Exam Two Study Guide
Exam Two Study Guide ECON 222 001
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This 13 page Study Guide was uploaded by Samantha Pruser on Friday November 6, 2015. The Study Guide belongs to ECON 222 001 at University of South Carolina taught by Chandini Sankaran in Summer 2015. Since its upload, it has received 363 views. For similar materials see Principles of Macroeconomics in Economcs at University of South Carolina.
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Date Created: 11/06/15
Test: Tuesday, November 10, 2015 Macroeconomics Review: Exam Two Lectures Eleven through Eighteen Chapter Eight Macroeconomics vs. Microeconomics Macroeconomics- firms and households Microeconomics- economy as a whole Goods and Purchases (Make up part of GDP) Consumption: Spending by households on goods and services, not including spending on new houses (which are counted instead in investment) EXAMPLE: buying new clothes, food, movie tickets, etc. Durable: goods that don’t quickly wear out Investment: Spending by firs on new factories, office buildings, additions to inventories, plus spending by households on new houses - Business Fixed Investments- spending by firms on physical capital buildings, factories, tools and equipment - Residential Investment- household spending on new housing Changes in business inventories: inventories are counted for the year produced, not sold. Pretend like the firm bought it from itself at the end of the year Government Purchases: spending by all levels of the government federal, state, local governments on goods and services, aircraft carrier, highways and teachers’ salaries GDP GDP: Amount (in dollars) of all the finished goods and services produced within a country's borders in a time period (aka Production and Income for short) What GDP measures? 1. Every transaction has a buyer and a seller. Every dollar of spending for some buyer is a dollar of income for another seller - GDP = total income or total expenditure or total dollar value of production 2. Households spend money whenever they buy goods and services - Every dollar of spending represents a dollar of goods and services that has been produced - BEA (Bureau of Economic Analysis) performs the national income accounting for the US - Wages make up the largest part of it - Measured quarterly (every 3 months) GDP Calculations 1. Income Method Wages + Rent + Profit + Interest 2. Expenditure Method Y = C + I + G + N GDP = Consumption + Interest + Gov. Purchases + Net Exports 3. Output Method Add up production of final goods and services P x Q = (market values) INCLUDE CIRCULAR FLOW MODEL Details of GDP Business Cycles:Short Run GDP Peak (high point) Peak of a business cycle= top of a curve Trough (low point) Business Cycle Ups: Economic Expansions/ booms Business Cycle Downs: Recessions/Depressions Exclusions from GDP Calculations 1. Value of intermediate goods 2. Second- hand goods 3. Illegal production 4. Items produced at home and never enters the market 5. Transfer payments (Social Security Check) Trade Exports: Produced in country, then shipped out Imports: Produced out of country, then brought in Net Exports = Exports - Imports ( NX = X - M) Balanced Trade NX = X - M Trade Surplus NX+ = X > M Trade Deficit NX- = X < X Real vs Nominal GDP Nominal GDP- the value of final goods and services evaluated at current-year prices Real GDP- the value of final goods and services evaluated at base-year prices - Better indicator of economic well-being because it already factors in inflation and you do not have to put it through the GDP Price deflator calculation Output Method Calculations (NGDP, RGDP, Price deflator and Inflation) Equations GDP Price Deflator NGDP x100 (nominal GDP) RGDP (real GDP) Inflation Rate GDP deflator (new) - GDP deflator (old) x100 = Inflation GDP deflator (old Output method Example using the timber industry EXAMPLE: 2011 Q P NGDP2011 Timber 50 x $20 = $1,000 2012 Q P NGDP2012 Timber 50 x $30 = $1,500 1. Real GDP- adjusted for inflation (fix prices at the base) RGDP11= P11 x Q11 = $20 x 50 =$1,000 RGDP12= P11 x Q12 =$20 x 50 =$1,000 RGDP13= P11 x Q13 =$20 x __ =______ 2. GDP Price Deflator11 1,000 x 100 =100 1,000 GDP Price Deflator12 1,500 x100 =150 1,000 Note: In the base year, NGDP=RGDP, GDP price deflator is always 100 in the base year 3. Inflation Rate: is the percent change in GDP GDP Shortcomings 1. Household Production: childcare, cooking and cleaning, If done by a non-household member then it adds to the GDP 2. Underground: 10% or more of the economy in America 3. The Value of Leisure 4. Happiness 5. Pollution or quality of environment 6. The distribution of income 7. Crime and social problems - Over the long term shortcomings are becoming more serious 1. Aka