Econ Quiz 1
disposable income
PI after personal taxes have been paid
resources
anything that can be used to produce something else
opportunity cost
as more of a particular good is produced, its marginal opp cost increases ppc is concave to the origin because of increasing opp costs some resources are better suited for the production of one good than another
nominal inflation
actually paid for a loan
Expenditure Approach (most important)
add up spending on domestically produced final goods and services (Consumer spending + investment spending + government purchases + net export spending)
Income Approach
add up the income created from producing goods and services (wages, rent, interest, and profit)
net exports of goods and services (Xn)
add value of exported goods (produced domestically and sold abroad) subtract value of imported goods (produced abroad and sold domestically) = exports (x) - imports (m) C+I+G+Xn
other-things-equal assumption (ceteris paribus)
all variables except those under consideration are held constant for a particular analysis
business cycle
alteration between increases and decreases in economic activity
positive economics
analysis that describes the way economy actually works factual statements
Law of Demand
as price goes down, quantity demand goes up as price goes up, quantity demand goes down OTC P and Qd have an inverse relationship law of diminishing utility, income effect, substitution effect
determinants of demand
consumer taste and preferences number of buyers consumer expectations consumer incomes normal goods inferior goods prices of related goods
menu costs
costs of changing listed prices
unit of account costs
costs of having a less reliable unit of measurement
who benefits from deflation
creditors, savors, and fixed-income receivers will benefit debtors will have to pay back loans with "more expensive" dollars
Winners of Inflations
debtors/borrowers - can repay loan with funds that have a lower real value than expected some flexible- income receivers
deflation
decline in the overall price level
analyzing change in equilibrium
determine the effect on equilibrium p and q steps: does the supply or demand curve shift? which direction? use graph to determine effects on P and Q
government purchases (gov consumption expenditures and gross investment)
includes federal, state, and local government spending on goods and services excludes transfer payments
National Income
income earned by a nation's residents for productions of goods and services
personal income
income received by household
shoe leather costs
increased costs of transactions caused by inflation
purposeful behavior
individuals make rational decisions to maximize utility firms make rational decisions in order to maximize profits
markets
interaction between buyers and sellers determines price in a competitive, there are many buyers and sellers acting independently: no single individual can affect the market place may be local, national, or international
Economic resources
land (natural resources) labor (human output) capital (equipment, machinery, buildings, etc) (physical capital) Entrepreneurship (risk-taking, innovation, and organization of resources for production
Scarcity
limits on goods and services available for consumption because of limited resources
normative statements
make prescription about the way the economy should work (subjective statement)
anticipated inflation
people can plan ahead to mitigate the effects of inflation
employed
people who currently hold a part or full time job
GDP
per person per capita- GDP/population
labor force participation rate
percent of population aged 16 or older that is in the LF = LF/ pop aged over 16
personal consumption expenditures (PCE) price index
price deflator based on overall consumer spending
allocative efficiency
producing the right mix of goods/ most highly valued by society
Production Possibility model
production possibilities curve (PPC) shows the maximum combinations of output for given resources and technology in a two good economy the ppc illustrates basic economic concepts trade-offs, opp costs, efficiency, scarcity, and economic growth
nominal interest rate =
rate of inflation + real interest rate
disinflation
rate of inflation slowing still positive
inflation redistributes
real income which help some and hurts others
determinants of supply (factors that shift the supply curve)
resources (inputs) prices technology number of producers taxes and subsidies (gov politics) producer expectations prices of related goods (or any factor that changes cost of production and supply)
inferior goods
-goods for which demand decreases as income increases
Market economy (capitalism or free enterprise)
3 fundamental questions are answered by buyers and sellers resources are privately owned role of gov is limited to providing laws that protect property rights
Command Economy (centrally planned economy or socialism)
3 fundamental questions are answered by the government government owns or controls most of the country's resources
Price index
$ total for a market basket in a particular year/ $ total for a MB in a particular year * 100
unemployment rate
% of the total number of people in the labor force who are unemployed # of unemployed/Labor force
%Change in real income =
%change in Nominal income - % change in price level (real income can decrease even with an increase in nominal income)
Other application % Change in real income=
%change in nominal GDP - %change in GDP deflator
inflation rate equation
(PI Year 2 - PI Year 2)/100
consumer spending (personal consumption expenditure) (C)
- household spending on: durable goods (have a life 3 or more years), nondurable goods, services
scarcity and choice
resources are scarce so people always face choices the true cost of a decision is measured in forgone alternatives (opportunity cost) with every choice, an alternative forgone- money, time, effort, or the opportunity to do something
change in demand
shift of demand curve, which changes Qd at any given point
economic growth
shifts the ppc outward improved tech and more/better resources create economic growth
structural unemployment
skills workers become obsolete or there are more people seeking jobs than jobs available
Microeconomics
study of individuals consumer, firm, or market
economics
study of scarcity and choice wants exceed society's productive capacity scare productive resources must be allocated to satisfy unlimited wants and needs
Value Added Approach (Approaches to GDP)
survey firms and add up their contributions to the value of final goods and service (sales minus value of inputs purchased)
Natural Rate of Unemployment (NRU)
the full employment rate = frictional unemployment + structural employment (cyclical unemployment =0
unemployed
the number of people actively looking for work but not currently employed
interest rate
the price (calculated as a % of the amount borrowed) charged by lenders to borrowers for a loan
utlitity
the satisfaction gained from consuming a good or service
aggregate output
total quantity of final goods and services produced in an economy (measured using real GDP)
gross domestic profit (GDP)
total value of all final goods and services produced within an economy (country), in a given period
Criticisms of the unemployment rate calculations
