Study Guide for Exam Two
Study Guide for Exam Two EC 2113
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This 6 page Study Guide was uploaded by Grey Garris on Thursday October 22, 2015. The Study Guide belongs to EC 2113 at Mississippi State University taught by Heriberto Gonzalez Lozano in Summer 2015. Since its upload, it has received 238 views. For similar materials see Principals of Macroeconomics in Economcs at Mississippi State University.
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Date Created: 10/22/15
EC 2113 Principals of Macroeconomics with Dr Lozano Exam Two Study Guide 102715 Ch 7 The Basics of Macroeconomics o Macroeconomics the part of economics concerned with largescale or general economic factors such as interest rates and national productivity 0 Main Factors The main three factors of Macroeconomic study are GDP GrossDomestic Product Inflation and Unemployment I GDP 0 The GDP is a measure of total expenditure in an economy Essentially it is how much money people have spent on every product that an economy produces The GDP at its most basic is a multiplication problem the amount of final goods sold multiplied by their price Their price is referred to as market value GDP is measured regularly be it yearly or quarterly 3months as it projects economic growth and decline in a nation 0 Final Goods The goods which are intended for the last user Example A tire sold to a car manufacturer is a component of those cars as such it is not a final good instead it is called an intermediate good A tire used to replace a busted one is a final good because the car owner is the one actually using it 0 Restrictions I Things without market value such as doing your own housekeeping are excluded from measurement I ega commodities are also excluded 0 Determining the Final Price of a Final Good Diyafm n3 Flu104 P cer 7 The F ncu seth39na Price 04quot a 3 06 is aenemw nea ha Sam s ms 35 Sum value I Syger 7 Pram eld 39Eiem From 39112 Shea Homer no l1 gt km 4 W m Woof mm 5 lSG 3 so Sold wool 0 jL LE Manama L 220 7 40 sous 0 4 w Ciohn3 me 5 270 m 3 50 sort comr so 4 V r M Fume Remtizr n 7 350 80 SewardP sens 9 C r 7 Venues 5 H4O 350 1 A The manner We 4 an seller 04 in mm 309d 50 m cm cor 3513 0 man a PM 09586 Tms f m Prune is 353nmccmlv less ncm m sum Vague or 15 mmnmu s Races bmse MN is no mean aw m seller s 0 cornde PMGGS who we 9451 need a Pro Fm The sum 0 we WW3 s m pHceosm Hem o The New Circular Flow of the GDP New Cancumr View NX NT 1 I Resdr Qua We Wor d So n s pm n Ffmcmcm M EavesImenmsj made by SEAIEA S Govemm 39l39 Purchases 43 30065 Cnn5umPiO momms made by Goods Marker 4hr mos New Ewi nal 39u est minus ImPaNS Nea TmS PCT in w 6M 09 1 0 365 Income 0 When looking at the GDP there is a new Circular Flow model that must be discussed This model adds the Government the Financial Market and all other Economies 0 Using this model there is a way to calculate the GDP of an economy using this equation GDP C I G NX Wherein I C the total spending by households on goods and services For renters this includes rent payments for homeowners this includes rent payments paid to the homeowner but not the purchase price or the mortgage I Machinery Structures Inventories The total spending on goods that make other goods I G Government Purchases and Sales excluding transfer payments such as Social Security I NX Exports Two Approaches To GDP ExpenditureOutput Approach IncomeAllocations Approach Consumption by Households Wages Investment 8er Businesses Rent Governmeth Purchases nterest Expendituresby Foreigners PrJofit Statistical Adjustments 0 Nominal vs Real GDP and the GDP Deflator 0 GDP is a dollar measurement which presents some problems 0 Nominal A GDP measurement based on the prices that prevailed when output was produced 0 Real A GDP measurement based on a base year price and reflects changes in price level 0 Example I M Lattes Nominal m E Inflation E E Deflator Year Price Quantit Price Quantity Y 2011 10 400 2 1000 6000 6000 1000 000 2012 11 500 250 1100 8250 7200 1146 146 2013 12 600 3 1200 10800 8400 1286 120 I Nominal GDP is Price of that year times the Quantity of that yeah I Real GDP is Price of the base year 2011 times the Quantity of that year I GDP Deflator Nominal GDP Real GDP 100 The GDP Deflator show the average increase in price between two times The difference between two Deflator values is the value of inflation o Shortcomings of GDP I Nonmarket Activities and the Underground Economy are not counted I Improved Product Quality the increase in price may not be due to inflation but product quality increased I Composition and Distribution of the OutputIncome Distribution GDP does not reflect who gets most of the wealth because it assumes equal distribution which is impossible I Noneconomic Sources of WellBeing Other things that don39t Factors Affecting Productivity and GDP Growth with the percentage of times an increase has been because of them Technological Advancement 40 Quantity of Capital 30 Positive and Negative Views of Economic GDP Growth have to be paid for that offer payment in happiness Institutional Structures of GDP Needed for a High GDP