Midterm-1 Cheat Sheet - GDP = Y = C I G X X = exports –...

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GDP = Y = C + I + G + X X = exports – imports C = durable goods + nondurable goods + services I = fixed investment + inventory investmen fixed investment = nonresidential + residential Investment is a flow of new capital added to stock of capital. Net investment = gross investment depreciation. Investment = (Capital stock) t – (capital stock) t-1 = 1 t t K K Inventory investment = change in stock of inventories X > (< 0=> trade surplus (trade deficit) Real GDP vs nominal GDP. How would these terms be used? GDP = Σ value added = Σ final products = Σ incom GNP = GDP + net payments of factor incomes from abroad. Accounting F = Government transfers to the private sector N'= interest o government debt T = taxes X = net exports V = factor income and transfer payments from abroad (net) S p = Private Savings S g = Government saving S r = Rest of World savings S p = (Y + V + F + N' -T) – C S g = (T - F - N') – G S g > (<) => budget surplus (budget deficit) S r = - X - V = ne foreign investment of the United States S p +S g +S r =(Y + V + F + N' - T) - C +(T - F - N' - G) - V – X= Y - C - G – X M = money, Δ M M t - M t-1 B = government bonds, Δ B = B t - B t-1 S g = -( Δ M + Δ B), Gov deficit => sell bonds and or print money S p = I + Δ M + Δ B p (B p private bonds) S r = Δ B r (B r = foreign holdings of U. S. government bonds) S p +S g +S r =I + Δ M + Δ B p + - Δ M - Δ B + Δ B r Exchange rate = dollar price of one unit of the foreign currency. Can be calculated as a trade weighted exchange rate Review: Monitoring the Economy Inflation and Employment Inflation = 1 1 ( )/ t t t t p p p π = CPI measures cost of a basket of consumer goods. PPI measures cost o a basket of producer goods. Measuring Price The CPI measures price changes by buying a market basket of goods at different times. Three know problems are: 1) Tastes may change over time but same basket is bought. 2) Relative prices may change but the same basket is bought 3) Price change involve subtle income changes that give rise to income effects that will alter the mix of goods bought. The CPI for period t, P t is calculated wit the Laspeyres formula P p q p q t ti i n i i i n i = = = 1 1 1 1 1 / Project-2 The IS curve (IS stands for Investment and Saving) defines the combinations o income (Y) and interest rate (r) when the commodity market (goods and services) is at equilibrium (anywhere along the IS curve, the demand for commodities i equal to the supply, when it is off the IS curve the economy is out of equilibrium). However, the IS curve cannot determine real GDP and the interest rate. Th economy’s equilibrium real GDP and its equilibrium interest rate can be found at the intersection of the IS and LM curve, where both the commodity market an money market are in equilibrium. The LM curve defines the combinations of income (Y) and the interest rate at which the money market is in equilibrium
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