Study Guide Exam 2
Study Guide Exam 2 Econ 2305- Microeconomic Principles
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Econ 2304 - Microeconomic Principles
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This 12 page Study Guide was uploaded by Evelin Notetaker on Friday October 23, 2015. The Study Guide belongs to Econ 2305- Microeconomic Principles at University of Houston taught by William Alexander in Summer 2015. Since its upload, it has received 194 views. For similar materials see Econ 2305 in Economcs at University of Houston.
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Date Created: 10/23/15
Macroeconomics Study Guide Exam 2 Chapters 1013 15 Chapter 10 Gross Domestic Product GDP measures two things Total income of everybody Economy s total expenditure Income must equal expenditure In the circular ow diagram money ows from households to firms Households own all the resources Households earn income purchases or rents these resources Firms make money when households purchase goods or services Definition of Gross Domestic Product is the market value of final goods and services produced within a country Use market value equals the value of the economy GDP excludes certain products such as those sold illegally Only the final good price is included in GDP Prices of intermediate good are included in the final price The inventory of intermediate goods is accounted for in GDP Only production in the nation included even if owned by foreign company once produced in the US it is included in the GDP If produced by outside company and company owned by US it is still not accounted for because it is not produced in the nation Components of GDP YCIGNx Y is GDP C is consumption I is investment G is government purchases Nx is net exports Consumption is spending done by households on goods and services Investments are purchases done for future purposes I Inventories and new homes fall in this category spending on capital goods Government purchases are done by local state federal I Includes salaries for government workers Net exports are exportsimports Real GDP is the value for the previous year The value when impact of price changes on output have been removed Example price of candy 2006 which is the base year is 2 and 2007 is 3 for the real GDP of 2007 we use the quantity of candy 2007 with the price of 2006 Nominal GDP is the current price of goods and services GDP de ator re ects only prices takes out in ation Nominal GDPReal GDP X 100 Base year always equals 100 GDP measures ability to attain goods and services GDP deflator w GDP deflator v GDP deflator v Inflation rate w 100x GDP does not account for household production GDP does not account for negative or positive externalities Chapter 11 Measuring cost of living Consumer Price Index CPI I Measures overall cost of goods and services bought by consumers I Reported by the Bureau of Labor Statistics BLS prices of goods and services x 100 prices of base year In ation is the general increase in prices I A significant factor is increase of money supply In ation rate is the percent change in prices from previous year CPI year 2 CPI year 1 x 100 l Inflation year 2 CPI year 1 Housing is greatest consumer spending Producer Price Index PPI I Costs of goods and services bought by firms I Useful for predicting future CPI I Also calculated by BLS Three main problems with CPI I Substitution bias I Introduction of new goods I Unmeasured quality change Substitution bias each year there is not necessarily proportional change I Some prices rise more than others I When cost of good rises consumers tend to buy less of the good I Consumer substitute toward less expensive alternative I This causes overstate of living Introduction of new goods I Introducing new goods allows more variety I With greater variety value of dollar increases I This underestimates the value of the dollar overstating in ation Unmeasured quality change I Quality can rise or fall I A price can rise because of better quality but that is not accurately accounted for it would be overstated GDP de ator accounts for the difference nominal to real GDP de ator vs CPI I GDP de ator based on domestics good I CPI based on all goods and services bought by consumer I CPI based on fixed basket I GDP de ator based on currently produced goods and services Cost of living allowance COLA I Include partial or complete indexation I Automatically raises wages when CPI rises Purchasing power is the amount of goods and services able to buy Real interest rates nominal interest rate in ation rate Current year index Adjusting for inflation 2 Nominal amountx Original year index Initial deposit Purchasmg power 2 T New quantity Original quantity Percent change in purchasing power 2 100x Original quantity Rate of in ation less than interest rate purchasing power rises Rate of in ation greater than interest rate purchasing power lowers Chapter 12 Production and Growth Nation s standard of living based on workers productivity Differences in growth rates between countries I Some countries grow faster than others I No guarantee that rich countries will stay rich Higher productivity leads to higher economic growth Determinants of productivity physical human capital natural resources and technological knowledge Physical capital are resources that produce goods and services Human capital is knowledge and skills acquired I Inputs are teachers libraries student time Natural resources are provided by human nature Technological knowledge is the methods to best produce I Common knowledge everyone becomes aware of it I Proprietary knowledge known only by company person who discovered it I Society s understanding Production function YAFLKHN I Youtput Avariable production Ffunction of inputs required L quantity of labor Kphysical capital Hquantity of human capital N natural resources Society can change amount of capital by raising future productivity or investing in current resources I Society can invest more capital by consuming less and saving more income Catch up effect it is easier for poor countries to grow faster because they lack resources so once resources are introduced there is an increase in productivity that leads to an increase in