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EC 111 Unit 2 Study Guide

by: Conner Jones

EC 111 Unit 2 Study Guide EC 111

Conner Jones
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EC 111 Zirlott unit 2 study guide
Principles of Macroeconomics
Study Guide
EC 111 zirlott unit 2 study guide
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This 5 page Study Guide was uploaded by Conner Jones on Sunday March 6, 2016. The Study Guide belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 80 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.

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Date Created: 03/06/16
EC 111 Unit 2 Study Guide Chapter 10 Income and expenditure  GDP (Gross domestic product)- the market value of all final goods and services produced within a country in a given period of time o Includes: tangible goods (bikes, movies, etc.) and intangible goods (services like concerts, cell phone service, house cleaning, etc.) o Does not include intermediate goods (goods used in production of other goods), Does not include resale of goods (used car, used textbook, etc.), does not include American companies producing goods outside of American borders o Things without market value are not included (stuff you do yourself)  For economy as a whole, income equals expenditure Circular flow diagram  Simple depiction of macro economy  Illustrated GDP as spending, revenue, factor payments, and income  Omits: government (taxes), financial system (funds and loans), and foreign sector (trades, and currencies) Components of GDP  Consumption (C) o Total spending by households on goods and services  Investment (I) o Total spending on goods that will be used in the future to produce more goods  Capital equipment (machines, tools, technology)  Structures (factories, offices)  Inventories (goods produced but not yet sold)  Houses (residential fixed investment)  Government spending (G) o All spending on goods and services purchased by government at the federal, state, and local level o Does not include social security, food stamps, unemployment insurance, etc.  Net exports (NX) o Exports-imports  Equation for GDP – Y=C+I+G+NX Real v. nominal GDP  Nominal GDP- values output using current prices, not corrected for inflation  Real GDP- values output using prices of a base year, corrected for inflation  GDP deflator – nominal GDP/real GDP X 100 (GDP deflator for base year is ALWAYS 100)  Inflation rate – current year GDP deflator - previous year GDP deflator/previous year GDP deflator X 100 (New-Old)/Old GDP and economic Well-Being  Real GDP per capita is the main indicator of the average person’s standard of living, however it is not a perfect measure of well being  GDP does not include: o Quality of the environment o Leisure time o Non market activity such as child care o Equitable distribution of income  Having a large GDP enables a country to afford better schools, cleaner environments, health care, etc.  Indicators that positively correlate wo GDP o Life expectancy o Literacy o Internet usage and technology Chapter 11 CPI (consumer price index)- measures typical consumer’s cost of living  how is CPI calculated? o Fix the “basket”- the BLS (bureau of labor statistics) surveys consumers to determine what is in the typical consumer’s “shopping basket” o Find the price- BLS collects data on pries of all goods in basket o Compute basket’s cost- use the prices to compute total cost of everything in the basket o Choose a base year and compute index- cost of basket in current year/cost of basket in base year X 100 o Compute inflation rate- (CPI this year – CPI last year)/CPI last year X 100  Problems with CPI o Over time some prices rise faster than others o Consumers substitute toward goods that become cheaper over time o CPI misses this substitution because it uses a fixed basket of goods o Therefore, the CPI overstates increase in cost of living  Comparing CPI and GDP deflator o Both measure inflation o Imports- included in CPI and not GDP deflator o Capital goods- included in GDP deflator and not CPI o CPI uses a fixed basket while GDP deflator uses a basket of currently produced goods and services  Correcting variables for inflation Inflation o Minimum wage was $1.15 in 1964 and $7.25 in 2015 o CPI today – 220.3, CPI in 1964 – 31.3 o Amount in today’s dollars = amt. in year T Dollars X (price level today/price level in year T) o $1.15 X (220.3/31.3) = $8.08 o minimum wage in 1964 had more spending power than the minimum wage does now  indexation – when a dollar amount is changed due to inflation and is automatically corrected by law or contract  real v. nominal interest rate o real interest rate is adjusted for inflation, nominal is not o real interest rate = nominal interest rate – inflation rate o example: deposit $1000 for one year, nominal interest rate is 9%, during that year inflation rate is 3.5%  real inflation rate = 9% - 3.5% = 5.5% Chapter 13 financial institutions  financial system- group of institutions that helps match saving of one person with investment of another  financial markets- institutions through which savers can DIRECTLY provide funds to borrowers o bond market – certificate of indebtedness o stock market – claim to partial ownership of a firm  financial intermediaries- institutions through which savers can INDIRECTLY provide funds to borrowers o banks o mutual funds – institutions that sell shares to public and use proceeds to buy portfolios of stocks/bonds  kinds of savings o private savings = income – tax – consumption (Y – T – C) (income not used for consumption or taxes) o public savings = tax revenue – government spending (T – G) o national savings = private savings + public savings (portion of national income not used for consumption or government purchases) o investment (in closed economy) (Y – C – G) = national savings  budget surplus – an excess of tax revenue over government spending o taxes – gov’t spending o public savings  budget deficit – shortfall of tax revenue from government spending o gov’t spending – taxes o – (public savings)  investment – the purchase of new capital o examples: equipment for new business, build a new house, build a new factory  market for loanable funds o a supply-demand model for the financial system o assumptions:  only one financial market  all savers deposit savings in this market  all borrowers take out loans from this market  there is one interest rate (both return to savings and cost of borrowing) o supply of loanable funds come from savings o demand of loanable funds come from investments Chapter 15  Bureau of Labor Statistics (BLS) – measures unemployment in US  labor force – the total number of workers including employed and unemployed in the market  does not include: o discouraged workers o workers paid “under the table”  types of unemployment o Natural rate of unemployment – normal rate of unemployment around which actual unemployment rate fluctuates o Cyclical unemployment  Deviation of unemployment from its natural rate  Associated with business cycles o Frictional unemployment  When workers spend time searching for the jobs that best suit their skills and tastes  Short term for most workers  Economy is always changing so some frictional unemployment is always going to occur  Occurs when wages are above equilibrium o Structural unemployment  Occurs when there are fewer jobs than workers  Usually long term  Job search – the process of matching workers with their appropriate jobs  Ways gov’t can speed up job search o Government employment agencies: provide info about job vacancies to speed up the matching of workers to jobs o Public training programs: equips workers displaced from work with skills needed in growing industries  Unemployment insurance: a “safety net” that provides income to the unemployed o Increasing UI will raise frictional unemployment  Minimum wage laws o Increasing MW would increase structural unemployment  Union – a worker association that bargains collectively with employers over wages, benefits, and working conditions o Exert their market power to negotiate higher wages for workers o When they bargain successfully, wages and unemployment rise in that industry  Efficiency wages: firms voluntarily pay above equilibrium wages to boost worker productivity o Worker health – paying higher wages allows workers to eat better, makes them healthier o Worker turnover – paying high wages gives workers more incentive to stay, reduces turnover o Worker quality – higher wages attracts better job applicants, increases quality of firm’s workforce o Worker effort – workers can work hard or shirk. Shirkers are fired if caught.


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