Boston University EC 102 Watson Midterm 1

question

GDP

answer

the market value of all FINAL goods and services produced within a country in a year

question

what is the most fundamental macro concept?

answer

GDP

question

Measuring GDP: The Expenditure Method

answer

calculates GDP by adding up the value of expenditures on all FINAL goods and services in the economy

question

Expenditure Method Formula

answer

GDP = personal consumption + investment + government PURCHASES + exports - imports

question

GDP important identity

answer

Y = C + I +G +NX

question

Potential GDP

answer

an estimate of what GDP would have been id all factors of production (labor and capital) had been used at their "normal" rates

question

Per capita GDP

answer

GDP / Population

question

Nominal GDP

answer

the value of all goods and services measured at CURRENT prices

question

Real GDP

answer

the value of all goods and services measured at a CONSTANT price level

question

Y =

answer

REAL GDP

question

P =

answer

Price level. Measured by GDP deflator or Consumer Price Index (CPI)

question

P x Y =

answer

NOMINAL GDP

question

The GDP deflator (P)

answer

(NOMINAL GDP / REAL GPD) x 100

question

Inflation using P (GDP Deflator)

answer

((P in later year - P in earlier year)/ P in earlier year)) x 100

question

Consumer Price Index (CPI)

answer

Measures changes in the prices of things that an average consumer buys.

question

CPI formula

answer

(cost of basket in given month/ cost of basket in base period) x 100

question

Inflation using CPI

answer

((CPI in later year- CPI in earlier year)/ CPI in earlier year)) x 100

question

Reasons why the CPI may overstate inflation

answer

substitution bias, increase in quality bias, new product bias, and outlet bias

question

Substitution bias

answer

the CPI uses fixed weights, so it cannot reflect consumers' ability to substitute towards goods whose relative prices have fallen

question

Increase in quality bias

answer

some of the increase in the price of a product may reflect an improvement in the product's quality, while the rest represents true inflation. It is hard to separate the two.

question

New product bias

answer

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

question

Outlet bias

answer

increasingly, consumers buy from discount or lower-price on-line retailers.BLS collects price data primarily from full-price retail stores, not taking into account the lower-price outlets.

question

CPI vs. GDP Deflator: goods

answer

CPI includes only goods typically bought by consumers. GPD deflator includes ALL goods

question

CPI vs. GDP Deflator: origin of goods

answer

CPI includes imported goods while GDP deflator includes only DOMESTIC goods

question

CPI vs. GDP Deflator: basket of goods

answer

CPI uses a FIXED basket of goods. GDP deflator uses a CHANGING basket of goods

question

nominal interest rate (i)

answer

real interest rate + inflation rate

question

Relation between price level and interest rate

answer

when price level goes up, interest rates go up

question

Disinflation

answer

When inflation is going down. Prices are still increasing, just NOT AS FAST

question

Deflation

answer

when prices are going down

question

How to calculate what a past amount would be worth in a later year

answer

(value in earlier year dollars) x (CPI later/ CPI earlier)

question

employed

answer

worked, even part time, in the last week

question

unemployed

answer

did not work in the last week, but did look for job over the last month

question

labor force

answer

employed + unemployed people

question

unemployment rate

answer

number unemployed/ number in labor force

question

labor force participation rate

answer

labor force/ civilian non institutional population

question

Who is in the civilian non institutional population?

answer

people over 16, not in the military, jail, or another institution

question

frictional unemployment

answer

people who are in between jobs

question

structural unemployment

answer

results from skills no longer being relevant to work

question

cyclical unemployment

answer

unemployment caused by a business cycle recession

question

natural rate of unemployment

answer

Normal rate of unemployment. Frictional + structural unemployment

question

How do training programs influence the natural rate of unemployment?

answer

can reduce structural unemployment

question

How does unemployment compensation influence the natural rate of unemployment?

answer

tends to increase frictional unemployment

question

How do labor market policies influence the natural rate of unemployment?

answer

legal restrictions on hours, vacations, retirement, and especially firing control the natural rate of unemployment

question

How do minimum wage laws influence the natural rate of unemployment?

answer

overall probably not an important factor in national unemployment rate but forces the wage to remain above equilibrium. Quantity of labor supplied > quantity of labor demanded

question

How do labor unions influence the natural rate of unemployment?

answer

little effect on national unemployment rate

question

How do efficiency wages influence the natural rate of unemployment?

