DEFINITION:

REAL GDP is the total value of all final goods and services produced in the economy during a given year measured in dollars of constant purchasing power.

Or

GDP valued at constant, base year, prices.

P = The Price Level

 

 

 

 

 

 

Y = Real GDP

Can also do following:

DEFINITIONS:

The NOMINAL WAGE is the wage in terms of current dollars.

That is, the actual dollar amount paid.

The REAL WAGE is the wage measured in terms of dollars of constant purchasing power, or in terms of constant, base year, dollars.

Or, the wage in terms of how many goods and services it will buy.

National Bureau of Economic Research Recession Dating Procedure

NEW DEFINITION:

POTENTIAL OUTPUT is the highest SUSTAINABLE level of output.

t = time

YP = Potential Output

Note: Both Y and YP are in real terms.

The unemployment rate is defined as follows:

Rate of inflation:

DEFINITION:

DISINFLATION is a reduction in the rate of inflation.

Additional Features That An Open Economy Has That A Closed Economy Does Not:

1. The market for final goods and services is linked with those of the rest of the world through:

Exports (X) and Imports (IM)

2. The financial system is linked with those of the rest of the world through:

Capital Flows (Flows of capital assets)

Note that we are talking about capital funds here, not physical capital.

3. The monetary system is linked with that of other countries through:

The foreign exchange market, in which exchange rates between the domestic and foreign currencies (moneys) are established.

 

 

 

 

The euro was introduced to world financial markets as an accounting currency in 1999 and launched as physical coins and banknotes in 2002.

Of the 27 European Union (EU) member states, 13 have the euro as their national currency:

Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Slovenia.

EURO SYMBOL:

Exchange rates are quoted in two different ways:

1. Domestic price of a unit of foreign currency.

(We will label it "e.")

Example: $1.25 = €1.00

This is the way it is done in Chapter 6.

2. The number of units to foreign currency required to purchase one unit of domestic currency.

Example: €.80 = $1.00

Note that this is equal to 1/e.

 

 

 

 

 

Using the first method:

If the dollar price of the Euro increases, the dollar has DEPRECIATED and the Euro has APPRECIATED.

For example, from $.90 per Euro to $1.00 per Euro.

If the dollar price of the Euro decreases, the dollar has APPRECIATED and the Euro has DEPRECIATED

For example, from $1.15 per Euro to $1.05 per Euro.

 

 

 

 

TRADE BALANCE = X - IM

If X > IM have Surplus in Trade Balance.

If X < IM have Deficit in Trade Balance.

If X = IM have Balanced Trade

 

 

 

If X < IM, difference made up by capital flows from abroad.

If X > IM, difference made up by capital flows to foreign countries.