Macro Test #1

In a country with low standards of living and low levels of human capital, we would expect this country to focus on which of the following products? computers smartphones clothing HDTVs

clothing

trade is based on principle of

comparative advantage

Scarcity

condition arising because wants exceed ability of resources to satisfy them; situation where not enough resources are available to produce and consume all goods and services we desire

Bowed out line means increasing opportunity cost straight line means

constant

Substitution bias

consumers substitute relatively cheaper goods for relatively more expensive goods

The largest component of GDP is consumption expenditures. investment. government purchases. net exports.

consumption expenditures.

Consumer price index

measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services. Calculated as the current cost of a fixed basket of consumer goods divided by the cost of the basket in the base period (multiplied by 100)

Marginal change

small incremental adjustment to a plan of action

Economics

social science studying the choices people make as they cope with scarcity, the incentives influencing those choices, and the arrangements that coordinate them. study of how society manages its scarce resources. Scarcity is the fundamental idea behind economics.

Why do economic issues and problems occur?

Human wants exceed the resources available to satisfy them.

Macroeconomic Goals

In 1946, Congress passed Employment Act Goal of providing full employment to all Americans who are willing and able to work. In 1978, Congress passed the Humphrey-Hawkins Act, to augment the original law. Directs the government to pursue policies designed to stimulate economic growth and reduce inflation, in addition to those policies that promote full employment.

The Income Approach to GDP

Income approach—the sum of the income that is earned in the economy Calculate GDP by adding together all of the incomes earned in the economy. Expenditures by consumers and producers eventually flow back to households as income through the resource market.

Over time the production possibilities frontier can shift outward in response to:

Increases in the capital stock Improvements in technology and human resources An increase in population will also lead to an outward shift of the ppf Such growth leads to increased GDP per capita

Economies use four basic types of resources, or inputs.

Land, labor, capital, and entrepreneurship Together, these are known as factors of production or resources.

The National Income and Product Accounts

Measures our nation's economic performance Compares American income and output to that of other nations Tracks the economy's condition throughout the business cycle

What component of US GDP is usually negative in expansion years? Consumption expenditures Investment Government purchases Net exports

Net exports

Shifts in PPF

Over time, the production possibilities frontier can shift outward in response to: Increases in the capital stock Improvements in technology and human resources Such growth leads to increased GDP per capita.

How people make decisions

(1) A choice is a tradeoff (2) People make rational choices by comparing benefits and costs (3) Most choices are "how much" choices made at the margin (4) Choices respond to incentives

Personal consumption

(C) refers to the purchases of goods and services by households for their own use. Durable Goods Non-Durable Goods Services Rental Expenditures on Housing Consumption accounts for more than two-thirds of all U.S. expenditures.

Government purchases

(G) refers to spending on goods and services by all three levels of government: federal, state, and local. Transfer payments—such as Social Security payments and unemployment benefits—are not counted as government expenditure. They do not involve new production.

Which of the following is considered a payment for entrepreneurship?

Profit

Which of the following is NOT included in investment? Residential housing. New machines purchased by businesses. Purchases of common stock. Increase in business inventories.

Purchases of common stock.

who is affected by inflation

Social Security recipients, pensioners, and others receiving fixed incomes are hurt by inflation Cost of living adjustment (COLA) pegged to CPI Borrowers? Lenders?

Allocative efficiency

Society must decide where on the PPF to locate How many computers to produce? How many leather jackets to produce? Allocative efficiency tells us that the mix of goods and services produced are just what individuals in society desire

Net Exports

Some of what households, businesses or the government purchase is not produced domestically. Since these goods are not produced domestically, spending on these imports are subtracted from GDP. On the other hand, U.S. firms sell some of what they produce to households, firms and governments in foreign countries. Because these goods and services are produced domestically, spending on these exports are added to GDP. Net exports = exports - imports = NX

more cpi

The CPI is an index of the overall price level; some prices in the basket rise and some fall The market basket changes over time; new products, retired products Technological innovations have improved the quality of goods such as cars and electronics

Market basket

The CPI measures how much more (or less) it costs to buy a given market basket from one month, quarter, or year to the next. A market basket is the combination of goods and services that the typical consumer purchases during the period in question.

Production efficiency

The economy can produce any combination of goods and services that lies on or below the PPF. Points on the PPF represent production efficiency. Goods and services are produced at their lowest resource cost All of the economy's resources are being productively employed.

When an economy is producing the right mix of goods and services desired by society, we refer to that economy as entrepreneurial. productively efficient. capitalistic. allocatively efficient.

allocatively efficient.

Productivity

amount of goods and services produced from each hour of a worker's time

Phillips curve

shows negative relationship between inflation and unemployment

A candy bar contains $0.25 worth of chocolate, gets packaged in a $0.12 wrapper, and sells at a retail store for $0.50. How much does that candy bar contribute to GDP?

.50

4 Steps to Calculate the CPI

1. Survey consumers. 2. Survey retailers. 3. Determine the cost of the market basket. 4. Compare the cost of the market basket across time periods. The base year serves as the basis for comparison with prices in another year.

