Macroeconomics Study Guide Test #2
Macroeconomics Study Guide Test #2 Econ 105
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This 6 page Study Guide was uploaded by Alaina White on Tuesday March 8, 2016. The Study Guide belongs to Econ 105 at Pace University taught by Rukhama Halim in Spring 2016. Since its upload, it has received 26 views. For similar materials see Macroeconomics in Economcs at Pace University.
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Date Created: 03/08/16
Macroeconomics Test #2 Chapter 24 Production (P) increases, when there is more production happening in a country, employment (E) increases, income (I) also increases, then they also spend (expenditures increase) more or aggregate demand (AD), which flows back to production. Financial Investment- The purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as a house, land, or factories) or the building of such assets in the expectation of financial gain. Economic Investment- Spending for the production and accumulation of capital and additions to inventories. Investment made by firms or government in any project. The money they are using. Performance and Policy (of an economy) Business Cycle- Recession + Peak Real GDP- (Real Gross Domestic Product) Gross Domestic Product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal. A measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). Corrects for price changes. Nominal GDP- Gross domestic product without or before accounting for inflation. GDP measured in terms of price level at the time of measurement; GDP not adjusted for inflation. Uses current prices. Inflation- A rise in the general level of prices in an economy; an increase in an economy’s price level. An increase in the overall level of prices. Output Growth= GDP Growth Standard of living is measured by output per person No growth in living standards prior to industrial revolution Chapter 25 National Income Accounting- A term used in economics to refer to the bookkeeping system that a national government uses to measure the level of the country's economic activity in a given time period. Measures an economy’s overall performance. Is done by the Bureau of Economic Analysis. Compiles National Income and Product Accounts. Access health of economy. Track long run course. Gross Domestic Product- defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year. Measure of aggregate output. Monetary measure. Avoid multiple counting. Market value final goods (are products that are purchased by their end users). Ignore Intermediate goods (are products that are purchased for resale or further processing or manufacturing). Count Value added- is the difference between the sale price of a good or service and the costs associated with it. This attempts to correct the problem of double counting. Is the total value of the goods and services produced by a country in a year. Chapter 26 Increase in real GDP or real GDP per capita over some time period Percentage rate of growth, growth as a goal Rule of 70 Determinates of growth rate: 1) quantity and quality of natural resources. 2) Quantity and quality of human resources (labor, skilled labor), 3) supply and stock of capital goods. 4) Technology. These effect the growth rate of countries (ability to produce goods and services). Additions may include education, literacy, efficient financial institutions, free trade, and a competitive market. Leader countries invent technology, follower countries adopt technology. Research and development can also promote growth. Real GDP= hours of work x labor productivity The data for GDP comes from the Bureau of Economic Analysis, which is part of the Department of Commerce. There are two possible reasons for total spending to rise from one year to the next. 1) The economy may be producing a larger output of goods and services. 2) Goods and services could be selling at higher prices. When studying GDP over time, economists would like to know if output has changed (not prices). Thus, economists measure real GDP by valuing output using a fixed set of prices. A Numerical Example 1. Two goods are being produced: hot dogs and hamburgers. Year Price of Quantity Price of Quantity of Hamburge of Hot Dogs Hot Dogs rs Hamburge rs 2010 $1 100 $2 50 2011 $2 150 $3 100 2012 $3 200 $4 150 2. Definition of nominal GDP: the production of goods and services valued at current prices. Nominal GDP for 2010 = ($1 × 100) + ($2 × 50) = $200. Nominal GDP for 2011 = ($2 × 150) + ($3 × 100) = $600. Nominal GDP for 2012 = ($3 × 200) + ($4 × 150) = $1,200. 