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GDP

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The market value of all final goods and services produced in the economy in a give time period

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Output-based GDP

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(output) + (subsidies on products) - (intermediate consumption)

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Expenditure-based GDP

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Each dollar of expenditure included in GDP is placed into the 4 main components in the economy, and their sum must equal GDP

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GNI

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GDP + (factor payments received from the rest of the world) - (payments of factors income paid to the ROW) GNI is the value added by domestically owned factors of production while GDP is the value added domestically

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GDP growth

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GDP year 1 minus GDP year 2 divided by GDP year 2 times 100%

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Real GDP

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Tells us the size of the economy at a given time. Also called GDP base year, because it is compared to prices in the year we compare with.

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GDP Deflator

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Tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. In year 1 = Nominal GDP year 1 divided by Real GDP year 1 times 100%. It is an index number, which means it is 100 in base year.

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General Level of Price Increase

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GDP deflator year 2 minus GDP deflator year 1 divided by GDP deflator year 1 times 100%

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Purchasing Power Parity (PPP)

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To obtain true comparisons internationally, price differences are eliminated by using this. It is used to convert the values of the countries' economic aggregates expressed in national currency into a common currency (international dollars). It assumes that the price levels in the two countries are the same if measured in terms of the same currency. E.g. if one pound of coffee is 25DKK in DK and 5$ in US the nominal exchange rate must be 5/25 = 0.2 for the countries to have the same purchasing power.

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Nominal Exchange Rate

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E divided by P*. Where E is number of foreign currency units that can equal one domestic currency unit. P* is the foreign price level.

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Human Development Index (HDI)

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measures the economic well being, computed as the geometric mean of 3 normalized indices; Health, Education, and Income

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Consumer Price Index (CPI)

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When increasing a family has to spend more money in order to maintain the same standard of living. It is a measure of the overall cost of the goods and services bought by the typical consumer. It is calculated by fixing the price of the average basket bought and weighing the most important prices. It does not reflect the change in purchasing power since it is based on a fixed basket of goods and services.

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CPI Change Rate

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CPI year 2 minus CPI year 1 divided by CPI year 1 times 100. This gives us the general increase in price level over time. In base year, CPI is 100.

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GDP deflator vs. CPI

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The first measures how the price level changes of all the goods and services produced domestically, while the latter reflects the prices of all goods and services bought by consumers.

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Inflation

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A situation where the economy's overall price level is rising

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Inflation Rate

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CPI year 1 minus CPI year 2 divided by CPI year 2 times 100. This is the same as the CPI change rate.

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Real Interest Rate

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It is the nominal interest rate minus the inflation rate. If the inflation rate is higher then the nominal exchange rate (which is what banks provided), you will loose purchasing power when investing.

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Sources of Growth

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Production of capacity is its source. It depends on the fraction of 15-64 year olds who works, its working time, and its productivity.

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GDP per Capita

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The GDP divided by the population

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Productivity

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Quantity of goods and services produced each hour of a worker's time. Investments in real capacity improve both quality and quantity, but relatively fluctuating and general trend is decline.

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Scandinavian Welfare Model

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Principle is that all citizens have right to public service/transfers and all are obliged to contribute (universalism).

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Measuring Economic Inequality

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Many ways of measuring inequality in the distribution of income across the population ('relative' poverty): • Distribution of annual income. If median income < mean income : there are more individuals with low incomes than with high incomes. • Decile dispersion ratio : ratio of the average income of the richest 10 % / by the average income of the bottom 10%. It gives the income of the rich as multiples of that of the poor. • Lorenz Curve % of total income received by each given % of households (usually quintiles): the curve plots the cumulative % of total income received against the cumulative % of recipients. If each individual had the same income (total equality), the Lorenz curve would be a straight line.

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The Gini index

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measures the extent to which the distribution of income among individuals within an economy deviates from a hypothetical perfectly equal distribution. Varies between 0 (complete equality) and 100 (complete inequality). Income redistribution (income taxes, benefit payments, subsidized welfare goods and services)

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Short-run Fluctuations

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An economic activity occur in all countries and in all times throughout history. In most years we face expansion of goods and services.

