Exam 1 Study Guide
Exam 1 Study Guide AGEC 21700 - 001
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This 8 page Study Guide was uploaded by Victoria E on Wednesday September 16, 2015. The Study Guide belongs to AGEC 21700 - 001 at Purdue University taught by Lawrence P Deboer in Fall 2015. Since its upload, it has received 425 views. For similar materials see Economics in Agricultural & Resource Econ at Purdue University.
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Date Created: 09/16/15
AGEC Study Guide Exam 1 Macroeconomics Measurements o Aggregation adding up the value of the things that businesses produce as total output and considering employment and unemployment amp pdceleveL 0 Four main measures of the economy to describe the bigger picture 0 output of goods and services 0 price of goods and services 0 the share of the labor force unemployed 0 interest rates charged by lenders 0 Output the result of production cars houses hamburgers roads missiles doctors lawyers plumber s services all within a year 0 Measured by GDP 0 Gross Domestic Product the value of all nal goods and services produced in a year 0 Measures production the products the economy produces o It divides the whole world into a puzzle and each piece in the puzzle is counted as GDP 0 If we produced it we are going to count it 0 product because it measures what is produced 0 domestic because it measures what happens within a nation s borders 0 gross because it doesn39t drop quotnet outquot or subtract depreciation of equipment and structures 393 GDP value of things produced x price of which those things are sold at o What does value mean 0 You can t add egg rolls and rings but you can add their values 0 What does nal mean 0 Include only what is produced this year not what was produced in earlier years even if it gets sold in this year it is only counted in the year it is created 0 Underground economy hidden transactions drug market 0 GDP is divided into 5 major categories 0 Consumption output purchased by households consumers 0 Investment output mostly purchased by businesses in order to produce other goods 0 Government purchases resources or inputs purchased by governments 0 Exports sales of goods and services to people businesses and governments of other countries 0 Imports purchases of goods and services from people businesses and governments of other countries Since the value of imported goods is not produced in the nation we don t want to count them Subtracted to remove the value of these items from total GDP Real GDP vs nominal GDP 0 Nominal GDP output measured in current prices the rpices that existed in the year the output was produced 0 Nominal is current not adjustable for in ation Real is constant adjustable for in ation 0 Divide nominal GDP by a price index de ator after dividing by 100 to get real GDP 0 Real GDP growth the percentage change in real GDP from one year to the next It measures the change in the quantity of goods and services produced from one year to the next without the in uence of price changes 0 Called quotde ating GDPquot which is why the price index is the GDP quotde atorquot In ation represents GDP the skyrocketing of prices 0 Not all GDP measures in current prices 0 Real GDP tries to get underlying prices Real GDP Growth oThis measure is always called growth even when it s a decline oThe percentage change in real GDP from one year to the next Remove the in uence of in uence of in ation from GDP 0 Divide nominal GDP by a price indexrea GDP 0 The percentage change in real GDP 0 GDP DEFLATORlOO REAL GDP 0 GDP growth new real GDP old real GDPnew real GDP then x100 Recessions and Expansions 0 Recession a signi cant decline in economic activity that spreads across the economy and can last from a few months to more than a year oTroughs mark the ends of recessions 0 Peaks mark the ends of expansions 0 Real GDP falls during recessions and rises during expansions In ation Rate oA price index is an average price of the goods and services produced in the economy in ation a rise in consumer prices 0 Increases in price index imply that the overall prices have increased on average 0 In ation tends to fall after recessions start and rise after expansions start De ation decreases in price index imply that prices of goods and services have decreased on average Two main price indexes measure in ation GDP de ator oThe price index used to turn nominal GDP to real GDP Consumer Price Index CPI oThe weighted average price of goods and services a typical household buys the most commonly used price index 0 calculated each month by the Bureau of Labor Stats they go out every month and track the prices of things and send it to the BLS surveys 80000 prices of goods and services in 200 expenditures categories 0 they choose the items based on consumer expenditure surveys from 1960 to 1015 prices rose 8 fold Measuring In ation Rate w CPI o CPI in ation ratechange in the price index from one year to the next 0 In ation rate new CPIold CPI old CPI all x 100 o It also measures how fast prices are rising from one year to the next Core rate of in ation o A version of the CPI that excludes the prices of energy and food Unemployment Rate oThe unemployment rate is the percentage of unemployed people in the labor force oThe labor force is the number of people age 16 and over who willing and able to work whether they are working or not 0 calculated monthly by the bureau of labor statistics 0 it s a survey of about 60000 people 16 years old and above 0 survey classi es everyone as 1 unemployed 2 employed 3 not in the labor force 2 employedworking for pay or working for