ECON-3020 Study Guide - Fall 2018, Comprehensive Midterm Notes - Gross Domestic Product, United States Dollar, Measures Of National Income And Output
ECON-3020
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Topic 1: Introduction
❖ Models are useful because they are
➢ Abstract
➢ Simple
➢ Distinguish exogenous from endogenous
■ Exogenous: taken as given by the model. What is not explained, but
assumed
■ Endogenous: what the model explains, what it tries to account for
■ Example: How do consumers respond to price discounts?
● Exogenous: price discounts
● Endogenous: consumption of goods
➢ Diverse
➢ Testable
❖ Inconvenient but necessary separations
➢ Short run: fixed capital, fixed prices, fixed technology, sluggish prices (markets in
process of clearing)
➢ Long run: prices adjust, markets clear, capital accumulates, technology improves
❖ GDP: the market value of all final goods and services newly produced within a fixed
period of time in domestic soil
➢ Three ways to measure it:
■ Total sales to consumers, or total spending
■ Sum of value added in the production of all goods
■ Total income to everyone in the economy
➢ These ways are all the same because someone’s income is someone’s
spending, and because final goods include intermediaries.
➢ How we compute GDP
■ GDPt=PtAQtA+PtBQtB+...
■ When no price is available, impute prices
● Housing: as renting home from myself (service provided by
housing)
● Government services, like police, valued at csot
■ Used goods are not included
■ Inventories are included when created
■ Difficulties
● Imputation: hard, subjective, arbitrary
● Excludes underground economy
● Excludes non-market activities
● Income is not wealth: If a war destroys half of the factories, we
may all work harder this year, so GDP is actually higher, but we
are worse off.
● Income is not welfare: forced labor, environmental destruction
■ Financing does not matter: it doesn’t matter who is paying
■ Two alternatives:
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● GNP: gross national product
◆ Income owned by domestic citizens
◆ If most industries in an economy are owned by foreigners who
ship out the profits and goods, GDP>GNP
● DPI: disposable personal income
◆ What households and non-corporate businesses have after taxes
and transfers
■ GDP highly correlated with health, education, human development, electricity,
happiness
■ But GDP has limitations
● Health: you can work citizens to death
● Quality of life: does not include freedom or leisure
● Environment
● Useless government spending
● Not wealth
● Happiness: inequality, crime, only matter indirectly
➢ Real GDP: GDP measured at constant (base prices)
■ Nominal GDP=current year price*quantity t
■ Real GDP=base year price*quantity t
■ To calculate growth, put this year’s RGDP over the GDP of the base year
● or from a specific time period, put this year’s real GDP over last
year’s real GDP
➢ Laspeyres, Paasche, chain-weighted GDP (in book)
➢ Another issue: compare countries
■ Must convert currency
■ NGDP in dollars=NGDP of (yen, euros, pesos, etc.) divided by E, the
exchange rate (how many yes, euros, pesos, etc. one can buy with one
dollar)
■ However, prices of goods are different in different countries. Purchasing a
Big Mac might cost more here than in Japan.
➢ So, we use purchasing power parity exchange rates
■ An exchange rate that equalizes the purchasing power of two countries
● Eppp=PJapan/PUS
● Use the same fixed basket of goods to compute the price level in
each country
❖ Inflation
➢ If prices go up, you can’t buy as many goods with $1
➢ Measures of inflation
■ GDP deflator
■ Consumer price index (CPI)
● Fixes basket of goods
● Weaknesses
◆ Sampling: only a few consumption goods
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