3. Definition of real GDP: the production of goods and services valued at constant prices. Let’s assume that the base year is 2008. Real GDP for 2010 = ($1 × 100) + ($2 × 50) = $200. Real GDP for 2011 = ($1 × 150) + ($2 × 100) = $350. Real GDP for 2012 = ($1 × 200) + ($2 × 150) = $500. Because real GDP is unaffected by changes in prices over time, changes in real GDP reflect changes in the amount of goods and services produced. The GDP Deflator Definition of GDP deflator: a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. Nominal GDP GDP deflatorReal GDP100 2. Example Calculations GDP Deflator for 2010 = ($200 / $200) × 100 = 100. GDP Deflator for 2011 = ($600 / $350) × 100 = 171. GDP Deflator for 2012 = ($1200 / $500) × 100 = 240. Rearranging this equation gives us: Real GDP = Nominal GDP x100 GDP deflator We can also say that we are deflating the Nominal GDP for price rise by dividing by deflator to get the real GDP which is adjusted for inflation. We can also see that there are times when real GDP declines. These periods are called recessions. Is GDP a true measure of economic well- being or strength of an economy? GDP measures both an economy’s total income and its total expenditure on goods and services. --- GDP per person tells us the income and expenditure level of the average person in the economy. ----GDP, however, may not be a very good measure of the economic well- being of an individual. 1. GDP omits important factors in the quality of life including leisure, the quality of the environment, and the value of goods produced but not sold in formal markets. 2. GDP also says nothing about the distribution of income. 3. However, a higher GDP does help us achieve a good life. Nations with larger GDP generally have better education and better health care. --- The Underground Economy 1. The measurement of GDP misses many transactions that take place in the underground economy. Chapter 27 Types/ Causes of Inflation: Cost- Push Inflation- Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply. If the price of inputs rises, the cost of the product rises, and the supply will decrease. Demand-Pull Inflation- Increases in the price level (inflation) resulting from the increases in aggregate demand. Inflation- An increase in the general price level .It is to note that prices of certain commodities may be falling as well during inflation. Types of inflation: 1) Cost push inflation- When cost of producing goods goes up .It is costlier to produce so prices rise. 2) Demand pull inflation- An Increase in prices caused by an excess in total spending, beyond the economy’s capacity to produce.so prices rise as a result. Two measures of price level: 1) GDP deflator (talks about total production). 2) Consumer price index( talks about total consumption on a basket of goods) The Consumer Price Index- a measure of the overall cost of the goods and services bought by a typical consumer. How the Consumer Price Index Is Calculated 1. Fix the basket: b. Example: 4 hot dogs and 2 hamburgers The Bureau of Labor Statistics uses surveys to determine a representative bundle of goods and services purchased by a typical consumer. 2. Find the prices. a. Prices for each of the goods and services in the basket must be determined for each time period. b. Example: Year Price of Price of 2010 $1 $2 2011 $2 $3 2012 $3 $4 3. Compute the basket’s cost. a. By keeping the basket the same, only prices are being allowed to change. This allows us to isolate the effects of price changes over time. b. Example: Cost in 2010 = ($1 × 4) + ($2 × 2) = $8. Cost in 2011 = ($2 × 4) + ($3 × 2) = $14. Cost in 2012 = ($3 × 4) + ($4 × 2) = $20. 4. Choose a base year and compute the index. a. The base year is the benchmark against which other years are compared. b. The formula for calculating the price index is: cost of basket in current year CPI 100 cost of basket in baseyear c. Example (using 2010 as the base year): CPI for 2010 = ($8)/($8) × 100 = 100. CPI for 2011 = ($14)/($8) × 100 = 175. CPI for 2012 = ($20)/($8) × 100 = 250. CPI must equal 100 in the base year. 5. Compute the inflation rate. a. Definition of inflation rate: the percentage change in the price index from the preceding period. Inflation does not mean that the prices of all goods in the economy are rising. Inflation means that prices of all goods on average are rising. In fact, the prices of many electronic goods (such as computers and DVD players) have fallen over time. b. The formula used to calculate the inflation rate is: CPI CPI inflation rate Year 2 Year1100% CPI Year 1 Inflation Rate for 2011 = (175 – 100)/100 × 100% = 75%. Inflation Rate for 2012 = (250 – 175)/175 × 100% = 43%.
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