ECON 2100 EXAM 4 STUDY GUIDE
Microeconomics - Answer -the study of how individual households and firms make
decisions and how they interact with one another in markets
Macroeconomics - Answer -the study of the economy as a whole
Gross Domestic Product - Answer -measures the total income of everyone in the
economy and the total expenditure on the economy's output of goods and services. total
income and total expenditure are essentially the same thing. includes all items produced
in the economy and sold legally in markets. only includes final goods, not intermediate
goods.
Statistical Discrepency - Answer -the difference between the two calculations of the
GDP
GDP formula - Answer -GDP = consumption + investment + government purchases +
net exports
(also Y = C+I+G+NX)
Consumption - Answer -spending by households on goods and services with the
exception of purchases of new housing
Investment - Answer -the purchase of goods that will be used in the future to produce
more goods and services
e.g. housing, inventory, capital equipment structures
Government Purchases - Answer -spending on goods and services by local, state, and
federal governments.
e.g. salaries of gov't employees
however, social security is not included in this
Net Exports - Answer -the foreign purchases of domestically produced goods minus the
domestic purchases of foreign goods
(exports - imports)
Real GDP - Answer -what the value of the goods and services produced during the
year would be if they were priced at the prices of a specific year in the past. usually the
one used by economists because it measures economic growth as the percentage
change in real GDP from one period to another.
Nominal GDP - Answer -the value of the GDP with this year's prices
GDP Deflator - Answer -GDP Deflator = (Nominal GDP / Real GDP) * 100
reflects only the prices of goods and services
, always = 100 for the base year
Inflation Rate (GDP) - Answer -(GDP Deflator 2 - GDP Deflator 1) / GDP Deflator 1
Consumer Price Index - Answer -measure of the overall cost of goods and services
bought by a typical consumer
Inflation Rate - Answer -percentage change in the price level from the previous period,
usually calculated through the CPI.
Five steps to calculate the CPI - Answer -1. Fix the basket: determine which prices are
most important to the typical consumer
2. Find the prices: find prices of each of the goods in the basket at each point in time
3. Compute the basket's cost
4. Choose a base year and compute the index: (CPI = priceNow/priceBase *100)
5. Compute the inflation rate: Inflation = dCPI/CPI1 * 100
Producer Price Index - Answer -measures the cost of a basket of goods and services
bought by firms rather than consumers, useful in predicting the changes in the CPI.
Substitution Bias - Answer -when prices change from one year to the next and do not
all change proportionately. consumers substitute toward goods that have become
relatively less expensive.
Unmeasured Quality Change - Answer -if the quality of a good deteriorates from one
year to the next while its price remains the same, the value of a dollar falls, because you
are getting a lesser good for the same amount of money.
GDP Deflator vs CPI - Answer -1. GDP deflator reflects the prices of all goods and
services produced DOMESTICALLY and the CPI reflects the prices of all goods
BOUGHT BY CONSUMERS
2. CPI compares the price of a fixed basket of goods and services to the price of the
basket in the base year and the GDP deflator compares the price of currently produced
goods and services used to compute the GDP deflator changes automatically over time
Dollar Figures from Different Times - Answer -amount in today's dollars = amount in
year T dollars * (price level today/ price level in year T)
Indexation - Answer -when some dollar amount is automatically corrected for changes
in the price level by law or contract, the amount is said to be indexed for inflation.
Nominal Interest Rate - Answer -the interest rate that measures the change in dollar
amounts
Real Interest Rate - Answer -corrected for inflation
Real = Nominal - Inflation
Microeconomics - Answer -the study of how individual households and firms make
decisions and how they interact with one another in markets
Macroeconomics - Answer -the study of the economy as a whole
Gross Domestic Product - Answer -measures the total income of everyone in the
economy and the total expenditure on the economy's output of goods and services. total
income and total expenditure are essentially the same thing. includes all items produced
in the economy and sold legally in markets. only includes final goods, not intermediate
goods.
Statistical Discrepency - Answer -the difference between the two calculations of the
GDP
GDP formula - Answer -GDP = consumption + investment + government purchases +
net exports
(also Y = C+I+G+NX)
Consumption - Answer -spending by households on goods and services with the
exception of purchases of new housing
Investment - Answer -the purchase of goods that will be used in the future to produce
more goods and services
e.g. housing, inventory, capital equipment structures
Government Purchases - Answer -spending on goods and services by local, state, and
federal governments.
e.g. salaries of gov't employees
however, social security is not included in this
Net Exports - Answer -the foreign purchases of domestically produced goods minus the
domestic purchases of foreign goods
(exports - imports)
Real GDP - Answer -what the value of the goods and services produced during the
year would be if they were priced at the prices of a specific year in the past. usually the
one used by economists because it measures economic growth as the percentage
change in real GDP from one period to another.
Nominal GDP - Answer -the value of the GDP with this year's prices
GDP Deflator - Answer -GDP Deflator = (Nominal GDP / Real GDP) * 100
reflects only the prices of goods and services
, always = 100 for the base year
Inflation Rate (GDP) - Answer -(GDP Deflator 2 - GDP Deflator 1) / GDP Deflator 1
Consumer Price Index - Answer -measure of the overall cost of goods and services
bought by a typical consumer
Inflation Rate - Answer -percentage change in the price level from the previous period,
usually calculated through the CPI.
Five steps to calculate the CPI - Answer -1. Fix the basket: determine which prices are
most important to the typical consumer
2. Find the prices: find prices of each of the goods in the basket at each point in time
3. Compute the basket's cost
4. Choose a base year and compute the index: (CPI = priceNow/priceBase *100)
5. Compute the inflation rate: Inflation = dCPI/CPI1 * 100
Producer Price Index - Answer -measures the cost of a basket of goods and services
bought by firms rather than consumers, useful in predicting the changes in the CPI.
Substitution Bias - Answer -when prices change from one year to the next and do not
all change proportionately. consumers substitute toward goods that have become
relatively less expensive.
Unmeasured Quality Change - Answer -if the quality of a good deteriorates from one
year to the next while its price remains the same, the value of a dollar falls, because you
are getting a lesser good for the same amount of money.
GDP Deflator vs CPI - Answer -1. GDP deflator reflects the prices of all goods and
services produced DOMESTICALLY and the CPI reflects the prices of all goods
BOUGHT BY CONSUMERS
2. CPI compares the price of a fixed basket of goods and services to the price of the
basket in the base year and the GDP deflator compares the price of currently produced
goods and services used to compute the GDP deflator changes automatically over time
Dollar Figures from Different Times - Answer -amount in today's dollars = amount in
year T dollars * (price level today/ price level in year T)
Indexation - Answer -when some dollar amount is automatically corrected for changes
in the price level by law or contract, the amount is said to be indexed for inflation.
Nominal Interest Rate - Answer -the interest rate that measures the change in dollar
amounts
Real Interest Rate - Answer -corrected for inflation
Real = Nominal - Inflation
