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ECON 1012 Study Guide Midterm 1

by: Jaimee Kidd

ECON 1012 Study Guide Midterm 1 ECON 1012

Marketplace > George Washington University > Economics > ECON 1012 > ECON 1012 Study Guide Midterm 1
Jaimee Kidd
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Study Guide for Midterm 1 covering chapters 4-6
Principles of Economics II (ECON 1012)
Roberto M. Samaniego
Study Guide
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This 4 page Study Guide was uploaded by Jaimee Kidd on Tuesday September 27, 2016. The Study Guide belongs to ECON 1012 at George Washington University taught by Roberto M. Samaniego in Fall 2016. Since its upload, it has received 49 views. For similar materials see Principles of Economics II (ECON 1012) in Economics at George Washington University.


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Date Created: 09/27/16
ECON 1012 Midterm One Study Guide Aggregates:  A measure of the sum of lots of things.  Gives an “overall picture” of something.  GDP = Gross Domestic Product o “Everything that was produced over a particular period of time in a particular  place” o E.G. US GDP for 2001 What is GDP? o NOMINAL GDP: Sum of the market value of all final goods and services  produced over a particular period of time in a particular place  (1) Final Goods (e.g. sandwich)  (2) Intermediate Goods (e.g. the bread in the sandwich, the labor used to  make it) o Nominal vs. Real  On average, prices tend to rise. Nominal GDP can’t distinguish price rises  from increases in production  REAL GDP: Take out price effects   Real GDP growth: the rate of increase in production o Growth from 02 to 03: (Y2003 – Y2002)/Y2002 X 100   Inflation: the rate of increase in prices o Inflation from 02 to 03: (P2003­P2002)/P2002 X 100       Important Aggregate Issues: o Real GDP dynamics:  Growth  Business cycles (booms & recessions) o Inflation (does it matter?) o Unemployment o Interrelations         Where from? o Output has two components:  (1) Supply (incentives to produce)  (2) Demand (incentives to buy) o Recall from micro: S&D are critical in determining both prices and output o The same will be true in macro Aggregate Demand  Classify production according to who BUYS it: o (1) People (consumption) o (2) Companies (investment) o (3) Government (gov’t spending) o (4) Other Countries (Exports and Imports)  The list of “actors” is exhaustive, and will be useful in other contexts also. Aggregate Supply  Think about output according to how it is MADE.  How do we think about this? o Companies produce output  Why? To maximize their benefit (profits)  How? They combine and use inputs (the notion of the production  function)  Production Function: One Firm o Inputs: capital, labor, land, intermediate goods o Output: beanie babies, bombs, cars, etc. o In between: Technology   Production Function: Aggregate o Inputs: capital, labor (land fixed) o Output: Real GDP o In between: Technology o The aggregate production function quantifies this concept: inputs in, output out o Technology can be thought of as the efficiency of the way you combine inputs  Y = output  K = capital  L = labor  T= Technology  Y = f(T,K,L)  In fact, Y = TK^1/3L^2/3 works very well  Important Notes: o If there is growth, it must be that  The quantity of inputs is increasing; or  You are getting more output from the same quantity of inputs o If there are cycles, it must be that  The quantity of inputs used isn’t steady; or  The output produced by a given quantity of inputs isn’t steady Measurement  How do we measure these things?  Nominal GDP you already know: o Add all spending on goods/services o Another way: Add all sources of income  However, nominal GDP doesn’t distinguish changes in quantities from changes in prices.  We need to separate the two effects. Real GDP o Pick a year, called a base year (e.g. 1996)  o Do the same as for nominal GDP, always using base year prices o Because you need a base year, it isn’t an “absolute” measure, but you can measure growth.  Price Level o A price aggregate (“average prices”) o Several ways of going about it:  (1) GDP Deflator  (2) CPI = Consumer Price Index  (3) PPI = Producer Price Index o As with Real GDP, these are not absolute measures, but you can use them to  measure inflation (how prices are changing over time)  (1) GDP Deflator  Any meaningful measure of the price level should have the  following property o Suppose that in 1996 the price level was 100. IN 1997  output was the same, but all prices rose by 2% o Price level should be 102 o The GDP Deflator is the simplest way to do this  GDP Deflator = (Nominal GDP/Real GDP) X 100  (2) CPI   Designed to give an impression of how price changes are affecting  households o (a) Pick a “basket of goods” that, on average, people  consume (based on surveys) o (b) Compute its price every year o (c) Pick a base year o CPI = Total price of the basket today / Total price of basket in base year X 100  (3) PPI  Designed to give an impression of how price changes are affecting  companies o (a) pick a “basket of goods” that, on average, companies  produce o (b) compute its price every year o (c) pick a base year  o Apply the same formula as for the CPI  Which one should you use?  Depends on what you want to do: o (1) If you want to see overall inflation, use the real GDP  deflator o (2) If you want to know how inflation is affecting  consumers, use CPI (example: redistribution) o (3) If you want to know how inflation is affecting  companies, use PPI (example: forecasts)  Problems: CPI Bias  Substitution: Products with prices that drop (relatively) tend to  have faster growth in quantities (applies to rGDP too)  Quality change: Rising prices may reflect improvements, not  inflation per se   New Goods: New goods may replace old ones, and be more  expensive (they are better or do new things) o  Solutions: hedonic prices, change the basket Economic Growth  Growth Theories o We will look in turn at each of the following:  Neoclassical  New Growth Theory  Institutional Theories (a “bigger picture” approach) o Neoclassical Growth  Technical change drives growth  Technical change = new technology, new products, new methods,  etc.  Technical improvements cause capital accumulation  This process of capital accumulation ends: growth eventuall stops 


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