Quiz 4 Review.docx - Per worker production function Per...

Per worker production function
Per worker production shifters
Section 1: Measuring the Economy: GDP, Prices, and Inflation
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 = (Nominal GDP/Real GDP) * 100
 Measures 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) *100
 The 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
o Does not account for household production and the underground economy
o One may use the underground economy when dealing with illegal goods, avoid paying
taxes, or avoid government regulation
o Does not account for value of leisure
o Does not account for pollution
o Does not account social changes (crime)
o Does not account for how the wealth is distributed
 Limitations of CPI
o Substitution Bias
o Increase in Quality Bias
o New Product Bias
o Outlet Bias
1.6 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 rate
 Real Interest rate = nominal interest rate – inflation rate
o Inflation rate is either given or can be calculated through the percent change in a price
index – CPI or GDP deflator
o (final –initial)/initial * 100
Section 2: Why Economies Grow in the Long Run
2.1. Be able to explain why economic growth isn't "zero sum." (notes)