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Hannah Holmes

Summary of Lecture Notes from Chapter 6 and Practice excludes unpredictable components used to predict underlying Questions changes in CPI 1.Consumer price index (CPI) the cost of a fixed basket of goods Indexation the automatic correction of a $ amount of the and services compared to the cost of the same basket in the base effects of inflation rate by law or contract year. measures overall level of prices in the economy percentage = inflation rate Chapter 7 Probs Substitution, ^ purchasing power cause of new goods, Production Function combine inputs to produce outputs unmeasured changes in quality of goods and services. Government policy to raise productivity and living standards imported goods impact productivity: the amount of goods and services produced for GDP prices of G S produced domestically each hour of a workers time. CPI prices of G S bought by typical consumers physical capital: the stock of equipment and structures that are GDP deflator measures overall prices in economy includes used to produce goods and services produced instead of consumed changes the group of goods and human capital: the knowledge and skills that workers acquire through education, training, and experience. services as composition of GDP changes. a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 natural resources: the inputs into the production of goods and GDP deflator = Nominal GDP x 100 services that are provided by nature, such as land, rivers, and Real GDP mineral deposits. 1.Past $ compared to present $ Past $ x Inflation over years technological knowledge: societys understanding of the best Present $ ways to produce goods and services. 2.Price indexes used to correct effect of inflation tax laws Y = A F(L, K, H, N) Y = output, L = labour, K = physical partially indexed capital, H = human capital, N = natural resources, A reflects the 3. Correction of inflation is important when looking at interest rates. available production technology, and F( ) is a function that shows Nominal interest rate reported without indexation^ in $ in how inputs are combined to produce output. a savings acct 1. Importance of Savings & Investment Opp. Cost resources Real interest rate takes acct changes in the value of the $ over are used to produce capital therefore a decrease in G & S time. reported with indexation Real = Nominal - Inflation produce for consumption. CPI measure of the overall cost of the G&S bought by the 2. diminishing returns: the property whereby the benefit from an extra unit of an input declines as the quantity of the input typical consumer increases. 1 more unit doesnt increase output 1. Basket 2. Prices Implication Catch-up Effect - the property whereby countries 3. Baskets Cost that start off poor tend to grow more rapidly than countries that 4. Chose base year and compute index start off rich. 1. Encourage saving consume less save more CPI = $ basket in current year x 100% $ basket in base year 2. (K) Investment from Abroad FDI- foreign $ and operated FPI 5. Inflation rate % change in price index from preceding period - foreign $ but domestically operated some profit goes to IR = CPI year 2 - CPI year 1 x 100% country CPI year 1 3. (H)Education kids could be working instead of in school high Core inflation measure of underlying trend of inflation opportunity cost ^ ed ^ ideas; brain dead prob ^ ed people leave to ^ standard of living places.4. (K,A)Property Rights and Political Stability improve economic 1.Financial markets - financial institutions through which savers can growth directly provide funds to borrowers 5. (A)Free Trade specializing means consume above the o Bond market - a certificate of indebtedness Loans that pay interest until the loan is paid off production level geography affects trade sub for technology 6. (K,A)Research Development techn. dev. Means ^ economic o Sale of bonds to raise money debt finance growth issued by big business; fed & prov. government bonds influence interest paid: term - length of time until 7. Population Growth stretches natural resources spreads GDP the bond matures; and credit risk - probability that the thin/ dilutes capital stock policies promote equal rights for woman borrower will fail to pay some of the interest or principal 8. Promotes technological progress ^ IR if ^ risk or long term o Stock market Stock a claim to partial ownership in a firm Sale of stock to raise money equity finance Sold on organised stock exchanges Price determined by supply and demand Price of stock reflects perception of companys future profitably Stock index an avg of a group of stock prices Chapter 5 Buy becuz dividends or capital gain GDP = total expenditure on G & S and total income probs = omits
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