If Farmer Sam MacDonald can produce 200 pounds of cabbages and 0 pounds of potatoes or 0 pounds of cabbages and 100 pounds of potatoes and faces a linear production possibilities frontier for his farm, the opportunity cost of producing an additional pound of potatoes is _________ pound(s) of cabbage.

2

How the economy works as a whole

5) Specialization and trade improve our lives (6) Productivity determines our standard of living (7) Government can smooth out the fluctuations in the overall economy

Which of the following statements about the business cycle is not correct? A. It is a regular and very predictable cycle in real GDP around potential GDP. B. From the peak to the trough, the economy is in recession. C. From the trough to the peak, the economy is in an expansion. D. It is a periodic movement of total production and other economic activity such as employment.

A

Which of the following is not a factor of production? An oil rig in the Gulf of Mexico A ski jump in Utah A bank loan to a farmer An orange grove in Florida

A bank loan to a farmer

Which of the following is a positive statement? An increase in college tuition is not fair to students. A recession leads to higher enrollments at universities. University bookstore prices are too high. Parking tickets on campus impose an excessive fee.

A recession leads to higher enrollments at universities.

The Expenditure Approach

Adding together the individual components of GDP gives the total value of all final goods and services produced in the economy: GDP = C + I + G + NX

Changes in population

An increase in population will also lead to an outward shift of the PPF. If output grows faster than the population, then GDP per capita increases. If output grows at the same rate as population, then there will be no change in GDP per capita. If output grows slower than the population, then GDP per capita decreases.

Law of increasing opportunity cost:

As we devote more and more resources to the production of one good, the opportunity cost of producing that good increases

Law of increasing opportunity cost

As we devote more and more resources to the production of one good, the opportunity cost of producing that good increases. Illustrated by moving along a concave (bowed out from the origin) PPF

Business cycles

Business cycles are a common feature of industrialized economies. Four phases of the business cycle Peak Recession Trough Expansion Business cycles are officially dated by the National Bureau of Economic Research (NBER) reflects overall movements in output, income, prices, and employment.

Which of the following is an example of a private investment expenditure (I)? A. Putting money into a Certificate of Deposit (CD) B. Purchasing a share of Google stock C. Building a new sales force training facility D. Trading a bond certificate

C

CPI Formula

CPI = Cost of Basket (current $) × 100 Cost of Basket (base $)

Why would the United States want to trade with Spain, given that the United States is so much larger and more productive? The United States wants to acquire Spanish land. Spain leads the world in technical change and innovation. Absolute advantage. Comparative advantage.

Comparative advantage.

The Great Depression of the 1930s

From 1929 and 1933, a $1,000 investment in the stock market fell to a value of $150. Massive bank failures. Unemployment rates approaching 25%. Business investment dropped from nearly 18% of output in 1929 to under 4% in 1933.

Which of the following equations best describes the expenditure approach to calculating GDP? GDP = C + I GDP = C + G + NX GDP = C + I + G + NX GDP = C + I + G

GDP = C + I + G + NX

Circular flow model

The flow of resources, goods and services, expenditures and incomes that result from decision makers' choices The way those choices interact in markets to determine what, how, and for whom goods and services are produced shows link between households and firms Payments and resources flow in any economy

interpreting the chi

The inflation rate is measured as the percent change in prices from one period to another:

Private investment

There are three categories of spending that are included in private investment (I): Spending on capital goods such as tools, instruments, and machines-- Capital goods are man-made inputs used—but not used up—in the production of final goods. All private construction-- Includes factories, rental property and new single- family homes (note this is not consumption) Changes in business inventories-- Inventory is the stock of goods that a firm produces but does not sell in the same time period. Firms add to inventory when they: Produce a good in one year and sell it in another year Want to protect themselves from an interruption in production Overestimate demand for their good

Some problems with measuring GDP

Underground economy is not accounted for in the measurements of GDP Some outputs are not traded in the market (i.e., homemakers) Difficult to account for improvements in quality Some activities use resources to avoid or contain "bads" (i.e., does not account for environmental pollution)

factor endowment.

What and how a nation produces

What is human capital? Immigrant labor Someone who operates heavy equipment Your professor's knowledge of the economy A car assembly line robot

Your professor's knowledge of the economy

Price index

a number whose movement reflects movement in the average price level

A point inside the PPF curve represents a situation of unemployed or underutilization of resources. negative returns. a growing economy. a fully employed economy.

a situation of unemployed or underutilization of resources.

Nominal value

a value expressed in dollars of the current period

Real value

a value expressed in units of constant purchasing power or of a reference base year

Investment in the US is a stable component of GDP. not important for economic growth. the sum of the total market value of all stocks on the major stock exchanges. a volatile component of GDP.

a volatile component of GDP.

Economic model

abstract representation of reality Economic models are tools that economists use to understand, explain and predict economic actions.

ceteris paribus

all other things unchanged" when evaluating changes in causal factors

Simplifying assumptions

focus on a specific aspect of an economic relationship

Market

any arrangement that brings buyers and sellers together and enables them to get information and do business with each other Goods markets are markets in which goods and services are bought and sold. Factor markets are markets in which factors of production are bought and sold

Households

are individuals or people living together as decision-making units. buy goods and services and sell factors of production. supply both labor and non labor resourcese

Comparative Advantage

being able to produce at a lower opportunity cost than someone else.

