the CPI is a measure of the overall cost of the goods and services bought by a typical consumer
how is the CPI calculated
CPI= Price of basked of goods and services in current year (divided by) price of basket in base year (times) 100
What is the GDP deflator
the GDP deflator is the ratio of nominal GDP to real GDP
How is the GDP deflator calculated?
GDP Deflator= Nominal GDP (divided by) Real GDP (times) 100
What is the difference between the GDP deflator and the CPI?
the GDP deflator reflects the prices of all goods and services produced domestically and the CPI reflects the prices of all goods and services bought by consumers
How do you compare dollar figures from different times?
amount in todays dollars= amount in year T dollars (times) price level today (divided by) price level in year T
what is the COLA
the cost of living allowance, which firms, unions, and the government uses to calculate social security, wages, taxes and more
what is the nominal interest rate?
the nominal interest rate is the interest rate that measures changes in todays dollars
what is the real interest rate?
the real interest rate is the interest rate that is corrected for inflation (see card 6)
how do you calculate the real interest rate?
Real interest rate = Nominal interest rate (minus) inflation rate (see card 6)
How is productivity determined?
productivity is determined by dividing output by labor (hours or units)
What is the principal of diminishing returns?
the law of Diminshing returns says that "as the stock of capital rises, the extra ouptut produced from an additional unit of capital falls" (lower marginal return)
what is the effect of saving in the long run?
in the long run, the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables
what is "the catch-up effect"?
the catch up effect is where in countries with low productivity, small amounts of capital investment substantially raise the workers productivity- a furniture maker with only hand tools would benefit more from a power tool than a shop that is already well-stocked with power tools
what is a financial market?
financial markets are institutions through which a person who wants to save can directly supply funds to a person who wants to borrow. the 2 most important are bond market and the stock market
what is a bond?
a bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. an IOU
what is a stock?
a stock represents ownership in a firm and is, therefore, a claim to the profits that the firm makes.
what is the sale of stock to raise money called?
what is the sale of bonds called?
what does NASDAQ stand for?
National Association of Securities Dealers Automated Quotation system
what are financial intermediaries?
financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers
what is a mutual fund?
a mutual fund is an institution that sells shares to the public and uses the proceeds to buy a selection, or a portfolio, of various types of stocks, bonds, or both
what is a closed economy?
a closed economy is one that does not interact with other economies