women are entering the workforce in larger numbers and increasing GDP GDP vs. GNP Gross Domestic Product (GDP): Amount (in dollars) of all the finished goods and services produced within a country's borders in a time period (aka Production and Income for short) - GDP = everything produced in US, regardless of worker’s citizenship Gross National Product (GNP): the total market value of all final goods and services produced during a given period of time, by the nation’s nationals, regardless of the place produced - GNP = only counts production by a nation’s citizens Equation GNP = GDP – (Production of foreign nationals + Production of nationals abroad) EXAMPLE: Chandini is not a US citizen, instead she is a Malaysian citizen -Chandini moves to the US to work, her production is part of US GDP, but not US GNP GDP Per Capita GDP Per capita: GDP divided by population EXAMPLE: China (2011) Singapore (2011) GDP= $7.318 Trillion GDP= $239.7 Billion Pop.= 1.344 Billion Pop.= 5.184 Million 7.318 T = $5,445 239.7 B = $46,238 1.344 B 5.184 M - This tells us the income, production and expenditure of the average person in the economy - Best single measure of economic material well-being of a country that can be compared across countries overtime GDP translated into Well-Being -Higher GDP, especially higher GDP per capita will represent countries with high literacy rates, high life expectancy and generally a higher income - Lower GDP means the opposite; lower literacy, lower life expectancy and lower income Incomes National Income: GDP minus the consumption of fixed capital (depreciation/ loss of value capital), National income must be smaller than GDP Personal Income: Income received by households 2. Incudes transfer payments 3. Excludes firms’ retained earnings Disposable Personal Income: personal incomes minus personal tax payments (what is freed up for people to spend as they freely choose) Unemployment Rate Shortcomings 1. Not a perfect measure 2. Understates unemployment 3. Hard to distinguish between Unemployment and Not in labor force Judged on job search efforts 4. Discouraged workers are currently counted as Not in Labor Force (NLF) 1. Should they we considered unemployed? 5. Does not measure the intensity of employment 1. Some people are underemployed, but counted as employed even if they want full time employment 6. Overstate Unemployment- Some may claim to be unemployed even if they are paid 1. Claim to be Unemployed but nor in labor force Claim Unemployment to get government benefits 2. Broader measure of Unemployment is a category called U-6 Counts discouraged workers and underemployed workers Chapter 9 Labor Force Working Age Population- 254.9 million 1.Labor Force 2.Not in labor force a. Employed a. Not available for work b. Unemployed b. Available for work -(Discouraged workers, etc.) Employed: spent a few hours of the week working at a paid job. Paid employees, self-employed and unpaid workers in a family business Unemployed: people not working who have looked for work during the previous four weeks, Actively seeking and willing to accept a job, recently laid off or waiting for a start date of a job Not in labor force: everyone else, people who do not have paid jobs and are not looking for jobs Unemployment Natural Rate of Unemployment: The normal rate of unemployment consisting of frictional unemployment and structural unemployment 1. Structural Unemployment: that results because the number of jobs available in some labor markets is insufficient to provide a job to everyone who wants one 2. Frictional Unemployment: Job Search, The time it takes to math workers with an appropriate job Cyclical Unemployment: Short-Run fluctuations in the UE rate. Month to month of year or year associated with business cycle fluctuations, with the short-run ups (booms and expansions) and downs (recessions and contractions) of the economy Labor Market and Structural Unemployment (G&S Markets) Structural Unemployment: that results because the number of jobs available in some labor markets is insufficient to provide a job to everyone who wants one 1. Minimum Wage Laws- government 2. Unions- workers 3. Efficiency Wages- firm - In labor markets households are sellers and firms determine the labor demand Wages Ls Ld Quantity of workers/# of labor force Red Line = Wage line Wage line is where Quantity of labor demanded equals Quantity of labor supplied Frictional Unemployment a) The time from graduating until you find a job that matches your skills and preferences b) Sectoral shift- norm in growing dynamic economies Consumer demand- buyers demanded changes from one industry to another industry: Atkins diet c) Technology d) Trade e) Unemployment Insurance: Increase job search unemployment, increases the time it takes for a worker to find a job Unemployment Survey - The household survey/ current population survey 1. Conducted by the Bureau of Labor Statistics 2. Every month 3. Survey 16,000 randomly selected households 4. 