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Econ 201 Unit 3 Study Guide

by: Yasmeen Mohamed

Econ 201 Unit 3 Study Guide ECON 201

Yasmeen Mohamed
University of Louisiana at Lafayette

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About this Document

These notes cover the main topics on Exam 3 for Macroeceonomics
Principles of Macroeconomics
John Must
Study Guide
Economics, Macroeconomics
50 ?




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This 5 page Study Guide was uploaded by Yasmeen Mohamed on Thursday March 17, 2016. The Study Guide belongs to ECON 201 at University of Louisiana at Lafayette taught by John Must in Spring 2016. Since its upload, it has received 31 views. For similar materials see Principles of Macroeconomics in Economcs at University of Louisiana at Lafayette.


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Date Created: 03/17/16
Econ 201 Unit 3 Study Guide Ch. 26, 27, 28, 38  Economic Growth: Increase in real GDP per capita over time. Current yearGDP–Baseyear GDP x100 Baseyear GDP  Real GDP: Current prices adjusted for inflation units of output x price perunit RealGDP Real GDP Per Capita = = priceindex Population Population *price index = (price of item in current year / price of item in base year) x 100  Rule of 70: Determines the number of years needed to double output. 70 Time to double = Interest∨Growthrate Percentage(not decimal form) Q: What are some characteristics countries have with improved growth? A: Improved goods/services, leisure, and better environment. Q: What contributed to promote economic growth? A: Technology, Labor Force, (Cultural, social, and political changes), education, industrialization Industrial promotion: property/copy rights, free trade, competition, literacy Q: Determinants of growth? A: Supply, Demand, Efficiency (allocative and productive efficiency) factors. Using all available resources. Q: Features of Economic Growth and info about each. A: Growth Accounting – ↑work hours and labor productivity ↑GDP. o Technological advance (40%) – Largest contributor to productivity growth, low cost o Capital (30%) – ↑labor productivity o Education and Training (15%) – Specialization promotes productivity growth o Economies of Scale (↓cost by ↑output) and Resource Allocation – ↑Productivity due to diverse career paths Labor Productivity Determinants:  Technology  Quantity of capital goods available to workers  Quality of labor  Inventory managed properly Business Cycle: Alternating inclines and declines in economic growth over time (4 phases)  Peak – Max business activity, economy at near max capacity  Recession – Decline in output, input, employment, and GDP (More inferior goods sold and ↓Income)  ↑Repair services, secondhand shops, crime, drugs, divorce, etc. ↓Leisure activities and spending  Trough – Lowest output and employment (can be long or short)  Expansion/Recovery – Increase in output, income, employment, GDP, and (Durable goods sold, Inflation occurs) Calculating Labor Force [Extraneous info given on exam] = Total employed + Unemployed but looking population ¿Unemployed butlooking Calculate Unemployment Rate = Total LaborForce x 100 Discouraged workers not counted in labor force because they are not actively seeking a job. Natural Rate of Unemployment (AKA Full Employment Rate) is when cyclical unemployment rate is close to 0%. So, 100 – Unemployment rate = Full employment rate. US considers full employment at 4-6% unemployment. Q: Who is affected the most by unemployment? A: Low skilled workers, MINORITIES (African) teens, IMMIGRANTS (Africans and Hispanics), men, less education, and the longer you are unemployed the more you are affected by unemployment. They all create a lower living standards as well as discrimination in the work force reduces our output. Q: Who are excluded from the Labor Force? A: Teens, institutionalized people (School, Nursing home), or (Unemployed) discouraged workers. Q: Why is the official unemployment rate inaccurate? A: it does not account for people’s level of education, jobs needed based on economy, different wages, not full-time…regardless of one’s qualifications to do more.  Three Types of Unemployment: 1. Frictional – Between jobs temporarily (layoffs). Workers are either searching for jobs or waiting to take one in the future. [Gov won’t pay people between jobs] 2. Structural – Your skills don’t match what’s needed in economy at a particular time, and you cannot move to a place where they are needed. [Gov helps by training people] 3. Cyclical – Caused by decline in total spending, and insufficient demand for goods and services. ↑unemployment due to recession. [Gov ↑Taxes, ↑business, ↑private jobs] Okun’s Law: Any 1% rise in UR above full employment rate is associated with rise in 2% of (-)GDP Gap meaning more potential GPD than actual GDP. This concept is used to calculate the absolute loss of output associated with any above natural UR. Doubling cyclical unemployment shows the amount of productivity lost in economy. Inflation: Increase in prices $CPI 2−$CPI 1 Inflation Rate = $CPI 1 x 100 Priceof itemcurrently Consumer Price Index (CPI) = price∈base year x 100 Demand-Pull Inflation: ↑Prices from ↑demand, shifts demand curve right [Gov solution by ↑taxes] Cost-Push Inflation: ↑Resource costs per unit production, creates inflation and recession, but should die out on it’s own. Supply curve shifts left. Deflation: Decrease in prices Cost of Living Adjustments (COLA) – Automatic increase in wages when inflation occurs. Nominal Interest Rate ($): Percent increase in money the borrower pays the lender (not adjusted for inflation) NIR = RIR + Inflation Premium (Expected Rate of Inflation) Real Interest Rate ($): Percentage increase in purchasing power that borrowers pay lenders. RIR = NIR – Expected Inflation Rate 45 Degree Reference line: Where Consumption = Disposable Income (AKA you’re spending all of what you make after taxes). Actual line is red. Gaps represent savings or dissaving’s on graph. Saving more than spending Spending more than saving Average Propensity to Consume (APC): Part of total income consumed. Consumption APC + APS = 1 APC = Total Disposable Income Average Propensity to Save (APS): Part of total income saved. Savings APS = Total DisposableIncome Marginal (Additional) Propensity to Consume (MPC): Change in income consumed [Final – Initial] ΔConsumption MPC + MPS = 1 MPC = ΔTotal Disposable Income Marginal Propensity to Save (MPS): Change in income saved [Final – Initial] ΔSavings MPS = ΔTotal DisposableIncome Expected Rate of Return(r): How much do you intend to make off a product? $Interest r (%) = x 100 $ItemCost Q: What affect would a change in interest rate have on the expected rate of return? A: They have a directly proportional relationship. The higher the interest rate, the more expected in return. Q: What 2 things does a business look first at before investing in a project? A: (1) Expected Rate of Return (2) Real Interest Rate Where Expected Rate of Return ≥ Real Interest Rate (Nominal IR – Rate of Inflation). *The country with the least opportunity cost should focus on making that product and trading it with the other country. GATT 3 Principles (Reduced Tariff: Tax on imported goods trade barriers):  Equal Trade Revenue Tariff: Tax money given to federal gov Protective Tariff: Tax that protects producers from foreign competitionction on tariffs  Eliminate import quotas Import Quota: Limit on amount of imported goods Dumping: Selling products abroad at a lower price than what’s charged at home = price discrimination. World Trade Organization (WTO): Stemmed from GATT, they are judge and jury for trade protect labor and environment


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