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Macroeconomics Study Guide 1

by: Kate Notetaker

Macroeconomics Study Guide 1 Econ 1012

Marketplace > George Washington University > Economcs > Econ 1012 > Macroeconomics Study Guide 1
Kate Notetaker

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Study guide for chapters 6 and 8 for the Quiz on Feb 5.
Dr. John Volpe
Study Guide
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This 6 page Study Guide was uploaded by Kate Notetaker on Tuesday February 2, 2016. The Study Guide belongs to Econ 1012 at George Washington University taught by Dr. John Volpe in Spring 2016. Since its upload, it has received 89 views. For similar materials see Macroeconomics in Economcs at George Washington University.

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Date Created: 02/02/16
Study Guide for Quiz 1  Chapters 6 and 8 Chapter 6  Sole Proprietorship  Firm owned by a single individual  Partnership  Firms owned jointly by two or more persons  Corporation  legal form of business o Provides owners with protection from losing more than their investment should the business fail  Asset  anything of value owned by a person or a firm  Limited Liability  Legal provision that shields owners of a corporation from losing more than they have invested Sole Partnership Corporation Proprietorship Advantages Control by owner Ability to share Limited personal work liability No layers of Ability to share Greater ability to management risks raise funds Disadvantages Unlimited Unlimited Costly to personal liability personal liability organize Limited ability to Limited ability to Possible double raise funds raise funds taxation of income  Corporate governance  way in which a corporation is structured and the effect that structure has on the corporations behavior  Seperation of ownership from control o Situation in a corporation in which the top management, rather than the shareholders, controls day-to-day operations  Principal-agent problem o Problem caused by an agent pursuing his own interests rater than the interests of the principal who hired him  As an owner of a small business, you can raise funds for your business in three ways: o By using retained earnings. This is when you are reinvesting profits back into the firm o Increasing the firm’s financial capital by recruiting additional owners to invest in the firm o By borrowing the funds from relatives, friends or a bank  An economy’s financial system is supposed to transfer funds froms avers to borrowers  Most firms raise external funds in two ways: o Indirect finance  The flow of funds from savers to borrowers through financial intermediaries such as backs  Intermediaries raise funds from savers and lend to firms o Financial markets or direct finance  The flow of funds from savers to firms through financial markets  Ex. The New York Stock Exchange  The borrower will sell the lender a financial security  Financial security  document that states the terms under which the funds are passed from the buyer of the security to the borrower  Two types of financial securities o Bonds  Financial security that represents a promise to repay a fixed amount of funds  Coupon payment  interest payment on a bond  Interest rate  cost of borrowing funds, usually expressed as a percentage of the amount borrowed  Higher the default risk on a bond, the higher the interest rate will be o Stock  Financial security that represents partial ownership of a firm  The firm is increasing its financial capital by bringing additional owners into the firm  Dividends  payments by a corporation to its shareholders  Stock and bond markets  made up of the buyers and sellers of stocks and bonds  Stock market indexes  measures the performance of the US stock market o The larger the firm’s profits are, the higher its stock price will be o We can expect that stock prices will rise when the economy is expanding and fall when it is in recession  Liability  anything owed by a person or firm  Income statement o Shows a firm’s revenues, costs and profit over a period of time o Accounting profit  a firm’s net income (revenue minus operating expenses and taxes paid) o Economic profit  a firm’s revenues minus all of its implicit and explicit costs  Provides a better indication than accounting profit of how successful a firm is  Calculated using all of a firm’s costs  Balance sheet o Sums up a firm’s financial position on a particular day  Usually the end of a quarter or year  Wall Street Reform and Consumer Protection Act  Legislation passed during 2010 that was intended to reform regulation of financial system Chapter 8  Gross Domestic Product o Measures total production o It is the market value of all final goods and services produced in a country during a period of time  Usually one year o Only includes the value of final goods and services  Final good or service  purchased by its final user and is not included in the production of any other good or service  Intermediate good  a good or service that is an input into another good or service  If we included intermediate goods, we would be double counting o Only includes production that takes place during the indicated time period  GDP does not include the value of used goods  The Circular-Flow Diagram o Firms sell goods and services to three groups  Domestic households  Foreign firms and households  The government o Firms use the factors of production (labor, capital, natural resources and entrepreneurship) to produce goods and services o Households supply the factors or production to firms in exchange for income  Income is divided into four categories: wages, interest, rent and profit o Governments make transfer payments to households  Transfer payments  payments by the government to households for which the government does not receive a new good or service in return  Components of GDP o Personal Consumption Expenditures or Consumption  Spending by households on goods and services, not including spending on new houses  This includes services (medical care, education, etc.), nondurable goods (food and clothing), durable goods (automobiles, furniture, etc.) o Gross Private Domestic Investment or Investment  Business fixed investment  spending by firms on new factories, office buildings and machinery used to produce other goods  Residential investment  spending by households and firms on new single-family and multi-unit houses  Changes in business inventories  also included in investment o Government Consumption and Gross Investment or Government Purchases  Spending by federal, state and local governments on goods and services o Net Exports of Goods and Services or “Net Exports”  Equal to exports minus imports  Equation for GDP o Y = C + I + G + NX  Value added  the market value a firm adds to a product o Additional market value a firm gives to a product  Household production  goods and services people produce for themselves o Not included in GDP  Underground economy  buying and selling of goods and services that is concealed from the government to avoid taxes or regulation o Possibly because the goods and services are illegal  GDP also frequently used as a measure of well being o Levels of GDP per person  called GDP per capita o Calculated by dividing the value of GDP for a country by the country’s population  GDP is not a perfect measure of well-being o Value of leisure is not included o GDP is not adjusted for pollution or other negative effects of production o GDP is not adjusted for changes in crime and other social problems o GDP may not provide good info about the goods and services consumed by a typical person  Nominal GDP  value of final goods and services evaluated at current- year prices  Real GDP  value of final goods and services evaluated at base year prices o Real GDP holds prices constant  Makes it a better measure than nominal GDP of changes in the production of goods and services from one year to the next  GDP Deflator o Price level  measure of the average prices of goods and services in the economy o GDP Deflator  measure of the price level  Calculated by dividing nominal GDP by real GDP and multiplying by 100  Gross national product o Value of final goods and services produced by residents of the US  Even if production takes place outside the US  Depreciation  value of machinery, equipment and buildings that are worn out and have to be replaced o Also called the consumption of fixed capital  National Income  consumption of fixed capital subtracted from the value of GDP  Personal Income  income received by households  Disposable Personal Income  equal to personal income minus personal tax payments


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