Absolute Advantage

being able to produce more than someone else; being able to produce using fewer resources than someone else.

Wages represent approximately what percent of gross domestic product (GDP)? between 40% and 60% between 30% and 40% between 10% and 30% less than 10%

between 40% and 60%

marginal propensity to consume

change in consumption / change in income

If country A has an absolute advantage over country B in the production of a particular good, this means that country A has a technological advantage over country B. country A can produce more of a product than can country B. country A can produce a product at a lower opportunity cost than country B. country A is the market leader in producing the product.

country A can produce more of a product than can country B.

Everything else the same, if investment expenditures rise by $300 billion and imports increase by $300 billion, then GDP increases by $600 billion. increases by $300 billion. decreases by $600 billion. does not change.

does not change.

Two countries will benefit from trading with one another if

each country concentrates on producing those goods for which it has the lowest opportunity cost.v

PPF

economic model that shows the alternative combinations of two goods and services that an economy can produce with the currently available resources and technology in a given time period. Designed to analyze: Scarcity Economic trade-offs Opportunity costs Economic growth Each point on the PPF represents a possible combination of goods that can be produced. An outward shift of the PPF indicates economic growth

Getting the most from scarce resources is

efficient.

A primary purpose of an economic model is to

explain the behavior of the economy.

Deflation

falling price level; negative inflation rate

Which of the following events did not do much to shape the macroeconomic analysis we study today? the Great Depression globalization and the impact of multinational corporations episodes of hyperinflation in Germany in the 1920s and many South American countries in the recent past large swings in budget deficits

globalization and the impact of multinational corporations

Inflation

increase in the price level (%) from one year to the next

macroeconomics covers

inflation, unemployment, productivity all included

Firms

institutions that organize production of goods and services. sell goods and services and buy factors of production

Positive

issues are testable or verifiable; studies "what is"

Expenditure approach

measures the value of GDP by adding the value of goods and services purchased by each type of final user The market value of output is determined only when it is purchased. As a result, the dollar value of the quantity supplied by producers must equal the dollar value of the quantity demanded by households, businesses, the government, and foreign countries.

Land

natural resources used to produce goods and services Can be renewable (i.e., water) or nonrenewable (i.e., coal) Land is paid rent Some examples of natural resources: Water Air Energy Minerals Wild plants, animals, birds, and fish

What does NX represent in the following formula to calculate GDP? net imports. government purchases. consumption expenditures. net exports.

net exports

In the circular flow model, incomes and resources flow in the same direction

no

Owners of factors of production pay income to firms.

no

Entrepreneurs

organize land, labor, and capital to produce goods and services Entrepreneurs are paid profits Closely related to the science of management

A nation's standard of living is primarily a function of

productivity.

Equity

property where economic wealth is distributed fairly among members of society; economic "pie" is split up fairly

Efficiency

property where society gets the most from its scarce resources; economic "pie" is as large as possible

Business cycles are similar to fashion cycles in the garment industry recurring periods of cost cutting by business enterprises recurring episodes of increases and decreases in economic activity large swings in budget deficits

recurring episodes of increases and decreases in economic activity

Which of the following is not a major macroeconomic goal? stable prices relatively low interest rates full employment high economic growth

relatively low interest rates

Incentive

reward or penalty that encourages or discourages an action

PPF analyzes

scarcity, trade offs, opportunity cost does not analyze incentives

Microeconomics

studies individuals, firms, and industries and how they make decisions

Macroeconomics

studies the broader economic issues such as inflation, employment and unemployment, and economic growth

Normative

subjective, requiring moral or ethical judgments; studies "what should be" or "what ought to be"

Actual business cycle dates (peaks and troughs) are determined by the Department of Commerce. the Harvard University Economics Department. the National Bureau of Economic Research. the President's Council of Economic Advisers.

the National Bureau of Economic Research.

Which phase of the business cycle follows immediately after a trough? the peak the recession the depression the expansion

the expansion

Human Capital

the knowledge, experience, and skill of individuals.

Gross domestic product (GDP)

the total market value of all final goods and services produced by resources in a given country in a given time period To determine how much output society produces, we must somehow add many different items.

US gross domestic product (GDP) is the final value of all manufactured goods. the final market value of all manufactured goods by domestic producers both here and abroad. the total market value of all final goods and services produced by resources in the United States. the total market value of all goods manufactured by resources in the United States.

the total market value of all final goods and services produced by resources in the United States.

Capital

tools, instruments, machines, buildings and other equipment that can be used to produce other goods and services. In contrast, consumption goods cannot be used to produce other goods and services. Capital is paid interest Capital has been produced for use in production

Opportunity cost

value of the most desired alternative good or service forgone in order to obtain something else

Labor

work time and work effort people devote to producing goods and services. Labor is paid wages Labor Force—the number of adults that are willing and able to work.

Households supply both labor and non-labor resources.

yes