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Cyclical Component

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It is not a trend but a short-run variation in the economy activity

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The Business Cycle

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The short-run fluctuations. Periodic but irregular up and down movements in production and jobs. Hardly predictable with much accuracy. Short run changes is monitored by the real GDP

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The Primary Industries

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The exploitation of natural resource endowments and extractions of minerals, oil, and gas

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The secondary Industries

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Manufacturing, construction, and utilities (producers of water and energy)

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The Tertiary Industries

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Service Industries

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Structural Changes

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It is perquisite for growth, but growth does also cause it. It can be changes from the primary to the secondary sectors (people move to the cities), expansion of public and tertiary sectors, and recently strong expansion of private service sectors

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Technological Change

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The most important driving force for increase in productivity; specialization, substitution of labor for capital, new product methods, and products.

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Human Capital

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Education and qualification of the workforce. Important role since technological change is knowledge driven. It also implies changes in the structure and composition of labor demand

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Social Capital

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Equally important as human capital to the technological factors in determining growth.

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Exposure of International Trade

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The gains from trade are associated with specialization and division of labor, and therefore also with structural changes.

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International integration/international organizations

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extends the market: more division of production and changes in preferences and in the production possibility set. Trade allows countries to specialize in what they do best. Countries are as much partners in the world economy as they are competitors.

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Specialization

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Concentrating on the production of only one good (or a few)

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Absolute advantage

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When you are comparing the productivity with another person, firm, or nation. The producer that requires a smaller quantity of inputs to produce a good (higher productivity) is said to have an absolute advantage in producing that good

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Opportunity cost

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Rather than comparing quantities of input needed, this is can be compared because time spent on one product takes away the time spent on another product.

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Comparative advantage

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The producer who has the smaller opportunity cost in producing one good is said to have this.

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Tariff Barriers

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Taxes imposed by the importing country when an imported good crosses its international border.

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Non-tariff barriers

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Include bureaucratic rules concerning approval of products, specialized national product standards, as well as quotas on imports or subsidies to domestic products.

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Inter-industry Trade

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Trade driven by differences in natural resources endowments

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Intra-industry Trade

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Trade between the same industries in various countries.

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Horizontal differentiation

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E.g. different brands

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Vertical differentiation

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E.g. different qualities

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Balance of payments

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Here the transactions with the rest of the world is recorded. This gives an account of the in- and outflow of foreign currency generated by trade in goods and services and financial transactions.

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The Current Account

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A sub-balance of payments. Records of (i) the receipts from the sale of goods and services to foreigners, (ii) the payments for goods and services bought from foreigners, (iii) the income and other transfers received from and paid to foreigners

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The Capital Account

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A sub-balance of payments. Records of all the international borrowing and lending transactions

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The Change In Reserve Assets

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A sub-balance of payments. Shows the net increase or decrease in a country's holdings of foreign currency reserves

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Foreign exchange market

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Is a market in which the currency of one country is exchanged for the currency of another.

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Terms of trade

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(The price of exportable goods)/(The price of importable goods)

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Wage competitiveness

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Important measure of international competitiveness since the competitive position is mainly driven by wage costs of production. If wage increases are given in the short run, a devaluation can be a quick way to improve competitiveness (but brings inflation, hence increases in wage demands and unchanged wage competitiveness in the end).

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The Labor Market

answer

The core of the economy: this is where workers and employers meet. Moreover, the outcomes of the labor market are important for business cycles and growth and for political concerns (distribution of job and income in society). Not like other markets: The labor market cannot be approached by a traditional competitive framework. Responds to public policies: there is an deep relationship between welfare policies (education, tax and social) and the way in which the labor market functions.

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Labor demand

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The demand describes how much labor is demanded by firms

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Labor supply

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determines the available labor input for market activities. It has both a quantitative and a qualitative dimension.

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Unemployment

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Crucial indicator as for how well functioning labor markets are. The duration shows how big the unemployment problem is in the country.

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Natural rate of unemployment

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The amount of unemployment that the economy normally experiences. The designation natural means that this unemployment does not go away on its own, even in the long run.

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A Sclerotic labor market

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Few separations, few hires and a stagnant unemployment pool.

