ECON 2301 - Week 1 Notes

Economic Growth

(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita

Approximate Number of Years Required to Double Real GDP =

70 / annual percentage rate of growth

Nondurable Goods

A consumer good with an expected life (use) of less than three years.

Durable Goods

A consumer good with an expected life (use) of three or more years.

Aggregate Expenditure Model

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant. Assumes perfectly inflexible prices.

Rule of 70

A method for determining the number of years it will take for some measure to double, given its annual percentage increase . Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.

Aggregate Demand-Aggregate Supply Model

A model that explains short-run fluctuations in real GDP and the price level; allows for flexible prices (with or without flexible wages) and is therefore useful for understanding how the economy behaves over longer periods of time.

Purchasing Power Parity

A monetary measurement of development that takes into account what money buys in different countries; adjusts for the fact that prices are much lower in some countries than others

Taxes on Production and Imports

A national income accounting category that includes such taxes as sales, excise, businesses property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price. Includes business property taxes, license fees, customs duties, excise taxes, and general sales taxes.

Start-Up Firms

A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.

Public Transfer Payment

A payment of money from a government to an individual for which no good or service is required in return. Social security payments, welfare payments, and veterans' payments that government makes directly to households.

Recession

A period of declining real GDP, accompanied by lower real income and higher unemployment.

Inflation

A rise in the general level of prices in an economy; an increase in an economy's price level.

Allocative Efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it; produce the specific mix of goods and services that maximizes people's well-being

Learning by Doing

Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.

Services

An (intangible) act or use for which a consumer, firm, or government is willing to pay.

Consumption of Fixed Capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation

Increasing Returns

An increase in a firms output by a larger percentage than the percentage increase in its inputs

Price Index

An index number that shows how the weighted average price of a "market basket" of goods changes over time relative to its price in a specific base year.

Undistributed Corporate Profits / Retained Earnings

Any after-tax profits that are not distributed to shareholders are saved, or retained, by corporations to be invested later in new plants and equipment. Undistributed corporate profits are also called retained earnings.

Benefits of National Income Accounting

Assesses the health of the economy, tracks the long-run course of the economy, and enable formulation of policies to improve or safeguard the economy's health

GDP =

C + Ig + G + X - M or C + Ig + G + Xn

National Income includes:

Compensation of employees, rents, interest, proprietors' income, corporate profits, taxes on production and imports

Bureau of Economic Analysis

Compiles statistics about the economy

Saving

Disposable income not spent for consumer goods; equal to disposable income minus personal consumption expenditures; saving is a flow. Occurs when current consumption is less than current output (or when current spending is less than current income).

Government Purchases (G)

Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services.

Gross (all) Private Domestic Investment (Ig)

Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories. Includes (1) all final purchases of machinery, equipment, and tools; (2) all construction; (3) changes in inventories; and spending on R&D; Includes investment in replacement capital and in added capital. Includes money spent on the creation of new works of art, music, and film.

Nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation; uses current prices during the year that they were produced; current market prices multiplied by current total output

Private Transfer Payments

Gifts, inheritances, charitable contributions are not included in GDP. They produce no output. They simply transfer funds from one private individual to another and consequently do not enter into GDP.

Net Exports (Xn)

Goods and services produced that are produced within the borders of the United States

Inventory

Goods that have been produced but remain unsold.

Final Goods

Goods that have been purchased for final use (rather than for resale or further processing of manufacturing).

Imports (M)

Goods, services, or resources produced abroad and sold domestically.

Real GDP

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal. The value of final goods and services.

Net Domestic Product

Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock. GDP - depreciation (consumption of fixed capital)

Net Private Domestic Investment

Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year. Includes only investment in the form of added capital.

Investment

In economics, spending for the production and accumulation of capital and additions to inventories.

Rent

Income received b households and businesses that supply property resources

Network Effects

Increases in the value of a product to each user including existing users, as the total number of users rises.

Real GDP per Capita

Inflation-adjusted output per person; real GDP/population; amount of real output per person in a country

Interest Income

Money paid by private businesses to the suppliers of loans used to purchase capital.