answer

attract higher-quality job applicants but above equilibrium wages can increase unemployment

question

growth

answer

the change in real GDP over time

question

growth rate

answer

the annual percentage change in real GDP

question

growth rate formula

answer

(REAL GDP later year - REAL GDP earlier year)/ REAL GDP earlier year

question

the rule of 70

answer

method of determining how many years it will take GDP to double. 70/ growth rate

question

per capita GDP

answer

GDP/ population

question

growth rate of real per capita GDP

answer

growth rate of Y - growth rate of population

question

economic growth that is the ultimate determinant of

answer

nutrition, literacy, infant mortality, and life expectancy

question

even small differences in growth rates can lead to huge reductions in

answer

real per capita GDP

question

which correlates most closely with improvements in living standards?

answer

real PER CAPITA GDP

question

what does a country's standard of living depend on?

answer

its ability to produce goods and services

question

productivity

answer

the average quantity of goods and services produced per hour of labor input

question

productivity formula

answer

Y/ L (real GDP or number of outputs/ labor hours)

question

what determines productivity and its growth rate?

answer

capital and technological change

question

physical capital (K)

answer

the stock of equipment and structures used to produce goods and services

question

capital per labor hour

answer

K / L (physical capital/ labor hours)

question

human capital

answer

knowledge and skills workers acquire through eduction, training, and experience

question

technology

answer

processes a firm uses to turn inputs into outputs

question

technological change

answer

an increase in the quantity of output firms can produce with a given quantity of inputs

question

what are three sources of technological change?

answer

better machinery, increases in human capital, better organization and management of production

question

per worker production function

answer

the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

question

new growth theory

answer

a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system

question

what type of capital is subject to decreasing returns?

answer

physical capital

question

what type of capital is subject to increasing returns?

answer

knowledge capital

question

knowledge capital

answer

the totality of the collective scientific and engineering knowledge possessed by a society.

question

how can government policy help increase the accumulation of knowledge capital?

answer

protecting intellectual property with patents and copyrights, subsidizing research and development, and subsidizing education

question

convergence

answer

poor countries will grow faster than richer countries, and eventually catch up in terms of GDP per capita

question

why would we expect convergence?

answer

technology transfers and diminishing marginal returns to K/L

question

what are the three approaches to development?

answer

environmental approach, international trade approach, and institutional approach

question

environmental approach

answer

Jeff Sachs. geography, climate, endemic disease, inaccessibility of trade routes (landlocked countries), lack of natural resources, policy implications

question

International trade approach

answer

two dimensions of integration into the world of economy: trade in goods and services and capital inflows. in favor of globalization

question

institutional approach

answer

legal system, political system, monetary stability, and corruption.

1 of 77

question

GDP

answer

the market value of all FINAL goods and services produced within a country in a year

question

what is the most fundamental macro concept?

answer

GDP

question

Measuring GDP: The Expenditure Method

answer

calculates GDP by adding up the value of expenditures on all FINAL goods and services in the economy

question

Expenditure Method Formula

answer

GDP = personal consumption + investment + government PURCHASES + exports - imports

question

GDP important identity

answer

Y = C + I +G +NX

question

Potential GDP

answer

an estimate of what GDP would have been id all factors of production (labor and capital) had been used at their "normal" rates

question

Per capita GDP

answer

GDP / Population

question

Nominal GDP

answer

the value of all goods and services measured at CURRENT prices

question

Real GDP

answer

the value of all goods and services measured at a CONSTANT price level

question

Y =

answer

REAL GDP

question

P =

answer

Price level. Measured by GDP deflator or Consumer Price Index (CPI)

question

P x Y =

answer

NOMINAL GDP

question

The GDP deflator (P)

answer

(NOMINAL GDP / REAL GPD) x 100

question

Inflation using P (GDP Deflator)

answer

((P in later year - P in earlier year)/ P in earlier year)) x 100

question

Consumer Price Index (CPI)

answer

Measures changes in the prices of things that an average consumer buys.

question

CPI formula

answer

(cost of basket in given month/ cost of basket in base period) x 100

question

Inflation using CPI

answer

((CPI in later year- CPI in earlier year)/ CPI in earlier year)) x 100

question

Reasons why the CPI may overstate inflation

answer

substitution bias, increase in quality bias, new product bias, and outlet bias

question

Substitution bias

answer

the CPI uses fixed weights, so it cannot reflect consumers' ability to substitute towards goods whose relative prices have fallen

question

Increase in quality bias

answer

some of the increase in the price of a product may reflect an improvement in the product's quality, while the rest represents true inflation. It is hard to separate the two.

question

New product bias

answer

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

question

Outlet bias

answer

increasingly, consumers buy from discount or lower-price on-line retailers.BLS collects price data primarily from full-price retail stores, not taking into account the lower-price outlets.