underemployed workers are counted as "unemployed" they want to work more hours or are overqualified for their jobs discouraged workers - do not factor into the calculation they want to work but are not looking
labor force
unemployed + employed
real GDP
use price from a selected base year to account for changes in the price level (adjusted for inflation) multiply current Q by base year P (year 1) for each good, then sum
nominal GDP
use prices during the year that the output was produced multiply current Q and P for each good, then sum
productive efficiency
using the best technology and mix of resources/producing goods in the least costly way
opportunity cost
what you must give up to in order to something else
differences in economic systems exist by
who owns the factors of production (resources) method used to motivate, coordinate, and direct economic activity
Criticisms of CPI
Accurately accounting for- substitution - CPI uses a fixed-base year basket, but consumers frequently alter the mix of goods and services they buy as price changes (so CPI overstates inflation) product improvements innovations
Shortcomings of GDP
Household production (not all goods are bough and sold_ Underground economy (not all goods and services are sold in official markets) Leisure Social Costs Improved product quality Composition and distribution of outpu
CPI vs GDP deflator
CPI- Reflects prices of all goods and services bought by consumers compare prices of a fixed basket of G and S with the price of the basket in the BY GDP Deflator- reflects the prices of G and S produced domestically Compare price of currently produced G and S with the G and S of the BY
Losers of inflations
Lenders receive lower money than expected savers- value of accumulated savings deterior fixed income receivers- real income falls
Real GDP
Nominal GDP/GDP Deflator x 100
GDP deflater
Nominal GDP/Real GDP x 100 growth rate differs depending on the chosen BY, so real GDP is calculated using averages of early and late base year growth rates
Macroeconomics
The study of the economy as a whole
3 Fundamental questions each society must answer
What goods and services will be produced? How will the G and S be produced? Who will get G and S
surplus drives price down and sellers compete to have buyers take surplus off their hands shortage causes buyers to drive price up
What if market price is above or below the equilibrium P?
inflation
a rise in the overall price level in an economy inflation reduces "purchasing power" of money (a dollar will buy less than before)
economy
a system for coordinating a society's productive and consumptive activities
Law of Supply
as price goes up, quantity supplied (QS) goes up as price goes down, quantity supplied (QS) goes down price and Qs have a positive relationship p acts as an incentive to produce higher prices result in greater profit as price rises, producers are better able to cover increased production cost
cyclical unemployment
associated with the recession phase of business cycle
investment spending (gross private domestic investments) (I)
business investment (in capital goods) -structure and equipment (ex. factories, buildings, machinery, computer) -intellectual property products (software)
market
buyers and sellers of goods and services come together to trade
change in Qd (quantity demanded)
caused by a change in price, which is shown in a movement along the demand curve
Expenditure Approach
consumer spending (personal consumption expenditure) (C) investment spending (gross private domestic investments) (I) residential construction changes in investment government purchases (gov consumption expenditures and gross investment) net exports of goods and services (Xn)
Comparing Data from Different Times:
dollar figures from different times are not comparable representations of purchasing power figures should be converted using Price Index amount in current dollars= Amount in Years T dollars * current price level/ price level in Year T
GDP is a
dollar measure of production
nominal income
dollars received as wages, interest, or profit
assumptions
economists make these to simplify complex problems and make them easier to understand
Hyperinflation
extraordinarily high rate of inflation
normal goods
goods for which demand increases as income increases
complementary goods
goods that are used together ex pb and j
substitute goods
goods that can be used in place of another ex foreign goods and domestic autos
Other sectors (injections)
government - gov spending financial institutions- investment internationals- exports
Other sectors (Leakages)
government: taxes Financial- taxes international- import
What is in a market basket?
housing transportation food and beverages medical care education etc
Unemployment and Real GDP
in general, when real GDP raises during economic expansion the unemployment rate decreases and vice versa
market system
incentives, property rights, competition, self-interest motivates choices, use of money makes trade easier so people do not have to barter What will be produced? goods and services that create a profit determined by consumer preference How are goods and services produced? due to competition firms use the most efficient techniques, minimize the cost per unit, and produce products at the lowest possible prices who will get the goods and services? consumers with the ability and willingness to pay ability to pay depends on income
Included in GDP
market value of goods (ex groceries, clothing) and services (doctor visits and haircuts) produced and sold sales of final goods and services-sold to the end user goods and services currently produced and sold production within a country's geographic limits
price ceiling
max price at which a good can be sold set below equilibrium price to help consumers obtain a necessary good or service that they could not afford at equilibrium P because of a shortage ex. rent control
marginal analysis
means extra or addition involves studying the costs and benefits of doing a little more of an activity vs. a little less we choose to do something if marginal benefit exceeds marginal cost
core CPI
measures inflation excluding food and energy prices
consumer price index (CPI)
measures the price of "market basket" of consumer goods and services purchased by the typical urban consumer
produced price index (PPI)
measures the prices of goods and services purchased by producers
price floor
minimum price at which a good or service may be sold set above equilibrium price to help provide producers with sufficient income for sale of a good or service ex. min wage law
Mixed system
most countries employ this that combines pure marked and command systems rely primarily on markets with strong gov influences
actual unemployment
natural unemployment + cyclical unemployment
real income
nominal income adjusted for inflation (purchasing power of income)
expected real interest rate =
nominal interest rate - expected inflation rate
real interest rate formula
nominal interest rate - inflation rate
Excluded in GDP
non market activities financial assets such as stocks and bonds transfer payment- made to individuals w/o expecting a good or service in return sales of intermediate goods and services purchased for resale or further processing into final goods second hand sale production by a country's citizens outside of the country's geographic limits
frictional unemployment
occurs when individuals are searching for a job about to start a new job