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# Midterm 1 Study Guide Econ 303

UIUC

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This 4 page Study Guide was uploaded by Mitchell Chin on Saturday September 17, 2016. The Study Guide belongs to Econ 303 at University of Illinois at Urbana-Champaign taught by Rui Zhao in Fall 2016. Since its upload, it has received 8 views. For similar materials see Macroeconomics in Economics at University of Illinois at Urbana-Champaign.

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Date Created: 09/17/16

Midterm 1 Study Guide How to calculate GDP: Production approach Quantity x price = value added, Σ(value added) = GDP Income approach Wages + profits = GDP, profits = value added – wages Expenditure approach C + I + G + NX = GDP, NX = EX – IM How to calculate GNP: GNP = GDP + foreign production by US companies – domestic production by foreign companies How to calculate nominal GDP, real GDP, deflator GDP, CPI, and inflation rate with two products (X and Y): Year A is the base year. Nominal GDP year A = X QA x XPA + YQA x YPA Real GDP year A = Same as Nominal GDP year A Nominal GDP year B = X QB x XPB + YQB x YPB B A B A Real GDP year B = X Q x X P + Y Q x YP GDP Deflator year A = Nominal GDP year A/Real GDP year A = 100, this should always equal 100 GDP Deflator year B = Nominal GDP year B/Real GDP year B Cost of basket year A = Same as Nominal GDP year A Cost of basket year B = X QA x XPB + Y QAx Y P CPI year A = cost of basket year A (current year)/cost of basket year A CPI year B = cost of basket year B (current year)/cost of basket year A Inflation rate Year B w/ GDP deflator = [(GDP deflator year B/GDP deflator year A) – 1] x 100 Inflation rate Year B w/ CPI = [(CPI year B/CPI year A) – 1] x 100 How to calculate Value of year ? quantity, Growth index and Fisher index: Value of year 1 quantity: year 1 quantities multiplied by year 1 prices (question asks for price) Value of year 2 quantity: year 2 quantities multiplied by year 1 prices (question asks for price) Base year growth index w/ year 1 prices: value of year 2 quantity/value of year 1 quantity Previous three lines are repeated but with year 2 price. Fisher Index for year 1 and 2: sqrt(Base year growth index w/ year 1 prices x Base year growth index w/ year 2 prices) Previous 6 lines are repeated but with year 2 and 3 quantities and year 2 and 3 price. Real GDP in year 2: year 2 quantities multiplied by year 2 prices Real GDP in year 1: Real GDP in year 2/Fisher Index for year 1 and 2 Real GDP in year 3: Real GDP in year 2 x Fisher Index for year 2 and 3 How to calculate purchasing power in different time periods: (Target year CPI/Base year CPI) x dollar amount given. For example: Base year CPI = 40; Target year CPI = 160; How much purchasing power does $20 in the base year have in the target year? 160/40 x 20 = $80 How to calculate GDP per capita: GDP/Population How to calculate Annual Growth Rate of GDP over two different time periods: [(GDP year B/GDP year A) 1/n– 1] x 100; n is the difference in years This can be applied to the growth rate of Capital, Labor, TFP too. How to calculate contribution toward growth of GDP: Take annual growth rate from previous “How to calculate…” and multiply by a if contribution for capital, 1-a if contribution for labor, or by nothing if contribution for TFP. How to calculate GDP per capita over a period of time: n GDP desired year = GDP per capita(1 + annual average growth rate) ^ can manipulate to find annual average growth rate How to calculate the years it would take one country to catch up to another: n GDP per capita(1 + annual average growth rate) = GDP per capita(1 + annual average growth rate) n Left of equation can be fast country while right is the slow country. Solve for n. Production and Marginal Product: a 1-a Given production function: Y = F(K,L) = zK L Ex: Y = F(K,L) = 5K L 0.40.6 If 50 units of capital and 10 units of labor are used, how many units of output can be made? F(50,10) = 5(50) (10)4 0.6= 95.183 If both K and L are doubled then, and you get the product of (95.183 x 2) -0.60.6 Marginal product of Capital: 2K L Marginal product of Labor: 3K L 0.4-0.4 ^ partial derivatives Keeping L constant and increasing K will increase MP but decreLse MP K Keeping K constant and increasing L will increase MP but decrease MP K L How to calculate the steady state population density: Example production function: Y = 100D N 1/3 2/3 1/3 Y = Y/N; d = D/N y = 100d Just remember the exponent on ‘D’ is the same on ‘d’. 3 3 Solve for d and put over 1: d = (y/100) 1/(y/100) How to calculate steady state capital intensity, k, given s, d, n, a, and z: a 1-a szk = (n + d)k sz/(n + d) = k [sz/(n + d)]1/1-a= k The higher investment rate is, the bigger capital intensity is. a Graphical representation of szk = (n + d)k with US and India. How to calculate the output and consumption per person at the steady state: a Using the k from the last “How to calculate…” plug it into y = zk to find the output. To find the consumption per person, take the output and multiply by (1 – s). To find income differences (aka GDP per capita difference) at the steady state of two different countries take the richer country’s output and divide by the poorer country’s output: y US India How to calculate capital per capita: Assuming you calculated output already plug into equation k = k + sy B (n A + d)k A How to calculate the distance from the steady state: Take initial k/steady state capital intensity

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