question

CPI vs. GDP Deflator: goods

answer

CPI includes only goods typically bought by consumers. GPD deflator includes ALL goods

question

CPI vs. GDP Deflator: origin of goods

answer

CPI includes imported goods while GDP deflator includes only DOMESTIC goods

question

CPI vs. GDP Deflator: basket of goods

answer

CPI uses a FIXED basket of goods. GDP deflator uses a CHANGING basket of goods

question

nominal interest rate (i)

answer

real interest rate + inflation rate

question

Relation between price level and interest rate

answer

when price level goes up, interest rates go up

question

Disinflation

answer

When inflation is going down. Prices are still increasing, just NOT AS FAST

question

Deflation

answer

when prices are going down

question

How to calculate what a past amount would be worth in a later year

answer

(value in earlier year dollars) x (CPI later/ CPI earlier)

question

employed

answer

worked, even part time, in the last week

question

unemployed

answer

did not work in the last week, but did look for job over the last month

question

labor force

answer

employed + unemployed people

question

unemployment rate

answer

number unemployed/ number in labor force

question

labor force participation rate

answer

labor force/ civilian non institutional population

question

Who is in the civilian non institutional population?

answer

people over 16, not in the military, jail, or another institution

question

frictional unemployment

answer

people who are in between jobs

question

structural unemployment

answer

results from skills no longer being relevant to work

question

cyclical unemployment

answer

unemployment caused by a business cycle recession

question

natural rate of unemployment

answer

Normal rate of unemployment. Frictional + structural unemployment

question

How do training programs influence the natural rate of unemployment?

answer

can reduce structural unemployment

question

How does unemployment compensation influence the natural rate of unemployment?

answer

tends to increase frictional unemployment

question

How do labor market policies influence the natural rate of unemployment?

answer

legal restrictions on hours, vacations, retirement, and especially firing control the natural rate of unemployment

question

How do minimum wage laws influence the natural rate of unemployment?

answer

overall probably not an important factor in national unemployment rate but forces the wage to remain above equilibrium. Quantity of labor supplied > quantity of labor demanded

question

How do labor unions influence the natural rate of unemployment?

answer

little effect on national unemployment rate

question

How do efficiency wages influence the natural rate of unemployment?

answer

attract higher-quality job applicants but above equilibrium wages can increase unemployment

question

growth

answer

the change in real GDP over time

question

growth rate

answer

the annual percentage change in real GDP

question

growth rate formula

answer

(REAL GDP later year - REAL GDP earlier year)/ REAL GDP earlier year

question

the rule of 70

answer

method of determining how many years it will take GDP to double. 70/ growth rate

question

per capita GDP

answer

GDP/ population

question

growth rate of real per capita GDP

answer

growth rate of Y - growth rate of population

question

economic growth that is the ultimate determinant of

answer

nutrition, literacy, infant mortality, and life expectancy

question

even small differences in growth rates can lead to huge reductions in

answer

real per capita GDP

question

which correlates most closely with improvements in living standards?

answer

real PER CAPITA GDP

question

what does a country's standard of living depend on?

answer

its ability to produce goods and services

question

productivity

answer

the average quantity of goods and services produced per hour of labor input

question

productivity formula

answer

Y/ L (real GDP or number of outputs/ labor hours)

question

what determines productivity and its growth rate?

answer

capital and technological change

question

physical capital (K)

answer

the stock of equipment and structures used to produce goods and services

question

capital per labor hour

answer

K / L (physical capital/ labor hours)

question

human capital

answer

knowledge and skills workers acquire through eduction, training, and experience

question

technology

answer

processes a firm uses to turn inputs into outputs

question

technological change

answer

an increase in the quantity of output firms can produce with a given quantity of inputs

question

what are three sources of technological change?

answer

better machinery, increases in human capital, better organization and management of production

question

per worker production function

answer

the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

question

new growth theory

answer

a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system

question

what type of capital is subject to decreasing returns?

answer

physical capital

question

what type of capital is subject to increasing returns?

answer

knowledge capital

question

knowledge capital

answer

the totality of the collective scientific and engineering knowledge possessed by a society.

question

how can government policy help increase the accumulation of knowledge capital?

answer

protecting intellectual property with patents and copyrights, subsidizing research and development, and subsidizing education

question

convergence

answer

poor countries will grow faster than richer countries, and eventually catch up in terms of GDP per capita

question

why would we expect convergence?

answer

technology transfers and diminishing marginal returns to K/L

question

what are the three approaches to development?

answer

environmental approach, international trade approach, and institutional approach

question

environmental approach

answer

Jeff Sachs. geography, climate, endemic disease, inaccessibility of trade routes (landlocked countries), lack of natural resources, policy implications

question

International trade approach

answer

two dimensions of integration into the world of economy: trade in goods and services and capital inflows. in favor of globalization

question

institutional approach

answer

legal system, political system, monetary stability, and corruption.

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