Econ 2030 Exam 1 Study Guide
Econ 2030 Exam 1 Study Guide Econ 2030
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This 8 page Study Guide was uploaded by Melissa Cooey on Saturday February 6, 2016. The Study Guide belongs to Econ 2030 at Auburn University taught by Dr. Stern in Spring 2016. Since its upload, it has received 298 views. For similar materials see Macroeconomics in Economcs at Auburn University.
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Date Created: 02/06/16
Friday, May 20, y Econ 2030 Exam 1 Study Guide Lecture 1 - Economics: Foundations and Models Scarcity a situation in which we have limited resources, but unlimited wants. forces us to make choices. Economics is the study of these choices. economics is a social science. Economic models simplified versions of reality used to analyze realworld economic applications. Steps to building an economic model: 1. Decide on the assumptions to use in developing a model. 2. Formulate a testable hypothesis. 3. Use economic data to test the hypothesis. 4. Revise the models it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future. Important features of economic models: Assumptions and simplifications: every model needs them in order to be useful. Testability: good models generate testable predictions, which can be verified or disproven using data. Economic Variables: measurable items that can be used to insert realworld data into the model. Rational using all available resources to achieve your goal. 1 Friday, May 20, y Opportunity cost the highestvalued alternative given up in order to engage in some activity. Tradeoff an increase in the production of one good requires the reduction in production of some other good. 3 Economic Ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Marginal cost/Marginal benefit the additional cost or benefit associated with a small amount extra of some action. Marginal analysis comparing MC and MB. Choose an action that is MB≥MC. The Economic Problem: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced? Types of economies: 1. Centrally Planned Economies where governments decide what to produce, how to produce it, and who receives the goods and services (former USSR). 2. Market Economies where the decisions of households and firms determine what is produced, how it is produced, and who receives the goods and services. 3. Mixed Economies have features of both of the above (most developed countries, like the U.S., Germany, Japan, etc). 2 Friday, May 20, y Positive analysis the study of “what is?” (descriptive, can be tested with data, doesn't have to be true though). Normative analysis the study of “what ought to be?” (judgmental, prescriptive, reflects someone’s opinion rather than fact). Lecture 2 - Math Review Macroeconomics the study of the economy as a whole including topics such as inflation, unemployment, and economic growth. Slope a measure of how much variable y changes when variable x changes by 1 unit (sensitivity measure). Slope formula: change in value on the vertical axis/change in value on the horizontal axis = rise/run Percentage change the change in some economic variable, usually from one period to the next, expressed as a percentage. percentage change formula for variable X: (X new X old/ X old) x 100% Lecture 3 - GDP: Measuring Total Production and Income Economic Growth refers to a phase of a business cycle when GDP is increasing. Business Cycle altering periods of economic expansion and economic recession. Expansion/Economic Growth rising real GDP from a trough to the next peak. Recession/Contraction falling real GDP from a peak to the next trough. Trough the lowest point in real GDP at the end of a contraction or recession. Peak the highest point in real GDP at the end of an expansion, and right before a contraction. Recovery the early part of an expansion, right after a trough. 3 Friday, May 20, y Depression a deep and long recession (The Great Depression of the 1930’s). Inflation rate the percentage increase in the aggregate price level from one year to the next. Unemployment rate the percentage of the labor force that is unemployed. Final good or service a good or service purchased by a final user, such as a tire purchased by John White. Intermediate good or service a good or service that is an input into another good or service, such as a tire being purchased by Ford to be put on a Ford truck. GDP only includes the market value of final goods. GDP only includes current year productions. Example: if you buy a brand new 2016 car, then its value will be included in the GDP for 2016. However, if you buy a used 2010 car in 2016, its value will NOT be included, The fees that you paid to a car dealer will be included in the year’s GDP because it is a payment or service given to you in the current year. 3 ways to measure GDP: Spending approach (1st approach): can be measured as the sum of total spending in the economy. = C+I+G+NX Components: 1. Personal Consumption Expenditures, or “Consumption” (C) spending by households on goods and services, NOT including spending on new houses, including domestic and imported goods. 