capital Rich countries already have a variety of resources so introducing new resources has a smaller increase or change Investment from foreigners have two forms I Foreign direct investment which is owned and operated by foreign entity I Foreign portfolio investment is foreign money but operated domestically Advocate is when poor or less developed country learn new technologies from rich or developed countries Education is an investment in human capital I Each additional year of schooling raises wages I It enhances standard of living I Provides positive externalities Poor countries face brain drain I Emigration of highly educated workers I They leave to enjoy higher living standards Improved health leads economic growth Protecting property rights I Important to promote political stability I Property owners need to feel reassured that their property will not be stolen Inward oriented policies I Idea of a country avoiding interaction with the rest of the world I Thought to advance infant industry I Work to impose tariffs and trade restrictions to limit trading activities Outward oriented policies I Integrate country in world economy I Knowledge of public good Government plays a role in encouraging advances in technology do this by I Patent system I Grants in research and development Real growth is not constant every year Physical capital per worker is equal to ratio of physical capital to labor An economy s labor of productivity is the ratio of output to labor hours Higher level of capital per worker leads to higher labor productivity Chapter 13 Saving Investment Financial system Financial system consists of institutions that help match one person s saving with another person s investment Savers spend less than they earn Borrowers people spend more than they earn Savers supply money to financial system with the expectation to have their money returned plus interest Borrowers demand money from financial system and pay back with interest Saving examples are stocks and bonds Investment examples are spending on capital goods and new residencies Financial market is when person who wants to save directly supplies funds to a person who wants to borrow I Bond or stock market Bond is a certificate of indebtedness that specifies the obligations of the borrowers to holder of the bond I Interest is paid periodically I Interest rate based on the term of the bond I Date of maturity when loan will be repaid I Credit risk is the probability that buyer will not payback interest I Interest rate is based on risk meaning higher risk higher interest I Iunk bonds pay very high interests I Sale of bonds to finance I Federal government does not tax the interest payments Buyer can hold bond until maturity or can sell bond earlier Stock represents ownership in a firm I Equity finance is the sale of stock to raise money I Stockholders get benefits from a profitable company I When people are optimistic of company s future demand raises for stock bid price rises I Stock index computed as average group stock prices I Stock indexes indicators of future economic conditions I An increase number shares of stock company issues increase supply shares I A firm raise money only through initial offer shares Financial intermediaries financial institutions savers indirectly provide funds to borrowers I Banks and mutual funds Banks are medium for exchange Mutual funds sell shares to public and uses proceeds buy a selection I Allow people with small amounts of money to diversify holdings I YCIGNx previously discussed I YCIG output is sum consumption investment and government purchases Market loanable funds one financial market for economy Supply of loanable funds comes from saving I Supply slope upward I Right shift when households can save more money I Left shift when households need to reduce savings I Demand loanable funds people want to finance by borrowing Downward slope as interests rise demand falls as interest falls demand rises I Closed economy does not trade rest world I National savings YCGI leftover after consumption and government purchases I Private saving YCT is the income after taxes and consumptions I Public Saving TG is the tax revenue after government purchases I Budget surplus when a government spends less than it collects in tax revenues I Budget deficit is excess amount of government spending over tax revenue I Budget balance when the tax revenue equals the government spending I Crowding out is the reduction level of investment when government borrows to finance budget deficit Chapter 15 I Unemployment is those who are not employed are able and actively seeking a job Also includes people waiting to be recalled from a job they have been laid off I Discourages worked are people that are not employed and no longer seeking ajob BLS defined labor force sum employed and unemployed labor force x100 Labor orce artici ation rate f p p adult population Gives percentage of the population working I d Unemployment rate W x100 labor force Gives the percentage of labor force unemployed Employed 1 0 0 Em lo ment 0 ulation ratio p y p p Adultpopulation Adult population is the sum of employed unemployed and not in the labor force Population grows labor force grows and labor force participation rate increases Unemployment insurance is used to reduce the uncertainty by providing payments Side effect is that people stop searching for employment Efficiency wages are higher than demanded by supply and demand Can increase productivity by increasing worker health decreasing worker turnover and increasing worker quality Frictional unemployment arises from matching workers to jobs time to find best fit usually shorter term Structural unemployment arises from quantity labor supplied exceeds quantity demanded mostly longer amount Minimum wage laws forces the wage above the level of equilibrium so it is one of the causes since supply is greater than demand I Union bargains for better wages benefits and working conditions 11 percent of workers now part of a union Terms are agreed through collective bargaining When demands are not met strikes occur Once wage increase the supply exceeds demand leading to unemployed workers
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