Strong property rights Patents and Copyrights Efficient Financial Institutions Free Trade Competitive Market System General Trends of High GDP Literacy and Widespread Education Life Expectancy Education and Training 15 Economies of Scale and Resource Allocation 15 Positive 0 Greater Material Abundance Increased Standards of Living Leisure Time Expansion and Application of Human Knowledge Negative a Larger economies use up more resources and damage the environment more This is due to the rule that growth in Economies increases competition for resources Inflation Rate The rate of Inflation is the average percentage price increase between two years It has an equation in the form of CPI Year 2 CPI Year 1ICPI Year 1 X 100 o CPI Consumer Price Index 0 Measures the typical consumer s cost of living It is the basis of Cost of Living Adjustments COLAs in many contracts and Social Security benefits 0 Calculation I Fix the basket The Bureau of Labor and Statistics uses surveys to determine what the typical consumer buys and sets up a basket of items and services that are bought Find the prices of the items in the basket Multiply the prices to the amounts to find the total cost of the basket I Choose base year and compute the index Cost in Current YearCost in Base Year X 100 I This value which is the CPI can be used to find the Inflation rate in a given year 0 Example I Assume the Typical Basket is 4 Pizzas and 10 Lattes Year Price Price Basket Inflation Rate f of Cost Pizza Latte 2010 10 2 60 100 x 6060 100100 100 0 100 2011 11 250 69 100 x 6960 115100 100 15 115 2012 12 3 78 100x7860 130115115 13 130 0 Problems with CPI It is not a perfect measurement I Over time some prices increase faster than others I Consumers substitute higher priced goods for ones that become relatively cheaper which mitigates the price increase effect CPI calculation misses this because the basket is fixed for a number of years because it is difficult for the BLS to do its data collection I Increases in the CPI tend to overstate increases in the cost of living 0 Contrasts Between CPI and the GDP Deflator I Imported Goods CPI does use GDP Deflator does not use I Capital Goods CPI does not use GDP Deflator does use I The Basket CPI has a fixed basket GDP Deflator uses current production 0 Correcting Variables for Inflation Comparing Money Figures for Different Times I Ex Minimum Wage Did the minimum wage have more purchasing power then or now 0 1964 115 2010 725 0 To compare use CPI to convert 64 to 10 0 in Today in Year T x CPI TodayCPI Year T 0 809 115 x 2203313 Where the CPI in 2010 is 2203 and the CPI in 1964 is 313 I Purpose Indexation a amount is indexed for inflation and is auto corrected for inflation either by law or in a contract I Inflation is a general increase in prices and fall in the purchasing value of money 0 Income Distribution 0 Administrative Inefficiencies 0 Effects on Creditors and Debtors 0 Real vs Nominal Interest Rates I Real Interest Rate Nominal Rate Inflation Rate I Ex A 1000 loan with a 9 Interest Rate and 35 Inflation Rate I Real Interest rate is 55 The higher the Rate of Inflation in comparison to the Interest Rate the more the situation favors the debtor instead of the creditor If the Interest Rate was 35 and the Inflation Rate was 9 then the Real Interest Rate would be 55 which means that in effect the debtor will pay less than the loan back Unemployment Labor Force The adult population excluding Elderly Severely Disabled Hospitalized Jailed Military and FullTime Students It includes both the Employed and Unemployed 0 Labor Force Participation Rate 100 x labor forceadult population Unemployed The portion of the population that is searching for work but does not have it o Unemployment Rate 100 x of unemployedlabor force Duration of Unemployment 0 Typically 13 for under 5 weeks the other 23 for under 14 weeks 0 Usually only 20 of unemployed are so for over 6 months 0 Most observed unemployment is longterm The small group that is longterm has fairly little turnover Natural Rate of Unemployment The normal rate around which the actual fluctuates Frictional Structural Cyclical Unemployment is the deviation from the Normal Rate and is parallel with business cycle 0 Frictional Occurs when workers spend time searching for the job best suited to their skills 0 Structural Occurs when there are fewerjobs than workers Sectoral Shifts Changes in the composition of Labor Demand what types of workers are more desirableneeded than others This contributes to Frictional and is normal Labor Force Statistics 0 Produced by the BLS based on a regular survey of 60000 households and an adult populationquot that begins with age 16 Issues with Unemployment Rate 0 Doesn t show the Discouraged Worker Stat or the Downgrading Stat employees with higher education forced into lower level jobs by circumstance Government Assistance 0 Government Employment Agencies that provide information about jobs 0 Public Training Programs to train workers for specific tradeskill jobs 0 Unemployment Insurance that protects workers income for a set time penod
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