Study Guide for test#1 - Macroeconomics
Study Guide for test#1 - Macroeconomics ECON 2105 080
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This 16 page Study Guide was uploaded by Gunawork on Monday October 5, 2015. The Study Guide belongs to ECON 2105 080 at Georgia State University taught by Brian Hunt in Fall 2015. Since its upload, it has received 315 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Economcs at Georgia State University.
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Date Created: 10/05/15
MacroEcon 2105 Study Guide for Test 1 Chapter 2 6 7 8 Chapter 2 How individuals make choices Basic principles behind the individual choices 1 Resources are scarce 2 The real cost of something is What you must give up to get it gt Opportunity cost It is all about What you have to forgo to obtain your choice How much is a decision at the margin Tradeoffs Marginal decisions and marginal analysis VVP People usually take advantage of opportunities to make themselves better off Incentives V Allocate Choices Cost What is the opportunity cost Market choice Market system Innovation and productivity Before organizing a market there are some important questions to ask rst What will be produced How will it be produced Who will produce it For whom will it be produced Economic systems and the management of choice How do each of the type of economic systems manage choices in their respective market environments constrained by scarce resources and scarce opportunities How might each of theses systems differ in managing the tradeoffs between efficiency and equity Choice gt customs gt traditional economy Choice gt consumers and producers gt free market capitalist Choice gt government gt planned socialist Choice gt consumers producers and government gt mixed economy The function of markets in principles Without dividing into the politicized discussion of private versus public economies a mixed marketplace should function along 4 tenets 1 Serve as a medium to coordinate activities in response to private and public incentives signaling unlimited needs and wants in a resource constrained environment 2 Serve as a medium for the allocation of scarce resources through the use of pricing mechanism regulated or nonregulated or adoption of some acceptable private and or public practice 3 Making use of a pricing mechanism for the allocation of scarce resources or adoption of some type of acceptable private or public practice for the allocation of resources land labor and capital to persons or entities that will make for the most productive use of such resources 4 Create exploitable trade and exchange opportunities for participants that will maximize private and public gains and returns to society Comparative vs absolute advantage gt Comparative advantage the opportunity cost of producing the good is lower for that individual than for other people gt Absolute advantage if he or she can do it better than other people Careful DON T confuse comparative advantage with absolute advantage Positive versus Normative Analysis Positive analysis is testable Normative analysis is opinions Examples 1 The moon is made of green cheese Positive 2 Rich people should be taxed more Normative 3 More taxes on the rich will raise tax revenue Positive 4 Everyone ought to study economics Normative The function of markets in principles MARKET OPPORTUNITY Capacity Scarcity Regulatory To whom does it bene t in attempt to acquiring the most Scarcity should sometimes be a motivator allocate scarcity All need to serve in as a medium unlimited needs People need to choose rational and need to be regulation People willing to pay or not pay comes in affect to pricing mechanism land labor and capital regulation connection is incentive Markets need to create exploited trade and exchange opportunities for people V VVVV Capitalist Socialist Govemment involvement SIDE NOTE when you look at the CPI model of closed economy think of the role that the different entities play Tom s tradeoffs the production possibility frontier OPPORTUNITY COST Income SIDE NOTE In private labor wages would be allocated Example with 2 different goods and their constraints and production possible frontier gt Land is speci c to production of coconuts can t be used for anything else gt Labor can be used to produce coconut gt Capitol speci c to production of sh only gt Labor ltgt mobile Determining market return thanksgiving cooking in the kitchen with grandma example Division of labor Chapter 6 Intro to Macroeconomics As economy changes in composition naturally Chaos is still a natural formation While Macro is the whole pie Micro is the speci c slice of the pie Different people form different areas affect the economy s growth and downfall