2. Gross Private Domestic Investment, or “Investment” (I) spending by firms on new factories, office, buildings, machinery, and additions to inventories, AND spending by households on new houses. 4 Friday, May 20, y 3. Government Consumption and Gross Spending, or “Government Purchases” (G) spending by federal, state, and local governments on goods and services. 4. Net Exports of Goods and Services, or “Net Exports” (NX) exports imports Income approach (2nd approach, least accurate): can be measured as the sum of total income in the economy. Components: 1. Labor Income sum of wages, salaries, and fringe benefits paid to workers. 2. Capital Income sum of profits, rental payments, and interest payments. 3. Indirect Business Taxes taxes, such as sales tax. 4. Net Income of Foreigners (the income of foreign owned assets used in domestic production) minus (the income of American owned assets used in foreign production). 5. Depreciation the amount by which physical capital wears out over a given period of time. Value Added approach (3rd approach): can be measured by summing all extra values (value added) created by every business and every consumer. Value Added (value of the good produced) minus (cost of materials used in the production of that good). Problems with using GDP as a measure of total production: GDP does not include household production (goods and services people produce for themselves) GDP does not include underground economy (buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal). 5 Friday, May 20, y GDP does not include leisure. GDP is not adjusted for pollution and other negative effects of production. GDP is not adjusted for changes in crime and other social problems. GD does not measure how total production is distributed inside the economy. Nominal GDP the value of final goods and services evaluated at currentyear prices. Real GDP the value of final goods and services evaluated at baseyear prices. Price level a measure of the average prices of goods and services in the economy. GDP Deflator a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100. GDP deflator = (Nominal GDP/Real GDP) x100% Inflation percentage change in the price level. Inflation = (GDP deflator year 2 GDP deflator year 1/GDP deflator year 1) x100% Lecture 4 - Unemployment Unemployment rate the percentage of the labor force that is unemployed. Working Age Population (WAP) Noninstitutionalized individuals 16 years or older. Employed (E) Anyone in the WAP who: did any work at all as a paid employee worked in their own business, profession, or on their own farm. worked 15 hours or more as unpaid workers in a familyoperated enterprise. did not work but had jobs or businesses from which they were temporarily absent because of illness, vacation, labor dispute, etc. 6 Friday, May 20, y parttime, “unemployed”, and selfemployed (home businesses) persons are counted as employed. Unemployed (U) Anyone in WAP who is not employed and: has actively looked for a job during the survey period (last 4 weeks). is waiting to be recalled for a job from which they were laid off. Labor Force (LF) Anyone who is employed (E) or unemployed (U) is measured as: LF = E+U Discouraged Workers people who are available for worked but have not looked for a job during the previous 4 weeks because they believe no jobs are available for them. NOT included in the labor force. Labor Market Formulas: The Unemployment Rate (UR) measures the percentage of the labor force that is unemployed: UR = (U/LF) x100% The Employment Rate (ER) measures the percentage of the labor force that is employed: ER = (E/LF) x100% The Labor Force Participation Rate (LFPR) measures the percentage of the workingage population in the work force: LFPR = (LF/WAP) x100% The Employeeto Population Ratio (EPR) measures the percentage of employed in the workingage population: 7 Friday, May 20, y EPR = (E/WAP) x100% 3 types of unemployment: Frictional Unemployment shortterm unemployment that arises from the normal turnover in labor markets. Structural Unemployment unemployment arising from lack of skills; often results from technological progress. Usually lasts longer than frictional unemployment (takes time to acquire a new skill). Cyclical Unemployment unemployment caused by a business cycle (recession). Explaining Unemployment: In the United States and most other industrial countries, the unemployed are eligible for unemployment insurance payments from the government. If the minimum wage is set above the equilibrium market wage, the quantity of labor supplied will be greater than the quantity of labor demanded, causing unemployment. Economists believe that the current minimum wages is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted. Labor unions bargain with employers for higher wages and better working conditions for their workers. Some firms choose to pay their employees higherthanmarket wages to increase their productivity and minimize job turnover. Efficiency wages cause unemployment because there may be workers willing to work for less. 8
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