Quiz 4 Review.docx - Per worker production function Per worker production shifters Section 1 Measuring the Economy GDP Prices and Inflation 1.3 Be able
Quiz 4 Review.docx - Per worker production function Per...
Per worker production functionPer worker production shiftersSection 1: Measuring the Economy: GDP, Prices, and Inflation1.3 Be able to calculate the GDP deflator and CPI and explain what they measure. (Ch. 8.3 & 9.4 and notes)GDP Deflator = (Nominal GDP/Real GDP) * 100Measures the average price of all goods and services in the economy relative to the base year (often use 2012)CPI = (value of market basket in period t) / (value of market basket in base period) *100The ratio of the value of a market basket of goods and services for the typical household in one month compared to the market basket value in the arbitrary base period. 1.4 Be able to explain the limitations of GDP and the CPI. (Ch. 8.2 & 9.4)Limitations of GDP oDoes not account for household production and the underground economyoOne may use the underground economy when dealing with illegal goods, avoid paying taxes, or avoid government regulationoDoes not account for value of leisureoDoes not account for pollutionoDoes not account social changes (crime)oDoes not account for how the wealth is distributedLimitations of CPI oSubstitution BiasoIncrease in Quality Bias oNew Product BiasoOutlet Bias1.6 Be able to calculate real interest rates and explain their importance. (Ch. 9.6 and notes)Real interest rate - The nominal interest rate minus the inflation rateReal Interest rate = nominal interest rate – inflation rateoInflation rate is either given or can be calculated through the percent change in a price index – CPI or GDP deflatoro(final –initial)/initial * 100Section 2: Why Economies Grow in the Long Run2.1. Be able to explain why economic growth isn't "zero sum." (notes)