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