econ quiz 4.docx - Section 1 Measuring the Economy GDP Prices and Inflation In this section we're studying how economists measure two things the size of

econ quiz 4.docx - Section 1 Measuring the Economy GDP...

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Section 1: Measuring the Economy: GDP, Prices, and Inflation In this section, we're studying how economists measure two things: the size of an economy (with GDP) and average prices in an economy (with the GDP deflator and the Consumer Price Index). We want to understand these so that we can measure how economies grow (like the U.S., Australia, or China) or don't (like Haiti or the Democratic Republic of the Congo) after you adjust for the effects of rising prices (i.e. inflation). After you read the text, study this material, and we cover it is class, you should 1.3 Be able to calculate the GDP deflator and CPI and explain what they measure. (Ch. 8.3 & 9.4 and notes) GDP Deflator: Measures prices relative to their value in 2012, when it was 100, measure inflation for the whole economy Formula: (nominal GDP/real GDP)x100 CPI :the ratio of the value of a market basket of goods and services for a typical household in one month compared to the market basket value in the base periodx100, measures the price level just for consumers Formula: (value of market basket in period t/value of market basket in the base period)X100 Formula for market basket :(QXP)+(QXP) .... 1.4 Be able to explain the limitations of GDP and the CPI. (Ch. 8.2 & 9.4) Limitations of GDP: Household production Social problems/not adjusted for crime Leisure Pollution Underground economy Limitation of CPI (Four biases cause changes in the CPI to overstate the true inflation rate): Substitution bias Increase in quality bias New product bias Outlet bias 1.6 Be able to calculate real interest rates and explain their importance. (Ch. 9.6 and notes) Real interest rates =% change in nominal interest rate-inflation What is real interest rates importance? The importance of the real interest rate is removes inflation for a better look at the economy Higher the inflation rate low the real interest rate Section 2: Why Economies Grow in the Long Run In this section, we're studying how economists explain growth over decades and centuries. We build upon what we did in the first section in that we often use real GDP to measure production a well as income. After you read the text, study this material, and
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