gt In ation could be healthy not when it s a hyper in ation it shouldn t pass a certain limit slow rate of in ation is good for the economy and people as a whole In ation changes of money and the usage of money gt De ation dangerous worse it s more expensive Macroeconomics vs Microeconomics MicroEcon focuses on how decisions are made by individuals and rms and the consequences of those decisions Example gt How much it would cost for a university or college to offer a new course the cost of the instructor s salary the classroom facilities the class materials and so on gt Having determined the cost the school can then decide whether to offer the course by weighing the costs and bene ts MacroEcon examines examines the aggregate behavior of the economy that is how the actions of all the individuals and rms in the economy interact to produce a particular level of economic performances as a whole Example gt Overall level of prices in the economy how high or how low they are relative to prices last year rather than the price of a particular good or SCI39VICC In macroeconomy the behavior of the whole economy is greater than the sum of individuals actions and market outcomes Example Paradox of thrift when families and businesses are worried about the possibility of economic hard times they prepare by cutting their spending This reduction is spending depresses the economy as consumers spend less and businesses react by laying off workers As a result families and businesses may end up worse off than if they hadn t tried act responsibly by cutting their spending Save or spend Regulator Taxer MICROECONOMIC QUESTIONS MACROECONOMIC QUESTIONS Go to business school or take a job How many people are employed in the economy as a whole What determines the salary offered by What determines the overall salary levels Citibank to Cherie Camajo a new paid to workers in a given year Columbia MBA MICROECONOMIC QUESTIONS MACROECONOMIC QUESTIONS What determines the cost to a university or What determines the overall level of prices college of offering a new course in the economy as a whole What government policies should be What government policies should be adopted to make it easier for lowincome adopted to promote full employment and students to attend college growth in the economy as a whole What determines whether Citibank opens a What determines the overall trade in goods new office in Shanghai services and financial assets between the United States and the rest of the world Macroeconomics theory and policy gt In a self regulating economy problems such as unemployment are resolved without government interventions but through the working of the invisible hand gt According to Keynesian economics economic slumps are caused by inadequate spending and they can be mitigated by government interventions gt Monetary policy uses changes in the quantity of money to alter interest rates and affect overall spending gt Fiscal policy uses changes in government spending and taxes to affect overall spending Y C I G ltgt saves consumer induced investor induced govt induced De ning GDP The market value of all nal goods and services produced in a nation within a speci c period of time Functions as a barometer for the economy Sum of output from all economic activity Output becomes income 0 Look at output as income Focus on REAL growth Transfer payment is not government spent National Income wages instant payments rent pro ts Output Total Income Three uses of GDP data Why is GDP useful to examine 1 Estimate living standards across time and nations 2 Measure economic growth 3 Determine whether an economy is experiencing a shortrun expansion or recession Measuring living standards Total GDP May not always be the best standard to compare countries Doesn t adjust for population size of country Per capita GDP GDP per person GDP divided by population Average living standards in a nation The peaks and valley of the graph explain the business cycle Peak and Trough is where the correction is not too steep Business cycle ltgt Real GDP Shortrun uctuations in economic activity that can cause output to be above or below the longrun trend Real GDP is measuring economic growth versus per capita Parts of the business cycle Expansion Contraction Peak Trough A little in ation is good but too much can slow down the economic GROWTH Demand driven GDP counts market value Each quantity was sold at a market value Quantity X Price Market Value Looking closely at how we measure GDP Why does GDP include both goods and services Goods Tangibles Food clothing cars houses Services Intangibles Health care entertainment advice travel banking The composition of our industries and economy has greatly changed over the last 50 years Intermediate