a family business or on vacation but going back to work 1 unemployedputting in efforts to nd work 3 not in the labor force not working for pay or even looking to nd work ex retired housewives Ex retired students less than 16yrs institutionalized or in hospital for long term are not accounted for in the unemployment rate 3 unemployed unemployedlabor force all x 100 unemployment rate measures the number of people that want to work but don39t have a job Three causes of unemployment 1 Cyclical when the economy falls into recession workers are laid off or let go and people entering the labor force have dif culty nding jobs Frictional this results from the fact that it takes time for workers Structural there may be a million unemployed people and a million job openings but if the jobs are for nurses while the people that are unemployed are steel workers the jobs will not be lled and the unemployment rate wont change 0 5 a rule of thumb natural rate of unemployment The unemployment rate rises during recessions JUN Interest Rates 0 Interest rate an added percentage that a borrower must repay a lender in addition to the amount borrowed 0 Usually measured on an annual basis 0 Federal funds rate banks with excess will lend to those that are short charging the federal funds rate 0 Treasury bond rates these interest rates paid by the US Treasury when it borrows to nance a budget de cit 0 Prime rate these interest rates supposedly charged by banks to their best corporate customers 0 Commercial paper rates interest rates on shortterm loans that lenders make to businesses for operations such as stocking inventories or meeting payrolls O 0 Corporate bond rates interest rates paid by corporations when they borrow for longer periods of time usually for business expansion Mortgage rate interest rate charged to people borrowing to nance a home purchase 3 Real interest rate nominal interest rate expected in ation rate An interest rate spread measures the difference between two interest rates which can indicate the attitudes of lenders 0 Moody s uses the designation BAA to classify riskier corporations The AAA label is reserved for the less risky corporations 0 Interest rate spread BAAAAA Purchasing power measures the amount of goods and services that an amount of money can buy 3 Real salariessalarielePl after dividing by 100 Great Depression August 1929 to March 1933 Great Recession December 2007 to June 2009 Agec notes September 1 2015 Revenue Ticket Price x Quantity of Tickets Sold 0 RP x Q Quantity of tickets sold Revenueticket price 0 RPQ When the question asks using a constant price they will take the price from a base year and apply it to different amounts of tickets sold to estimate what the revenue would ve been 0 To get the revenue of constant prices quantity of tickets sold x 1983 ticket price Ticket price index each year s price1983 price x 100 Nominal revenueticket price index 100 real revenue in constant 1983 ticket prices Use an index of the prices of lots of goodsservices the CPI Consumer price index is the average price of all goodsservices combined Nominal revenue consumer price index reaI revenue in constant 1983 prices Factor to 2015 2015 CPU each year s CPI Constant purchasing power revenue x factor to 2015 Ticket price cpi to see which one is increasing faster Purchasing power is how much you can buy with it Nominalcpi rea min wage gt has gone down Constant purchasing power wage x factor to 2015 ANY CALCULATION THAT HAS TO DO WITH MEASURING MONEY OVER ANY AMOUNT OF TIME MUST ACCOUNT FOR INFLATION Agec notes September 32015 Demand how much of a good or service will be purchased by consumers over a period of time 0 Demand slopes down 0 The law of demandThe costlier a good is the less of it people will buy Supply how much of a good or service will be produced for sale by rms during a period of time 0 Supply slopes skyward the higher the market price the more likely will increases in production be pro table even if less ef cient resources must be used 0 Point of equilibrium the point that quantity demanded quantity suppHed If price is above equilibrium there is a surplus of goods and both consumer and producers have 0 Once equilibrium is reached there is no more incentive to reduce price Determinants of demand and supply 0 Demand own price income other prices such as complementssubs preferences expectations population 0 Supply own price input costs such as land labor and capital technology natural conditions expectations number of rms The Elasticity of Demand 0 Response of quantity to price changes is large elastic Response of quantity to price changes is small inelastic Agec notes September 15 2015 o The longer the time the people have to adjust the bigger the adjustment will be 0 When house prices rise construction rms want to build more houses 0 But it takes extra time to nd and buy land Install streets and infrastructure Hire workers rent equipment build the houses After a few years all this is done 000 Help session 0 Chapters 1 and 2 BAA and interest rate goes up 0 Panic diff in interest rates growspread 0 Know how to calculate GDP and growth Unemployment rate 0 Know generally what an unemployment rate is Calculating elasticity change Qchange P elasticity 0 Learn Law of diminishing returns Review session Ex Minimum wage of 1988 CPI 1988new CP difference x old minimum wage Ex Elasticity of demand change in qty change in price New Qold Qold Qnew Pold Pod P the answer should be a negative elasticity lt 1 unit elastic 1 1 lt inelastic lt O elasticity of supply should always be a positive answer
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