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ECO1102 Final Exam Notes.docx

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ECO1102 Final Exam NotesChapter 5 Measuring a Nations IncomeGDP gross domestic product measures the total income of a nation the most closely watched economic statistic watched because it is the best measure of a societys economic wellbeingThe market value of all final goods and services produced within a country in a given period of timeOnly includes the value of final goodsValue of intermediate goods is already included in the prices of final goodsIncludes tangible and intangibleComponents of GDPY GDPC consumption expenditureI investmentG government purchasesNX net exportsConsumption spending by households on GS with the exception of purchases of new housing considered an investmentInvestment spending in a capitalequipment inventories and structuresoTaken with the hope of producing future profitGovernment purchases education sewersoSpending on goods and services by local territorial provincial and federal governmentNet Exports the value of a nations exports minus the value of its importsReal vs Nominal GDPIf total spending rises from one year to the next theno1 the economy is producing a larger output of GSo2 GS are being sold at higher pricesGDP Deflator Nominal GDPReal GDP100Inflation rate in year 2 GDP deflator yr 2GDP deflator yr 1 GDP deflator yr 1 Capital vs Capital GoodsWhen businesses borrow money for investment spending its called capitalGoods bought with capitalChapter 6 Measuring the Cost of LivingConsumer Price Index CPI overall measure of the cost of the GS bought by a typical consumerUsed to monitor changes in the cost of living over timeWhen CPI rises the typical family has to spend more dollars to maintain the same standard of livingInflation describes a situation in which the economys overall price level is risingInflation rate is the percentage changein the price level from the previous periodProblems in measuring the cost of livingCommodity substitution biasoPrice changes are not proportional from item to itemIntroduction of new groupsoNew items are available for saleUnmeasured quality changeoPrices need to be adjusted for changes in qualityIndexationThe automatic correction of a dollar amount for the effects of inflation by law or contractCOLACost of living indexAutomatically raises the wage when the CPI raisesCorrecting economic variables for the effects of inflationDollar figures from different times1957 gas price in 2012 dollars1957 gas price X CPI in 2012CPI in 1957Real and Nominal Interest ratesReal interest rateNominal interest rateinflation rateChapter 7 Production and GrowthProduction and growthWhat dictates high standard of livingWhat policies should poor countries pursue to promote rapid growthWhat is best for economy in the long runProductivityExplains large variation in living standardDef the quantity of GS produces from each hour of a workers timeHow productivity is determinedPhysical capital per workeroStock of equipment and structures that are used to produce GSHuman capitaloTerm for the knowledge and skills that workers acquire through education experience and trainingNatural resourcesoInputs into the production of GS that are produced by natureTechnological knowledgeoSocietys understanding of the best ways to produce GSImportance of saving and investmentOne way to raise future productivity is to invest more current resources in the production of capitalDiminishing Returns and Catchup EffectDiminishing returns the benefit from an extra unit of input declines as the quantity of the input increases
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