Macro

What are the main rules for computing GDP?

Only final goods and services are included to avoid double counting.

How are intermediate goods treated in GDP calculation?

They are excluded as their value is already included in final goods.

What happens to inventories in GDP measurement?

Inventories are treated as investment and included in GDP.

What is value added in the context of GDP?

Value added is the output value minus the cost of intermediate goods.

How does GDP measure value added across firms?

It sums the value added at each production stage to avoid double counting.

How are home production and informal activities treated in GDP?

They are generally excluded due to lack of market prices.

Why might GDP understate true living standards?

It excludes home production and informal activities that contribute to well-being.

What is the Consumer Price Index (CPI)?

A measure of inflation based on a fixed basket of goods and services.

How is the CPI constructed?

It uses a consumption basket weighted by household expenditure.

What is the difference between CPI and GDP deflator?

CPI uses a fixed basket; GDP deflator uses a changing basket reflecting current production.

What does the CPI include that the GDP deflator does not?

Imported goods, as they are part of household consumption.

What is substitution bias in the CPI?

It occurs because the CPI does not account for consumers switching to cheaper alternatives.

How does the introduction of new goods affect the CPI?

New goods are not fully captured, leading to an overstatement of inflation.

What is the unemployment rate?

A measure of the percentage of the labor force that is unemployed.

How is the unemployment rate measured?

Through a household survey classifying individuals as employed, unemployed, or not in the labor force.

What is the labor force participation rate?

The fraction of the adult population that is either employed or unemployed.

How can changes in labor force participation affect the unemployment rate?

A decrease in participation can lower the unemployment rate even if jobs remain unchanged.

What is a reason the unemployment rate may be misleading?

Discouraged workers are not counted, which can understate unemployment.

What is underemployment?

When individuals work less than they would prefer or in jobs below their skill level.

What are the factors of production?

Inputs used to produce goods and services.

How do capital and labour contribute to GDP?

Capital increases productivity; labour provides necessary human input.

What does the production function Y = F(K,L) represent?

Maximum output produced with given capital and labour.

What assumptions are made about factor supplies in the production function?

Factor supplies are fixed in the short run.

What are constant returns to scale?

Doubling inputs results in doubling output.

What are increasing returns to scale?

Doubling inputs results in more than double output.

What are decreasing returns to scale?

Doubling inputs results in less than double output.

What is the marginal product of labour (MPL)?

Additional output from employing one more unit of labour.

Why does the marginal product of labour diminish?

More workers with fixed capital leads to less output per worker.

How do competitive firms decide on hiring labour and capital?

They hire until the value of marginal products equals input prices.

How is the real wage determined in competitive markets?

At the level where labour demand equals labour supply.

How is the rental price of capital determined?

Where the marginal product of capital equals the rental price.

Why is economic profit zero in equilibrium with constant returns to scale?

Total income is exhausted by payments to labour and capital.