Test 2 Study Guide
Test 2 Study Guide ECN 222 - 005
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This 8 page Study Guide was uploaded by Abigail Johnson on Monday March 28, 2016. The Study Guide belongs to ECN 222 - 005 at University of North Carolina - Wilmington taught by Adam Talbot Jones in Spring 2016. Since its upload, it has received 34 views. For similar materials see Macroeconomics in Economcs at University of North Carolina - Wilmington.
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Date Created: 03/28/16
WEDNESDAY MARCH 2, 2016 March 28- BB&T Capitalism lecture (3 pts) rd March 3 4pm BB&T lecture series Burney Center Nominal GDP • 2010: 6,000 • 2011: 8,250 • 2012: 10,800 • 10à11= 37.5% increase • 11à12= 30.9% increase Real GDP • Hold price constant by using a “base” year shows the change in output (change in what is made between years) • 2010=base (just as example) • 2010: 10*400 + 2*1000 = 6000 • 2011: 10*500 + 2*1100 = 7200 • 2012: 10*600 + 2*1200 = 8400 • 10à11= 20% increase • 11à12= 16.7% increase GDP Deflator: a measure of the overall level of prices • 100 * nominal GDP/real GDP • unit-free measurement • Percent Change (normally an increase) in the GDP deflator from one year to the next = measure of inflation in % terms • 2010 Deflator: 100 o BASE YEAR = 100 • 2011 Deflator: [8250/7200 * 100] 115 • 2012 Deflator: [10800/8400 * 100] 129 • 10à11: 15% increase • 11à12: 12% increase [(129-115)/115] Real GDP indicates total economic activity Real GDP per capita is the main indicator of the average person’s standard of living. GDP does not value: • Environmental quality • Leisure time • Non-market activity (“black market” or non-paid services) • An equitable distribution of income GDP is correlated with other important factors ^ GDP Deflator measures • A measure of prices (inflation), of goods and services produced in the US • NOT including goods/services produced elsewhere Consumer Price Index CPI vs. GDP • GDP = quantity of goods and services (output), price constant CPI = measures the change in prices of goods and serviced purchased by typical households, holds quantities constant MONDAY MARCH 15 -Aplia assignment on GDP due Wed night -Ch.15 on unemployment on BB -Aplia for Ch.15 too CPI Motivation • “cost of living” adjustments (COLAs) • RGDP Calculate CPI 1. Fix the “basket” i. BLS (bureau of labor stats) surveys consumers to determine what’s in the typical consumer’s “shopping basket” 2. Find the prices 3. Compute the basket’s cost 4. Choose a base year and compute the index i. (cost of basket in current yr.)/(cost of basket in base yr.) *100 5. Compute the inflation rate i. Inflation rate= (CPI this year – CPI last year)/CPI last year *100 Core Inflation (Underlying Inflation) • All items less energy and food • Less noisy than headline Headline Inflation • All CPI items Imports are only 18% of GDP à housing is 43% of expenditure , so the majority is domestic 80,000 items in the CPI “basket” Basket index example: B10 $60, B =1169, B = $12 CPI= (current/base) *100 • CPI10 60/60*100= 100 • CPI11 69/60*100= 115 à (115-100)/100 *100 = 15% • CPI12 78/60*100= 130 à (130-115)/100 *100 = 13% nd 2 index example: per lb. Available in Week 9 Notes MONDAY 03/21 A country’s standard of living depends on its ability to produce goods and services • Ability depends on productivity. A nation’s workers are very productive, real GDP is large and incomes are high. • Produce more, have more When productivity grows rapidly, so do living standards What determines productivity growth rate? Production function (total amount of goods and services produced) Productivity function (total amount of goods and services produced per worker) Y= Af [L(labor)+ K(capital)+ H(human capital)+ N(natural resources)] • A= technology o Multiplies other inputs • The production function has the property constant returns to scale: changing all inputs by the same percentage causes output to change by that percentage o Ex: doubling all inputs (x2) causes output to double • Y/L = Af (1, K/L, H/L, N/L) o Productivity (capital per worker) o This equation shows that productivity (output per worker) depends on tools and resources available to each worker o Depends on: available in Week 10 Notes Technological knowledge: society’s understanding of the best ways to produce g&s • Technological progress is not faster computers, higher- definition TV, better phones… • It means any advance in knowledge that boosts productivity (get more output for same amount of RSS) WEDNESDAY March 23, 2016 Democracy and free market needs property rights Production Function, where Y = output, RGDP, and national income Y = A f (L,K,H,N) Economic growth and public policy • Institutional framework (base) of economy must be sound • Institutions are the “humanely