Midterm One Study Guide
Midterm One Study Guide EC 202
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This 19 page Study Guide was uploaded by Hannah Solheim on Sunday October 18, 2015. The Study Guide belongs to EC 202 at University of Oregon taught by Urbancic M in Fall 2015. Since its upload, it has received 323 views. For similar materials see Intro Econ Analy Macro >2 in Social Science at University of Oregon.
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Date Created: 10/18/15
Study Guide for EC 202 Macroeconomics Midterm 1 Cheat Sheet Study Points 0 Identify whether a statement is positive or normative 0 Positive statements are descriptive scienti c devoid of value judgments and can be true or false facts ex The US has a larger GDP than any other country 0 Normative statements are opinions about values judgments public policy ex Billionaires should be taxed at a higher rate than those in poverty 0 Explain the difference between microeconomics and macroeconomics o Macroeconomics study of the entire economy of a nation or society 0 Microeconomics study of an individual person rm industry etc 0 Explain how economists gauge the health of the economy 0 Economists use Gross Domestic Product because it measures both output productivity and income 0 Explain what Gross Domestic Product is o The summation of the market value of all nal goods and services produced within a country during a speci c time period measures income and output 0 Describe the three uses of GDP 0 1 To estimate living standards Calculate per capita GDP divide GDP by population 2 To measure economic growth Measured as a percentage change in real per capita GDP 3 To determine the economy s point in the business cycle Expansions are from trough to peak on GDP graph contractions are from peak to trough on GDP graph 0 Identify the difference between nominal and real GDP 0 Real GDP is data adjusted for changes in price over time adjusted for in ation 0 Nominal GDP is data measured in current prices not adjusted for in a on 0 Explain what a market value is 0 Market values are the product of quantity and price information which is why we must adjust for in ation by using the real GDP 0 Describe nal goods and services and how they make up GDP 0 A service is an output that provides bene ts wo the production of a tangible product ex Doctor s visit 0 A nal good is a good sold to the nal user ex Gallon of milk 0 Intermediate goods are goods that a rm repackages or bundles with other goods for sale at later stage These are NOT counted in GDP o The composition of the US economy has shifted from being dominated by manufactured goods to being dominated by services now about 70 This is partly because it is cheaper to manufacture goods in other countries 0 Identify the difference between gross domestic product and gross national product 0 Gross national product GNP is the output produced by workers and resources owned by the residents of the nation 0 GDP only includes goods produced domestically within the nation s borders 0 Example All Nike shoes produced in Thailand counted toward Thailand s GDP but Nike shoes counted toward United States GNP 0 Explain the four categories that make up GDP 0 Consumptionpurchase of nal goods and services by households excluding new housing example groceries automobiles services Consumption is the largest component in GDP Two different types of goods nondurable consumed over short period and durable consumed over long period Sale of durable goods are subject to the cyclical uctuations of the business cycle while nondurables must be purchased regardless of economic condition 0 Investmentprivate spending on tools and equipment used to produce future output example rm buying a sewing machine to make clothes When a family purchases a new home it goes in this category Stores purchasing inventory are counted in this category as well Stocks bonds and land do not count 0 Government Spending spending by all levels of government on nal goods and services Transfer payments welfare unemployment that the government gives to households does NOT count 0 Net Exports exports minus imports of nal goods and services Typically negative for the US Describe price level and GDP de ator 0 Price level is an index of the average prices of goods and services included in the GDP measure of in ation 0 GDP de ator is a measure of the price level that includes prices of nal goods and services included in the GDP way to adjust GDP for in ation Compute real GDP o realGDPZM X 100 pricelevel Compute the nominal GDP growth nominal GDP year x nominal GDP year x 1 O nominal GDP growth 2 X 100 Explain the four shortcomings of GDP 0 GDP does not count nonmarket goods which are produced and not sold even though they create value for society example mowing your grass 0 GDP also does not count the underground shadow economy which includes transactions that are not reported to the government and not taxed example tipping waiters and the drug trade Typically the underground economy is smaller depending on how developed the country is 0 GDP does not take into account how goods and services are produced affects quality of life example environmental impact of production 0 GDP does not capture how much time workers work to produce goods quality of life example environmental impact of production 0 GDP does not capture how much time workers work to produce goods Explain a recession and an expansion in technical terms 0 A recession is a contraction period where output and unemployment fall An expansion is where output and unemployment rise also called a boom 0 Depression is a deep and prolonged recession but this is not a technical term Know the theoretical and practical relationship between income and output 0 Theoretically output and income are equal 0 Practically income is lower than output because people have an incentive to lie about their income Explain the relationship between total production and total sales 0 GDP nal sales change in business inventories Calculate real GDP 0 real GDPZMXIOO de ator Explain why GDP is not a perfect measure 0 Countries with high prices high wages or relatively strong currencies will have their currencies overstated This problem is xed with purchasing power parity nominal GDP year x 1 0 Explain what happens to unemployment during a recession 0 Unemployment spikes quickly and then comes down gradually ldentity who an unemployed person is 0 An unemployed person is at least 16 years old not working available for work and has made speci c efforts to look for work in the last four weeks 0 Describe the difference between unemployment level and unemployment rate 0 The unemployment level is the number of people who are technically unemployed o The unemployment rate is the percentage of the labor force that is unemployed 0 Know that unemployment can never be completely eliminated 0 Explain the three different types of unemployment 0 Structural unemployment caused by changes in the industrial makeup structure of an economy Component of natural unemployment Creative destruction when the introduction of new products or technologies leads to the end of other industries and jobs Governments can help relieve structural unemployment with job training programs and relocation subsidizes o Frictional unemployment caused by delays in matching available jobs and workers Causes information availability and government policies about hiring ring ie unemployment insurance Component of natural unemployment o Cyclical unemployment caused by economics downturns ie recessions NOT a component of natural unemployment Most concerning type of unemployment because jobs are not available for those who want to work and the duration is openended 0 Explain the natural rate of unemployment o The natural rate of unemployment u is the typical rate of unemployment that occurs when the economy is growing normally We do not know the exact answer but estimates are about 5 0 Calculate the unemployment rate number employed o Unemployment rate u laborforce X 100 o The labor force only includes people who are employed or are actively seeking employment within last four weeks 0 Discuss the shortcoming of the unemployment rate o Discouraged workers those who are not working have looked for a job in the past 12 months and are willing to work but have not sought unemployment in the last four weeks and underemployed people who work fulltime but would rather work parttime are not included 0 Unemployment 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