versus nal goods Intermediate goods Goods that rms repackage or bundle with other goods to be sold at a later stage Milk sold to a coffee shop Tires sold to a car manufacturer Final goods Goods sold to the final users or consumers To get an accurate GDP estimate and avoid double counting Final goods are included in GDP Intermediate goods are NOT included in GDP NGDP Nominal Gross Domestic Product NGDP Pc Qc Looking closely at how we measure GDP Quantity X Price Market Value Total GDP National Output Form of dividend Expenditures Looking at GDP as different types of expenditures The Bureau of Economic analysis BEA is the US government agency that tallies GDP data a task is called national income accounting Consumption driven economy GDPCIGNX NX is export import C consumption Durable goods Nondurable goods Services this is a blessing I investment Plant equipment Inventory investment what we produce New residential housing stats G government purchases Defense goods Nondefense goods Federal State amp local NX net exports Exports Imports Trade de cit Real vs Nominal GDP Real GDP measures with prices held constant over time Nominal GDP measured current prices Price level an index to measure prices of goods and services in an economy GDP de ator a measure of the price level that includes prices of nal goods and services in GDP Used to de ate out in ation from nominal GDP so we can nd real GDP Nominal NGDP PX QX Py Qy PH Qn P price Q quantity Real Base period RGDPcy PXBy QyCy PyBy QyCy PnBy Qncy Real growth looks at purchasing power Focus on raising residual income than in ation Finding Real GDP Real GDPt NorfmalGDPt x100 Price Levelt Example Find Real GDP for 2010 2010 GDP in 2005 prices Fill in equation use t 2010 numbers from table Real GDP2010 mi x 100 130869 trillion Growth Rates Tell us how fast our economy is growing Can be calculated using a percent change formula A negative growth rate means the economy is contracting GDonlo GDP2009 Nominal GDP growth in 2010 x100 2009 Other useful evaluative formulas A Real GDP A Price Level A Nominal GDP PR Vpresent Vpast Vpast X 100 PR percent rate Vpresent present or future value Vpast past or present value Shortcomings of GDP gt During recessions wages go down Nonmarket goods Think about goods and services produced but never sold even though they create value for society Washing dishes mowing a lawn In lessdeveloped societies where houses produce many of their own goods GDP may be a poor measure of economic output Underground economy Hidden uncounted transactions Sometimes legal Waitress tips landscaper cuts a lawn Sometimes illegal Exchanges of narcotics Size of underground economy 0 10 of GDP estimated in United States 0 45 in developing countries Smaller in United States due to stronger economy and less corruption 0 The Quality of the Environment GDP is unable to distinguish how goods are produced Country A 0 10 million units of output Clean energy clean air Country B 0 10 million unit of output No environmental standards health problems Equal GDP but is wellbeing the same 0 Leisure time GDP does not capture how long it takes to produce goods and services Average work week South Korea 46 hours per week Netherlands 28 hours USA 36 hours Japan 36 hours Alternative measures of economic wellbeing Other measures of wellbeing Life expectancy Education levels Access to healthcare Crime rates Environmental quality 0 Reality Alternative measures dif cult to quantify GDP is correlated with most of these other measures anyway Gross Domestic Product GDP The market value of all nal goods and services produced in a nation within a speci c period of time To nd real GDP we must adjust nominal GDP for in ation 0 Business Cycle Shortrun uctuations in economic activity that can cause output to be above or below the longrun trend Real GDP is GDP adjusted for in ation or change in the price level Nominal GDP is GDP in current prices unadjusted for in ation Chapter 7 w nominal wage Real wage w price level As the coef cient goes up the denominator goes down Unemployment Rate during Recession Cyclical Unemployment Rate Always during Normal occurring Macroeconomic denoted as u Conditions Natural gt W Unemployment J Cyclical gt Caused by economic downturns The worst kind of unemployment Fiscal and monetary Natural rate of unemployment Full employment output Frictional gt Unemployment caused by time delays in matching available jobs and workers Structural gt Unemployment caused by changes in the industrial makeup structure of the economy and new industries are created and old ones are destroyed Industrial improvement Relevant Population 243 million Noninstitutionalized Civilian Aged 16 Not in Labor Force 89 million Labor Force 154 million Students