Macroeconomics Test #1

Why in microeconomics can we measure production in terms of quantity, but in macroecomics we meansure production in terms of market value?

In Microeconomics we measure in quantity because micro deals w/ individual markets. In Macro, we measure production in terms of market value because macro deals w/ economy as a whole.

What is the GDP deflator, and how is it calulated?

A GDP deflator is a measure of the price levelm calculated by dividing nominal GDP by real GDP and multiplying by 100. formula: nominal GDP/ real GDP X100

What is a production possibilities frontier? How can we show economic efficiency on a production possibilites frontier? How can we show inefficiency? What causes a production possibilities frontier to shift outward?

A PPF is a curve that shows maximum attainable combinations given current resources and technology. We can show efficiency by showing the maximum output given current resources and technology. We can show inefficiency by under untilizing given resources: improving in technology. Incerease in the labor force/capital stock causes it to shift outward.

What is a free market? In what ways does a free market economy differ from a centrally planned economy?

A free market is a market with few gov't restrictions on how a good/service can be provided or sold or on how a factor of production can be employed. A centrally planned ecomony is an economy is an economy in which the gov't decides how economic resources will be allocated.

What is absolute advantage? Comparative advantage? Is it possible for a country to have a comparative advantage in producing a good w/o also having an absolute advantage?

An absolute advatage is the ability to produce more of a good or service using same amount of resources. Comparative advantage is the abolity to produce a good or service at a lower opportunity cost than competitors. Yes.

Why is GDP an imperfect measure of economic well-being? What types of production does GDP not measure? Even if GDP includes these types of production, why would it still be an imperfect measure of economic well-being?

GDP does not include household production and the underground economy. Even if it did include this, it would be an imperfect measure of economic well-being since it does not include the value of leisure, or adjust for pollution/change in crime /social problems and the size may not be equally distributed.

What does increasing marginal opportunity mean? What are the implications of this idea for the shape of the PPF?

Increasing Marginal opportunity means that some workers, machines and other resources are better suited for one use than another. The implications are................................

Why does inflation make nominal GDP a poor measure of the increase in total production form 1 year to the next? How does the U.S. Bureau of Economic Analysis deal witht eproblem inflation causes with nominal GDP?

Inflation makes GDP a poor measure because its change can be due to a change in price or a change in production. The Bureau uses real GDP(base year prices) to separate out price changes from quantity changes.

What is the difference between microeconomics and Macroeconomics?

Micro-study of how households and firms make choices, how they interact in markets, and how the gov't attempts to influence their choices. Macro- is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

What is the difference between normative analysis and postive analysis? Is economics concerned mainly with normative analysis or with positive analysis?

Normative analysis is concerned with what ought to be. Positive analysis is concerned with what is. Economics are mainly concerned with positive analysis because it can be tested with statistical data.

What is the difference between productives efficiency and allocative efficiency?

Productive efficiency is when a good/service is produced at its lowest possible cost and allocatiove efficiency is when the consumers choices of production are preferred. In allocative efficiency, the marginal cost of producing a good is equal to the marginal benefits to society.

Discuss these ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin

Rational individual weigh the benefits and costs of every action and choose an action if the benefits outweigh the costs. People respond to incentives if it benefits them. Optimal decisions are made at margin to continue any activity until marginal benefits=marginal costs.

What is scarcity? Why is scarcity central to the study of economics?

Scarcity is the situation in which unlimited wants exceed limited resources available to fulfull those wants. It is central to the study because ecomomics is the study of the choices people make to attain their goals, given their scarce resources.

Briefly describe the 3 major measures of the price level

The 3 major measures of price level are GDP deflator, Consumer Price Index, and Producer Price Index.

What price index does the government use to measure changes in the cost of living?

The Consumer Price Index is used to measure changes in the cost of Living.

What does the labor force participate rate measure? Since 1950, how have the labor force participation rates of men and women changed?

The labor forces participation rate determines the amount of labor that will be available to the economy from a given population; the % of the working-age population in the labor force. Labor force participation rate of adult males has decreased and increased for females since 1950.

What is the relationship between frictional unemployment and job search?

The longer the duration of job search the more friction unemployment. Friction unemployment = short term unemployment that arises from the process of matching workers with jobs.

What is the natural rate of unemployment? Why isn't the natural rate of unemployment equal to 0?

The natural rate of unemployment if the normal rate of unemployment, consisting of frictional unemployment plus structural unemployment. The natural unemployment ratenever falls to 0 because there's always frictional and structural unemployment in the economy.