Podcast
Questions and Answers
Which of the following components is NOT part of the aggregate expenditure formula?
Which of the following components is NOT part of the aggregate expenditure formula?
What is the primary determinant of the real interest rate?
What is the primary determinant of the real interest rate?
Which factor is likely to shift the demand curve for loans?
Which factor is likely to shift the demand curve for loans?
Crowding out occurs when government borrowing leads to decreased levels of which type of investment?
Crowding out occurs when government borrowing leads to decreased levels of which type of investment?
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The GDP deflator is used to measure the price of which of the following?
The GDP deflator is used to measure the price of which of the following?
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What are the components of GDP according to the expenditure approach?
What are the components of GDP according to the expenditure approach?
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What does Real GDP measure?
What does Real GDP measure?
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Which of the following accurately describes nominal GDP?
Which of the following accurately describes nominal GDP?
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What is the primary difference between Gross Domestic Product (GDP) and Gross National Product (GNP)?
What is the primary difference between Gross Domestic Product (GDP) and Gross National Product (GNP)?
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What is the GDP deflator used for?
What is the GDP deflator used for?
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What is the formula to calculate the unemployment rate?
What is the formula to calculate the unemployment rate?
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Which type of unemployment is described as occurring because it takes time for employers and workers to find each other?
Which type of unemployment is described as occurring because it takes time for employers and workers to find each other?
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What does the employment population ratio measure?
What does the employment population ratio measure?
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What is meant by cyclical unemployment?
What is meant by cyclical unemployment?
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Which inflation measurement method is likely to overstate inflation due to fixed market basket components?
Which inflation measurement method is likely to overstate inflation due to fixed market basket components?
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What is the natural rate of unemployment comprised of?
What is the natural rate of unemployment comprised of?
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How is economic growth typically measured?
How is economic growth typically measured?
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Which step is NOT involved in calculating a price index?
Which step is NOT involved in calculating a price index?
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Study Notes
The Labour Force
- Employed: Individuals working for pay
- Unemployed: Individuals actively looking for work but without a job
- Out of the Labour Force: Individuals not actively looking for work
-
Labour Force: Sum of employed and unemployed individuals
- Unemployment Rate: Percentage of the Labour Force that is unemployed
- Labour force participation rate: Percentage of the working-age population in the Labour Force
- Employment population ratio: Percentage of the working-age population employed
Types of Unemployment
- Frictional Unemployment: Job searching time between employers and workers
- Structural Unemployment: Lack of skills valued by the labour market
- Cyclical Unemployment: Employment fluctuations due to GDP changes; recessions
- Seasonal Unemployment: Fluctuating employment in industries like construction, fishing, and farming
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Natural Rate of Unemployment: Sum of frictional and structural unemployment
- Full employment: Occurs when actual unemployment equals the natural rate of unemployment
Inflation
- General and ongoing increase in price levels
Price Index
- Market Basket: A selection of goods and services used to calculate the index
-
Four Steps to calculating the index:
- Selecting goods and services for the market basket
- Determining market basket cost in a base period
- Determining current period market basket cost
- Calculating the index by dividing current cost by base period cost
-
Consumer Price Index (CPI): Measures changes in consumer goods and services price levels over time
-
Potential overestimation of inflation:
- Substitution bias: Components of the market basket are fixed
- New Product bias: Excludes new goods and services
- Quality change bias: Incomplete accounting for quality changes
- Outlet bias: The type of store can affect prices
-
Potential overestimation of inflation:
- Inflation Rate: Percentage change in CPI between two periods
Economic Growth
- Measured as a percentage change in real GDP between time periods
- Key points:
- Growth is a process
- Investment = Savings
- Savings finances investments
Interest Rates
- Interest Rate: Price of borrowing in the financial market, also the rate of return on an investment
- Consumer Price Index (CPI): A measure of changes in the price of a specific basket of consumer goods and services
- GDP Deflator: Measure of price changes of all new, domestically produced goods and services
- Real Interest Rate: Rate of return adjusted for inflation
Supply and Demand for Loans
- Interest rate increases cause loan demand to decrease and supply to increase, and vice versa
-
Demand shifts:
- Consumer optimism or pessimism
- Business investment changes
- Tax credits
-
Supply shifts:
- Speculation about changes in the economy
- Changes in consumer spending patterns
- Government policies
Crowding Out
- Government borrowing potentially reduces private sector investment
- Government spending may lead to less private sector spending
Aggregate Expenditure
- Sum of the market value of all finished goods and services in the economy
- Components:
- Consumption
- Planned Investment
- Government Expenditure
- Net Exports
GDP (Gross Domestic Product)
- Measures the total output of a country's economy
- Market value of all final goods and services produced within a country in a given year
Expenditure Approach to GDP
- GDP = C + I + G + (X-M)
- C: Consumption
- I: Private Investment
- G: Government Purchases
- (X-M): Net Exports (Exports - Imports)
Flow Variable
- Measured over a specified period
Stock Variable
- Independent of time
Consumption
- Value of goods and services purchased by households
Private Investment
- Value of goods produced for use in producing other goods and services
Government Purchases
- Government expenditures for goods and services
Net Exports
- Difference between exports and imports
Value Added Approach
- Summing the value added at each stage of production
Income Approach
- GDP = GDI (Gross Domestic Income)
Nominal GDP vs. Real GDP
- Nominal GDP: Price × Quantity
- Real GDP: Base Year Price × Current Year Quantity
- GDP Deflator: 100 × (Nominal GDP / Real GDP)
GNP (Gross National Product)
- Value of final output produced by residents of a country, regardless of geographic location
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