16 and older Labor Force Calculations Labor Force = #employed + #unemployed Adult Population = #employed + #unemployed + #not in labor force aka: ( #Labor force + #Not in labor force) Unemployment Rate = # Unemployed x 100 # Labor force Labor Force Participation Rate (LFPR) = #labor force x 100 #adult population Employment Population Ration (EPR) = #employed x 100 #adult population Example: (Real Life Numbers) Unemployed = 11.3 million Labor Force = 155.5 million Working age population = 245.9 million UER = 11.3 million x 100 = 7.3% 155.5 million LFPR = 155.5 million x 100 = 63.2% 245.9 million EPR = 144.2 million x 100 = 58.6% 245.9 million Trends in Labor Force Participation Rates 1. Largest percentage of males are now retirees a. A large percentage of the elderly altogether 2. More people going to college a. Leads to a delay in entrance into the Labor Force 3. Change in the family structure a. More dads are now staying at home Women- More women than men are a part of the discouraged workers category 7. More women in the labor force now 1. Cultural norms are changing Women’s rights movement has gained a lot of traction 2. More education 3. Change in family structure Decreased fertility rate Less children born per woman Efficiency Wages Efficiency Wages: above equilibrium (Wages paid by the firm) 1. Increase worker effort and Productivity: higher wages motivate workers to work harder 2. Increase worker health: healthier and more productive 3. Increase worker turnover: decrease number of workers who quit 4. Increase worker quality: Attract workers with a higher reservation wage: lowest wage one will accept for a job Labor Unions 1. Collective bargaining 2. Strike- formal withdrawing of labor 3. Union Premia: union members earn 20% more than nonunion members, get more benefits and better working conditions - If a worker is working in a unionized industry, more beneficial to him if he is in the union than if he is not - Henry Ford: 1914 equilibrium was $2.50 a day, he paid workers $5 a day (very generous) Spillover Affect - These graphs illustrate the Spillover Effect 1. Non-unionized companies will experience lower wages when in competition with unionized companies EXAMPLE: Manufacturing Industry Wages Ls QLD<QLS This chart shows a unionized company (FORD) Ld Quantity of workers/# of labor force Wages Ls This chart shows a NONunionized Ld Ls2 company (CHRYSLER) QLD>QLS Quantity of workers/# of labor force Minimum Wage Laws Minimum Wage Laws: assigned to help low-income workers, however raising the wage that firms have to pay will likely result in them hiring fewer workers - Group most likely to earn minimum wage is teenagers or the least educated/experienced Minimum Wage Laws in the Labor Market Ls Purple line would represent a surplus of labor (unemployment) Ld Quantity of workers/# of labor force Ls Purple line would represent a lack of labor (NO unemployment) Ld Quantity of workers/# of labor force Consumer Price Index Consumer Price Index: measure of the average change over time in the prices of a typical urban family of four pays for the goods and services they purchase - To calculate the CPI in a given year we need: 1. Fix the basket of goods: establish a “market basket” of goods and services that they typical consumer buys. 10 bananas, 20 backrubs and 40 margaritas 2. Find the prices in the earlier (base) year and calculate the cost of purchasing this fixed basket (COB) 3. Find the prices in the current year and calculate the cost of purchasing this fixed basket in the current year 4. Calculate CPI=COB Current x100 COB Base 5. Calculate inflation rate as the percent change in the CPI CPI Current- CPI Base x 100 CPI Base EXAMPLE i. Fixed Basket has 10 bananas, 20 backrubs and 40 margaritas ii. Year P of bananas P of backrubs P of margaritas 2013 $1 $6 $3 COB13= ($1x10) + ($6x20) + ($3x40) = $250 iii. Year P of bananas P of backrubs P of margaritas 2014 $2 $12 $6 COB14= ($2x10) + ($12 x 20) + ($6 x 40) = $500 iv. CPI13 = COB13 x 100 = $250 x 100 = 100 COB13 $250 CPI14 = COB14 x 100 = $500 x 100 = 200 COB13 $250 v. Inflation Rate: CPI14 – CPI13 x 100 + (200-100) x 100 = 100% CPI13 100 - Let’s say there is a third year, 2015 vi. Year P of banana P of backrub P of margarita 2015 $3 $15 $8 COB15= ($3 x 10) + ($15 x 20) + ($8 x 40) = $650 CPI15= COB15 x 100 650 x 100 = 260 COB13 250 - Inflation between 2013 and 2015 = (260 – 100) x 100 = 160% 100 - Inflation between 2014 and 2015 = (260 – 200) x 100 = 30% 200 Problems of CPI - Tends to overstate inflation Substitution Bias: consumers