etc...
Term
 Confusion and Inconvenience   (The cost of inflation)
Definition
 Inflation changes the yardstick we use to measure transactions. Complicates long-range planning and the comparison of dollar amounts over time.
Term
 Tax Distortion   (The Cost of Inflation)
Definition
 Inflation makes nominal income grow faster than real income Taxes are based on nominal income, some are not adjusted for inflation So, inflation causes people to pay more taxes even when their real income hasn't increased
Term
 A Special Cost of Unexpected Inflation is the Arbitrary Redistribution of Wealth
Definition
 • Higher-than-expected inflation transfers purchasing power from creditors to debtors: Debtors get to repay their debt with dollars that aren’t worth as much.  Lower-than-expected inflation transfers purchasing power from debtors to creditors.  High inflation is more variable and less predictable than lowinflation. So, these arbitrary redistributions are frequent when inflation is high.
Term
 Real Interest Rate
Definition
 = r
Term
 Nominal Interest Rate
Definition
 = i
Term
 Inflation Rate
Definition
 = pi
Term
 Interest Rate Equation
Definition
 i = r + pi   Nominal Interest Rate = Real Interest Rate + Inflation Rate   As Price Level (P) goes up, Inflation Rate (pi) goes up
Term
 Calculating what a past amount would be worth in a later year
Definition
 Value in later year dollars   = (value in earlier year dollars)*(CPIlater /CPIearlier)
Term
 Disinflation
Definition
 This happens when inflation is going down Prices are still increasing, just not as fast
Term
 Deflation
Definition
 This is when prices are going down.
Term
 Employed
Definition
 Worked, even part time, in the last week.
Term
 Unemployed
Definition
 Did not work in the last week, but did look for a job in the past month.
Term
 Labor Force
Definition
 Unemployed & Employed People
Term
 Unemployment Rate
Definition
 Percentage of labor force that is unemployed = (#Unemployed/#Labor Force) x 100%
Term
 Not in the Labor Force
Definition
 Did not work in the last week or actively search for a job in the past month Includes retirees, full time students..etc
Term
 Natural Rate of Unemployement(NAIRU - Non-Accelerating Inflation Rate of Unemployment)
Definition
 Constituted by Structural and Frictional Unemployment Normal Rate of unemployment around which the unemployment rate fluctuates
Term
 Cyclical Unemployment
Definition
 Deviation of unemployment from its natural rate
Term
 Labor-Force Participation Rate
Definition
 Percentage of adult population that is in the labor force = (labor force/adult population)x100%
Term
 Efficiency Wages
Definition
 Above equilibrium wages paid by firms to increase worker productivity reduces worker turnover, and abseenteism increases productivity and attracts high-quality job applicants, motivates workers often leads to decrease in firm's cost...but efficiency wages can increase unemployment
Term
 Government Policies that influence the Natural Rate of Unemployment
Definition
 Training Programs = can reduce structural unemployment (ex: Trade Adjustment Assistance Program) Unemployment Compensation = tends to increase frictional unemployment as people will take longer to search for a job, reduces opportunity cost for unemployment (in US, its about half wage for about 6 months) Labor Market Policies = Legal restrictions on hours, vacations, retirements, and especially firing (especially restrictive in Europe) Minimum Wage Laws = Nationally is \$7.25...Minimum wage laws force the wage to remain above equilibrium which causes the quantity of labor supplied to be greater than the quantity of labor demanded (especially affects teens) Labor Unions = bargain with employers over wages, benefits, working conditions (important in airlines, autos, steel, and telecom)...this can keep wages above equilibrium in unionized industries, leading to unemployment (but only 9% of private work force is unionized so little effect on national unemployment rate)
Term
 Henry Ford
Definition
 Founder of Ford Motor Company introduced modern techniques of production and built cars on assembly lines (unskilled workers were taught to perform same simple tasks over and over again) increased daily wage to \$5 in 1914 (twice going wage)...this was successful
Term
 Growth
Definition
 Change in Real GDP over time Growth Rate = annual percentage change in Real GDP (%ΔY)
Term
 Growth Rate of Real Per Capita GDP
Definition
 %Δ Y - %Δ Population Correlates most closely to changes in living standards
Term
 Growth Calculations
Definition
 = ((GDP in later year-GDP in earlier year)/(GDP in earlier year)) x 100%
Term
 The Rule of 70
Definition
 Measures how many years it will take for the real GDP per capita to double Number of years to double = 70/Growth Rate
Term
 Productivity
Definition
 The quantity of goods and services that can be produced by 1 hour of work 'Person hour' = 1 worker working 1 hour Productivity = GDP/Person Hours = Y/L ... (Y= Real GDP (quantity of output produced)...L = Number of labor hours) •When a nation’s workers are very productive, real GDP is large and incomes are high. When productivity grows rapidly, so do living standards.  Productivity and growth rate are determined by capital and technological change.
Term
 Physical Capital
Definition
 is K The stock of equipment and structures used to produce g&s
Term
 Human Capital
Definition
 •the knowledge and skills workers acquire through education, training, and experience  •Productivity is higher when the average worker has more human capital (education, skills, etc.)
Term
 Technology
Definition
 Processes a firm uses to turn inputs into outputs
Term
 Technological Change
Definition
 an increase in the quantity of output firms can produce with a given quantity of inputs
Term
 3 Sources of Technological Change
Definition
 •Better machinery and equipmentex) Computers, software, machine tools, electronics •Increases in human capitalex) Education, training, experience •Better organization and management of productionex) “Just-in-time” system
Term
 Per Worker Production Function
Definition
 The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant.  If workers have little K, giving them more increases productivity a lot. If workers already have a lot of K, giving them more increases productivity little. Equal increases in capital per worker, lead to diminishing increases in output per hour worked (diminishing returns). Technological change causes the per-worker-production function to shift up.
Term
 New Growth Theory
Definition
 A model of long-term economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system. Key to Economic Growth - accumulation of knowledge capital (which is subject to increasing returns)
Term
 3 Ways Government Policy Increases the Accumulation of Knowledge Capital
Definition
 Subsidizing education Subsidizing research and development Protecting intellectual property with patents and copyrightsPatent = The exclusive right to produce a product for a period of 20 years from the date the product is invented.
Term
 Convergence
Definition
 Poor countries will grow faster than richer ones, and eventually catch up in terms of real GDP per capita
Term
 Why Convergence Happens
Definition
 (1)  Technology transfer     (2)  Poorer countries can attract more capital  Low K stock → High MPK → High returns to investment → Higher domestic saving and higher investment by foreigners
Term
 Environmental Approach (Approaches to Development)
Definition
 geography climate endemic disease inaccessibility of trade routes lack of natural resources policy implications
Term
 International Trade Approach (Approaches to Development)
Definition
 2 Dimensions of integration into world economyTrade in goods&services-import-substituting industrializationCapital Inflows-Financial Capital-FDI (Foreign Direct Investment) Against the critique of globalization
Term
 Institutional Approach
Definition
 Legal System Political System Monetary Stability Corruption
Term
 Microfinance
Definition
 Small lending to rural poor in developing countries 18th&19th Centuries: clubs to make small loans to members Early 20th Century: Bank of America
Term
 Criticisms of MicroFinance
Definition
 Doesn't reach the poorest of the poor diverts money from more important large-scale projects critics contend there is little evidence it serves to lift incomes in the long run
Supporting users have an ad free experience!