Macro - Macro:Unit1 GDP Deflator: tool to measure inflation...

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Macro: Unit 1  09/05/2010 01:23:00 1. How do the CPI and the GDP deflator differ with respect to the substitution effect? Why is this important? How else do the 2 measurements differ? How are the 2 measurements similar? GDP Deflator: tool to measure inflation Nominal GDP/ real GDP = current Q x current price / [ current Q x base year price] Looking at current quantity Measures everything domestically produced; market basket; no imprt ** allows for substitution effect (because uses current market basket of godos) ** does NOT capture quality improvements CPI: tool to measure inflation = base year Q x current P / [ base year Q x base year P] looking at base year Q FIXED market basket Includes only what consumers buy; includes imports ***does NOT allow for substitution effects o substitution bias (weakness of CPI) overstates inflation (b/c assuming cannot substitute) ***does NOT capture quality improvements 2. It is widely believed that the CPI overstates inflation by 1 % point per year. Implication? Policy making: social security; decreased payment Could decrease economic growth….
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3. What is NOT included in GDP? Used goods Research & development spending Unreported wages Illegal activity What is nominal GDP? = value of all final G & S produced domestically valued at market price (in current dollars; includes inflation); unadjusted What is real GDP? =value of all final G & S domestically produced valued at some constant dollar (removed inflation); measures real production What is a better measure of long run growth? Real GDP 4. How is the unemployment rate computed? u= # unemployed/ labor force x 100 What is a discouraged worker? Individual who has stopped looking for work; not employed and not looking for job-related reasons understate the unemployment rate because not included in unemployed category What has happened to labor force participation rates for men and women since 1950? Decrease in men: Kramer syndrome (slight) Increase in women: education (significant) 5. What determines a nation’s long run level of output? (Y) Factors of production
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Y= f(K, L, tech.) o K & L= stock variables; finite at a point in time o Tech.= combo/result of K & L; entire body of methods & materials to achieve commercial and industrial objectives; indicates advancement Why is this a fixed amount at a point in time in the long run? Output is fixed because at given point in time, K & L= fixed 6. What is MPK? MPK= marginal product of capital; the additional Y obtained by an additional unit of capital (keep gaining until a certain point- thereafter= diminishing point of returns) MPL? MPL= marginal product of labor; the additional Y obtained from an additional unit of labor
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Macro - Macro:Unit1 GDP Deflator: tool to measure inflation...

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