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30 Cards in this Set
- Front
- Back
Three main groups of the economy
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1. Consumers- max satisfaction with limited resources
2. Firms- max profit by selling g/s 3. Governments- spend money eduction, health, employee training and military, oversee regs, projects |
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economic growth
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economy's ability to produce greater levels of output over time and is expressed as the percentage change in a nations GDP over a giver period
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GDP
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market value of all final goods and services produced within a country in a given time period (usually quarter or year)
** FINAL GOODS- purchased by the end user |
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The expenditure Approach
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Total Spending on g/s
= C + I + G + (X-M) personal consumption, investment, government spending, net Exports |
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income approach
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total income earned by producing those g/s
income that firms pay for.. wages, rent for land, interest for capital goods, profits for entrepreneurs, |
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nominal vs real GDP
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nominal= dollar value of all g/s produced ina given year at prices that prevailed in that year
Real GDP= " prices that prevailed in a base year - tells us amount the change in out put produced - difference b/t the two is based entirely on price |
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What causes GDP to grow?
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1. increase in population= growing work force
2. increases in capital stock (productivity) and individual productivity 3. improvements in technology- substituting capital for labour (ATM and tellers) |
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determinants of economic growth
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increase in output/productivity per worker comes from the technology and capital per worker therefore we need liquidity to support this investment
1) capital alone cannot sustain growth- it leads to smaller and smaller gains in output so higher savings does not mean higher growth over time 2) sustained growth requires technological progress which means reserach |
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phases of the business cycle- growth
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expansion- inflation is stable, adjusted inventory to meet higher demand and investing in new capacity, profits increasing, business start ups out number bankruptcies, job creation is steady, RGDP rising
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phases of the business cycle- peak
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- demand outstrips capacity
- labour and product shortages - interest rates rise and bond prices fall - sales decline causing an accumulation of inventory - stock prices fall |
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phases of the business cycle- contraction
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- R GDP declines
- unwanted inventories and declining profits - more failures then start ups - falling employment erodes house hold income - consumer spend less and save mroe |
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phases of the business cycle-trough
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- interest rates fall triggering a bond rally
- inflation falls - purchasers who postponed spending now spend on lower prices - stock prices rally |
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phases of the business cycle- recovery
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- firms who reduced inventory must re stock
- still cautious of hiring back workers - not ready to make new investment - inflation may decline further, unemployment is still higher, wages are restrained ** expansion starts when an economy rises above its previous peak |
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economic indicators
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leading (anticipate)- housing starts, commodity prices, changes in employment through hours worked, stock prices, money supply, manufacturers new orders
coincident (current state)- personal income, GDP, industrial production, retail sales Lagging (confirm patterns)- unemployment, private sectors p*e spending, bus loans, labour costs, inflation |
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statistics canada recession
soft landings |
measured by the dept, duration and diffusion
- sustained debt, duration more then a couple months, whole economy soft landings- economic growth slows sharply by does not turn negative "holy grail" of policy makers |
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labour maker indicators
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participation rate- share of the working age pop that is in the labour force (labour(E+UE) /working age) --> shows the willingness of people to enter the workforce and take jobs
unemployment rate- represents the share of the labour force that is unemployed by actively looking for work. --> this number can rise bc employment falls, or more people enter the work force |
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types of unemployment
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cyclical unemployment- tied to business cycle, rises when the economy weakens (recession) and falls during growth
frictional unemployment- normal labour turnover, finished school m quit, fired, part of a healthy economy structural unemployment- lack skills, live in the wrong area, do not want to work for the wage rate offered - tied to technology, international comp, government policy, lasts longer then frictional because workers must restrain or relocate for a job |
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natural and actual unemployemt
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- when actual > natural, excess supply of workers= weakens labor bargaining power, inflation in check because no wage gains
actual < natural, shortage = bargaining power, wage gains, inflation |
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What factors influence interest rates?
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1. Demand and supply of capital- government decific and boom in business raises the demand for money (capital) and TF the price of capital, interest rates, goes up
2. Default Risk: if the government is at rsk of defaulting on its risk, the rates rise for everyone, this adiitonal risk is called default premium 3. foreign i and exchange rates- 4. central bank credibility- they can raise and lower ST rates to keep inflation low and stable 5. inflation- interest rates are raised by lenders to compensate for the additional inflation |
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How do interest rates impact the economy?
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1. raise the cost of capital for business investments.. invetments should earn a greater return then the cost of funds used to make them. higher rates make profit harder
2. higher rates discourage spending and encourages saving 3. increasing the portion of income needed to service debt, this reduces income available for other items (however savers earn more) ** high rates has a negative effect on rates |
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CPI
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consumer price index
600goods average price paid for this basket |
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costs of inflation
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1. erodes standard of living for those with fixed income, rewards those who have bargaining pwr and can increase wages of change investment strategy
2. reduces real value of investments bc money is worth less.. lenders also demand a higher rate 3. distorts signal prices 4. brings rising interest rates and a recession |
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output gap
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difference between real and potential GDP (what the economy is capable of producing when its existing inputs of labor, capital and tech are fully employed at their normal levels of us (aka with out inflation rising)
negative gap- actual < potential= spare capacity in the economy - inflation will or remain steady bc unused labor and capacity can be called in positive output gap- above capacity, upward inflation pressure (expansion towards peak) |
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demand pull and cost push inflation
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demand: higher and continued consumer demand pushes inflation higher
cost: supply side becomes more costly pushes pries up |
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phillips currve
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unemployment is low- inflation is higher
unemployment is high- inflation is low |
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sacrifice ratio
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gauge the cost of disinflation, the extent to which GDP must be reduced wit increase unemployment to achieve a 1% decrease in the inflation rate
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balance of payments
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bop- detailed statement of a country's economic transactions with the rest of the worldd for a given period of time
1) Current accounts: exchanges of goods and services b/t Canada and foreigners 2) Capital and financial accounts: financial flows b/t Canada and foreigners related to investments by foreigners in canada and vice versa * if we purchase more abroad then we do here, we run a current deficit. TF we need to fund this by selling more assets and running a capital ad financial account surplus |
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merchandise trade
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if canada's dollar drops, exports will increase because it is cheaper, but imports will decrease bc it is more costly to buy foreign goods. the benefits are lost however if the price of canadian goods rise to reflect the lower dollar/demand
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determinants of exchange rates
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- inflation differentials
- interest rate diffs - current account - economic performance -public debts and deficits - political stability |
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types of exchange rates
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fixed: central bank maintains the domestic currency at a fixed level against another country
floating rate: market forces to determine value of currency - central bank may intervene if it thinks movements are excessive |