Proprietor Income

Net income of sole proprietorships, partnerships, and other unincorporated businesses

Price Index (in hundredths) =

Nominal GDP/Real GDP

Disposable Income

Personal income - personal taxes. Personal income less personal taxes; income available for personal consumption expenditures and personal saving. DI = C (Consumption) + S (Saving)

Flexible Prices

Product Prices that freely move upward or downward when product demand or supply changes.

Inflexible / Sticky Prices

Product prices that remain in place (at least for a while) even though supply or demand has changed; stuck prices or sticky prices.

Intermediate Goods

Products that are purchased for resale or further processing or manufacturing

Real GDP per Capita =

Real GDP / Population

Business Cycle

Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.

Economic Investment

Relates to the creation and expansion of business enterprises. Specifically, economic investment only includes spending on the production and accumulation of newly created capital goods such as machinery, tools, factories, and warehouses.

Shocks

Sudden, unexpected changes in demand (or aggregate demand) or supply (or aggregate supply).

Demand Shocks

Sudden, unexpected changes in demand. Can be positive or negative. Cause most short-run fluctuations in GDP and the business cycle.

Supply Shocks

Sudden, unexpected changes in the supply of goods and services. Can be positive or negative.

Corporate Income Taxes

Taxes levied on corporations' profits. They flow to the government.

Statistical Discrepancy

The amount accountants add to national income to make the income approach match the outcome of the expenditure approach

Depreciation

The amount of capital that is used up over the course of a year

Expectations

The anticipations of consumers, firms, and others about future economic conditions

Growth Accounting

The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.

Stock Market Transactions

The buying and selling of stocks and bonds

Efficiency Factor (in growth)

The capacity of an economy to achieve allocative efficiency and productive efficiency and thereby fulfill the potential for growth that the supply factors (of growth) make possible; the capacity of an economy to achieve economic efficiency and thereby reach the optimal point on its production possibilities curve.

Net Foreign Factor Income

The difference between the income Americans earn abroad and the income they earn in the United States

Gross Output

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output. Sums together the dollar value of the economic activity that takes place at each of four stages into which all economic activity can be grouped: resource extraction, production, distribution, and final output.

Personal Income

The earned and unearned income available to resource suppliers and others before the payment of personal taxes.

Personal Consumption Expenditures (C)

The expenditures of households for both durable and nondurable consumer goods.

Unemployment

The failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.

Supply Factors (in growth)

The four determinants of an economy's physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve. The four determinants are improvements in technology plus increases in the quantity and quality of natural resources, human resources, and the stock of capital goods.

Modern Economic Growth

The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita; output per person rises rather than only output increasing

Infrastructure

The interconnected network of large-scale capital goods (such as roads, sewers, electrical grids, railways, ports, and the Internet) needed to operate a technologically advanced economy

Value Added

The market value of a firm's output minus the value of the inputs the firm has bought from others

Expenditures Approach

The method that adds all expenditures made for final goods and services to measure the gross domestic product. Also called the output approach.

Income Approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product. Also called the Earnings or Allocations Approach.

Labor-Force Participation Rate

The percentage of the working-age population that is actually in the labor force

Aggregate Output

The primary measure of the economy's performance is its annual total output of goods and services

Productive Efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs. The economy must use its resources in the least costly way

Financial Investment

The purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as a house, land, or factories) or the building of such assets in the expectation of financial gain.

Demand Factor (in growth)

The requirement that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible.

Economies of Scale

The situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and, hence, its output).

National Income Accounting

The techniques used to measure the overall production of a country's economy as well as other related variables.

Dividends

These are the part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They thus flow to households - the ultimate owners of all corporations.

National Income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest profit, proprietors' income, and such taxes. Private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports

Labor Productivity

Total output divided by the quantity of labor employed to produce it; the average product labor or output per hour of work.

Employee Compensation

Wages, salaries, and benefits paid by businesses and government to their workers

Multiple Counting

Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.

Net Exports (Xn) =

exports (X) - imports (M)

Net Investment =

gross investment - depreciation

Real GDP =

hours of work x labor productivity

There are five factors that, together, appear to explain changes in productivity growth rates:

technological advance, the amount of capital each worker has to work with, education and training, economies of scale, and resource allocation.