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Frictional unemployment

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Inevitable frictional unemployment resulting from the process of matching workers and jobs (part of the natural unemployment rate)

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Structural unemployment

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Or persistent unemployment due to a deep mismatch between demand and supply of labor across regions, skills, as well as to legislation (part of the natural unemployment rate).

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Reservation wage

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The wage, which makes workers indifferent to whether they are working or unemployed. Often, wages exceeds this.

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Bargaining power

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Even in the absence of collective bargaining, workers have some bargaining power that they use to obtain wages above their reservation wages. How much bargaining power a worker has depends on: (i) how costly it would be for the firm to replace her (ii) how hard it would be for the worker to find another job. which implies that how much bargaining power a worker has depends on: (i) the characteristics of both the job and the worker: replacing a cashier is easy and not very costly → low workers' bargaining power (ii) labor market conditions: a low unemployment rate makes more difficult for firms to find acceptable replacement workers but it is easier for workers to find other jobs → Workers have a stronger bargaining position

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Collective bargaining

answer

The process by which unions and firms agree on the terms of employment (broad sense).

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Efficiency wages

answer

Theory states that firms operate more efficiently if wages are above the equilibrium level.

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Labor market institutions

answer

Unemployment insurance, employment protection, minimum-wage laws, unions

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Labor market discrimination

answer

Occurs when the marketplace offers different opportunities to similar individuals who differ only by personal characteristics (i.e. after controlling for human capital and job characteristics).

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Passive measures

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Programs for the unemployed to secure their welfare benefits (insurance effect) and programs aiming at diminishing the labor force.

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Incentive effects of the UI

answer

- Influence on the effort that the unemployed devote to job search - A high replacement ratio could result in an income from finding a job little different from the income as unemployed - Reduced benefits with the duration of the unemployment spell could lead to accept a job even if the wage offer is relatively low.

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Flexicurity

answer

Flexible hiring and firing rules for employers + secure income transfers for workers.

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The liberal welfare model

answer

residual role of the state, modest state-provided benefits are modest, high concern about work incentives.

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The corporatist or continental European model

answer

crucial role private insurance schemes and the family (provider of social services).

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The universal or Scandinavian model

answer

central role of the state (provider of social services), universal rights defined at the individual level, social safety net for unemployment, sickness, inability to work, education, retirement and pension.

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Efficiency (efficient allocation of resources)

answer

Is obtained in the free market if the allocation of resources that comes out maximizes the total surplus received by all members of society. The price adjusts to balance the supply and the demand for the good. And the quantity produced and consumed in the market equilibrium maximizes the sum of consumer and producer surplus.

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Equity

answer

The fairness of the distribution of well-being among the various buyers and sellers.

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Externalities (positive, negative, in consumption/production)

answer

Arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.

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Pigovian taxes/subsidies

answer

The government can internalize the externality by taxing activities that have negative externalities and subsidizing activities that have positive externalities

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Pollution permits

answer

The government allocates rights to pollute to firms and allows voluntary transfers of these rights from one firm to another. A market to trade these permits develops and is governed by the forces of supply and demand: it efficiently allocates the rights to pollute. Firms that can reduce pollution only at high cost are willing to pay the most for the pollution permits while firms that can reduce pollution at low cost prefer to sell the permits they have. Both Pigovian taxes and pollution permits internalize the externality of pollution by making it costly for firms to pollute.

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Taxation

answer

It is inevitable. Revenues for provision of public goods, for remedies to externalities, for regulation of common resources. Its the inefficiency (reduction in economic wellbeing of taxpayers) that a tax creates as people take decisions according to the tax incentive rather than the true costs and benefits of the goods that they buy/sell.

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Marginal vs. average tax rates

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The average tax rate is total taxes paid divided by total income. The marginal tax rate is the extra taxes paid on an additional euro of income. It measures how much the tax system discourages people to work hard.

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Proportional, regressive, progressive

answer

Taxes How much more should the rich pay (vertical equity) ? - in a proportional tax system, all taxpayers pay the same fraction of income - in a regressive tax system, high-income taxpayers pay a smaller fraction of their income - in a progressive tax system, high-income taxpayers pay a larger fraction of their income.

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Deadweight losses

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that result when taxes distort the decisions that people make

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Redistribution

answer

A major objective of the welfare state. Households with low income are net recipients and households with high income are net contributors.

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