Homemakers Retirees Others Employed 142 million Unemployed 12 million 919 of labor force 81 of labor force Shortcomings of the Unemployment Rate Discouraged workers People who want a job but get discouraged and give up looking for work Are not included in the labor force and not considered unemployed Unemployed workers Parttime workers who want fulltime jobs Workers who are very overquali ed at their job Considered employed Equations Labor force participation rate f Labor Force Partlclpatlon rate M x 100 population Unemployment rate Unemployment rate u of unemployed labor force X 100 Chapter 8 How is in ation measured What problem does in ation bring 339 General trend and price level In ation Has the power to redistribute Is more demand driven It reduces the buying power of your money 0 v Commodity price In ation PV FV 1r An n number of periods r interest rate PVCl l rnC2l r2C3l r3 Cnl rnFVl rn 339 Actual income stream is what matters 339 As a debtor you don t want de ation which increases debt burden Consumer Price Index CPI CPI A measure of the price level based on the consumption pattern of a typical consumer Goal include everything purchased by a typical consumer to get a measure of the cost of living P x Q Market Value High in ation is the DEVIL How do you bring unemployment down 339 Consumption tax Simple Price Index Index gives and idea of the overall in ation in the economy Base period CPI 100 Demand and supply driven Trade protection Calculating a Simple Price Index 2013 2014 Good Quantity Price Cost Price Cost Popcorn 2 4 8 6 12 Limeade 2 4 8 4 8 Movie ticket 1 8 7 8 10 10 Basket Price 24 30 Index EPI 24 30 x 100 12 5 24 x100 100 24 Equation to nd the Price Index Price index basket price basket price in base year X 100 Finding price levels we can nd in ation by using a percentage change formula In ation rate i P2 P1 P1 X 100 Example 125 100 100 X 100 25 Prices DO NOT all move together Travel education health care Concerns about CPI accuracy Substitution Change in equality New products and locations new goods and services and locations Cost of in ation Shoeleather cost effort it takes to do something As prices go up it becomes more costly to hold money Shoeleather costs are resources that are wasted when people change behavior to avoid holding money Time effort and fuel costs that people bear when they try to use more money Money illusion People interpreting nominal wage or price changes as 211 changes If prices wages all go up by 2 there is no gal change in your purchasing power People with money illusion think they are richer in this case Nominal wage The wage in current dollars analogous to nominal GDP Real wage Nominal wage adjusted for in ation changes in the price level Another money illusion example If nominal wages go up by 3 but prices go up by 5 money illusion may cause you to think of yourself as wealthier but your real wages have actually decreased Menu costs The costs of changing prices Example a restaurant will have to print new menus for all price changes Uncertainty about future price levels Wage and other input contracts often have a longterm commitment Firms may have to borrow today and pay back the money later Uncertainty about prices may make borrowing riskier In ation and longterm agreements Prepare to r 39value of these Prod ce Sell Out I 2 39 PFOduce U W future dollars depends on Borrow 53 Re a Loans 5 lin ation Build Capital Goods p y c x 1 Hire Workers Pay workers D l I Today Future Time Pe ods Costs of in ation In ation creates wealth in redistribution Wealth redistribution Wealth can be redistributed between borrowers and lenders Borrowing future Price confusion What s causing the price to rise Dif culty analyzing price changes as a result of demand shifts or in ation Implications are very different morease in Buy New Resources Demand Build Factory Increase Hire Workers i gt Output Price Other resources Increase Don39 t Change Output In ation All prices affected Tax distortions Capital gains taxes are taxes on the gains realized by selling an asset for more than its purchase price Problem often the price rises due to in ation rather than an increase in the value of the good Example Buy a house in 1980 for 80000 Sell the house in 2012 for 230000 for a 150000 capital gain You have to pay taxes on this 150000 However the CPI rose from 80 to 230 in those years so the real value of the house is the same Using CPI to compare dollar values across time Prices from different time periods can be confusing In 1924 you could buy a fully constructed house for 1969 To compare we can transform this into a price in today s dollars Price Level To day Price Today Price Earlier x o Pr1ce Level Earl1er
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