may change their purchasing habits away from goods that have increased in price Increase in Quality Bias: Cars and computers have become more durable over time. Hard to isolate the pure- inflation part of price increase New Product Bias: The basket of goods used to change only every 10 years, delay to including new goods Outlet Bias: Increases in purchases from discount structure (EX: Costco) or the internet are not computed into CPI, it still uses full-retail prices Chapter 10 Business Cycles - the series of peaks and troughs of real GDP in a country Rise- expansions (boom) - peak Fall- recessions (contractions) – trough Great Recession- occurred from late 2007 until mid 2009 - Caused by mortgage rates in the housing markets Great Depression- Occurred in the 1930’s, depression in economy after war Economic Prosperity and Health - Countries that are prospering economically see better health in residents and more leisure hours in each day - High GDP has a direct relationship with a lot of leisure time and good health GDP Growth Rates Equation: New GDP – Base GDP x 100% Base GDP - To find growth rate of more than one year of GDP, add them all up on top of equation and divide by the number of years there are total Equation: GDP2011 + GDP2012 + GDP2013 x100 3 Factors Affecting Labor Productivity Growth Productivity: the quantity of goods and services that can be produced by one worker or in one hour of work 1. Capital: manufactured goods that are used to produce other goods and services (these are already produced factors of production, meaning they are not raw) a. Physical Capital: tools, machines and buildings EXAMPLE: For a fisherman physical capital would be his boat and net b. Human Capital (HK): knowledge and skills that humans acquire through training EXAMPLE: For a fisherman the knowledge of how to catch a fish and the skill of casting a reel very far out 2. Natural Resources: Water and minerals, aka raw materials 3. Technological Knowledge: a new innovation that has just been invented and helps a firm become more productive EXAMPLE: In 1939 when Henry Ford invented the assembly line 4. Public Policy a. Promote and maintain political and social stability- a country in a war does not have workers fully focusing on going into work everyday (MOST IMPORANT of 6) b. Encourage education and training c. Outward oriented policies- open economies d. Control population growth e. Research and development f. Encourage savings and investment (investments being the firm’s purchase of physical capital) Potential GDP - Potential (Real) GDP rises every year when the labor force expands and new technologies and innovations are invented - On average the US Real GDP rises by 3.2% (roughly) every year Financial System and Loanable Funds 1. Financial Markets: institutions which a person who wants to save can directly supply finds to a person who wants to borrow a. Bond Market: a type of debt financing includes a specified interest rate, interest paid depending on credit risk of the company Interest depends on a) Credit Risk b)Term to maturity c)Tax treatment EXAMPLE: Google Bonds will be much more stable than that of a startup b. Stock Market: Returns vary, depends on how well or poorly the firm does (Tied to equity and finance) 2. Financial Intermediaries a. Banks- take deposits from savers and makes loans to borrowers b. Mutual Funds- institutions that sell shares to the public and uses the proceeds to buy portfolio of bonds and stocks Key Services of Financial System 1. Risk Sharing 2. Liquidity 3. Information The Macroeconomics of Savings and Investments - Total value of saving in the economy must equal the total value of investment in the economy Equations: Y = GDP of a nation Open Economy Trades: Y = C + I + G +NX I = Investment Closed Economy Trades: Y = C + I + G C = Consumption Household Income: = Y + TR G = Government Purchases Disposable Income: Y + TR – T = C + SP SP = Private Savings Private Savings: SP = Y + TR – T – C SG = Public savings Public Savings: SG = T – G - TR TR = Transfer payments Market for Loanable Funds Market for loanable funds: a conceptual interaction of borrowers and lenders determining the market interest rate and the quality of loanable funds exchanged Supply of Loanable Funds Equilibrium interest rate Demand of Loanable Funds This graph illustrates QSLF = QDLF - (Based off the investments quantity of loanable funds) Supply of Loanable Funds Demand of Loanable Funds #2 Equilibrium interest rate Demand of Loanable Funds This graph illustrates the government implementation of an investment tax credit (Giving tax breaks to those who invest which enriches the economy) - This shifts the DLF1 to DLF2 (aka increases demand)
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