devised constraints that structure human interaction” o Governments o Property Rights } available in Week 10 Notes o o Trust • Without law and order and dependable conditions significant growth will not occur Production Function Y/L = Af(K/L, H/L, N/L) • Boost productivity by increasing K, requires investment. • Scarcity à more capital requires producing fewer consumption goods (tradeoff) • Must reduce consumption to increasing saving to fund the production of investment goods. o Reduce consumption à Increase saving à Invest • Tradeoff between available in Week 10 Notes • Government can implement policies that raise saving and investment. o K will increase, causing productivity and living standards to rise. o But there is a available in Week 10 Notes (asymptote to maximum K possible) § As K rises, the extra output from an additional unit of K falls… § The Catch-up Effect: the property whereby poor countries tend to grow more rapidly than rich ones • Investments from abroad o Can save and invest on own or government can also encourage this: o Foreign Direct Investment: available in Week 10 Notes o Foreign Portfolio Investment: available in Week 10 Notes § Some of the returns flow back to countries that supplied the funds. MONDAY MARCH 28 Video: • Running out of oil: 1978 • “The Coal Question” becomes “The Oil Question” Go to two business week sessions to replace missed Wednesday class Exam Monday 4/4 • GDP calculations • CPI • Production and Growth Production Function: Y/L = Af (1, K/L, H/L, N/L) • Human Capital (H) o Education and govn’t policy to promote education (investment in H) § Public schools, subsidized loans for college § Tradeoff b/t the present and future: year of school or a year of wages and experience o Health and nutrition § Healthcare, preventative medicine, and insurance § Significant malnourishment is a problem (more calories à more productivity) • Technology (A) o New tech ideas come from o Tech is important à get more out of inputs § à rise in living standards o It is a public good: ideas can be shared, increasing the productivity of many. o Patent Laws (Policies) limits technological progress à partial monopoly for x time. § Tax incentives or direct support for the private sector § Grants for basic research at universities o Free Trade § Access other’s technology § Countries with “inward-oriented” policies (avoid outside interaction) have generally failed to create growth ú Brazil, last 5 years ú North Korea as of forever ago § Countries with “outward-oriented” policies (promoting global integration) have often succeeded. ú South Korea ú Taiwan • Labor (L) o More labor à decrease in output numbers in productivity (as labor is the denominator of the equation) o Population Growth 1. Stretching natural resources a. Negative effect b. 200 years ago Thomas Malthus, “we will stretch our RSS to feed all the mouths and starve ourselves” i. Wars and Plagues are good; natural selection and population control c. However, now the pop. Is 6x what it was during Malthus’ time, and living standards have increased. Didn’t account for technological progress 2. Diluting the capital stock a. Negative effect b. Bigger pop. = higher L = lower K/L = lower productivity and living standards i. Applies to H as well (larger pop. = more children = strain on education system) c. Countries with faster pop. Growth tend to have lower educational attainment, which decreases potential living standards. 3. Promoting technological progress a. More people = more scientists, inventors, engineers = more frequent discoveries b. History dictates that growth rates increased as the world’s population increased; more populated regions grew faster than less populated ones. c. Incentives to innovate: avoid limits of natural resources Savings, Investment, and the Financial System Financial System: the group of institutions that helps match the savings of one person with the investment of another. Financial Markets: Available in Week 11 Notes • The Bond Market o A Bond Available in Week 11 Notes • The Stock Market o A Stock is Available in Week 11 Notes Financial Intermediaries: Institutions through which savers can indirectly provide funds to borrowers. (banks and mutual funds) • Mutual Funds: institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds Financial Markets: (bonds, stocks, etc.) [direct route] Rule of 72 • Take 72, divide by interest rate. Approximate number of periods it takes for a deposit to double Account Types 1. Standard brokerage account through the bank a. Stock exchange through bank. b. Taxed up front and when you pull out c. No limit on investment 2. 401K 3. IRA (individual retirement account) 4. Roth 401K 5. Roth IRA Details on 2-5 are available in Week 11 Notes
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