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Macroeconomics Week 2 notes

by: Kate Notetaker

Macroeconomics Week 2 notes Econ 1012

Marketplace > George Washington University > Economcs > Econ 1012 > Macroeconomics Week 2 notes
Kate Notetaker

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About this Document

Notes for January 19 and January 21, 2016.
Dr. John Volpe
Class Notes
Econ, Economics, Macroeconomics
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This 3 page Class Notes was uploaded by Kate Notetaker on Thursday January 21, 2016. The Class Notes belongs to Econ 1012 at George Washington University taught by Dr. John Volpe in Spring 2016. Since its upload, it has received 53 views. For similar materials see Macroeconomics in Economcs at George Washington University.


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Date Created: 01/21/16
January 19, 2016  Two principal items in a firm’s financial statements o Income statement  Tells us how well or how poorly a company is doing  Summary of firm’s revenues, costs, and profit over a period of time  Typically, a 12-month fiscal year  Does not necessarily coincide with the calendar year o Balance Sheet  Financial statement that sums up a firm’s financial position on a particular day  Usually end of a quarter or year  Summarizes the liabilities and assets of the firm  Assets listed in order of which ones are quickest to convert to cash  Accounts receivable – money incoming but don’t have it yet (quickest to be converted to cash)  Accounts payable – owe certain people, debt, etc.  Short term vs. long term liabilities  Firms net worth is the amount of its assets minus the amount of its liabilities  Divide the net worth by the common stock share and you have value per share for the firm  Accounting profit o Profit on the income statement is referred to as net income  Calculated as revenue minus operating expenses and taxes paid  This is accounting profit  Accounting profit = Revenue – Explicit costs  Listed expenses are explicit costs (costs and involve actually spending money)  Financial crisis of 2007- 2009 o US economy suffered the worst financial crisis since the Great Depression o Thought that it was better for more people to own homes  Trying to promote the idea of families o Not easy to give loans to people that didn’t qualify for loans  Subprime loans are loans for people that don’t qualify for regular loans  credit rating is low, jump from job to job, have been in debt, etc. o No doc loan – when there is no documentation and they take your word as the truth  Trying to encourage the purchase of homes o Starts bundling loans  Bundling mortgages, creates securities and sells them to pension funds, etc.  Comes with very high credit ratings [ o Mortgage-backed securities  Financial instruments based on home mortgage loans  Appeared to be much like bonds  Although many of the underlying mortgages were risky, the securities were incorrectly perceived to be low risk  Made to “subprime” borrowers o When prices fell in many housing markets, the underlying mortgages went into default  Value of the securities plunged January 21, 2015  Present Value o About discounting o PV = FV / (1 + R) n  R = interest rate  n = number of years  Future Value o About compounding o FV = PV ( 1 + R ) n o Want to know what I’m going to get to decide whether or not I will stay  Determining the price that a stock should sell for o P =pDividend / 10%  Measuring Total Production  Gross Domestic Product o Most common measure used by economists of overall economic activity in an economy is Gross domestic product, or GDP o Gross domestic product: the market value of all final goods and services produced in a country during a period of time, typically one year o Domestic = Only counting goods coming out of the United States o Interested in people having more goods and services per person  Gross domestic product per person (want this to rise)  Want the output of the goods and services to rise at a faster rate than the population o Output of the economy and income of the economy are theoretically the same thing  Measure how good an economy is doing by looking out the output and the income o Y = C + I + G + NX  Inventory Investment o Used to use the Gross National Product  Huge different between GNP and GDP for countries like Ireland  GNP might be very low but GDP is very high o US Economy can produce much more than consumers, government, etc. can buy  Some people are not working  Some plants are idle  Demand is not strong enough o When the US economy goes into a recession  Everyone says to make the government spend more  Government spending for planes, tanks, etc. o If aggregate demand is weak, the economy goes down o Having consumers buy more is very important  If they aren’t buying, businesses aren’t making investments o If demand isn’t strong enough, they want the government to lift the demand  The government will spend money that they don’t have  If you are going to deficit spend, you want spending to actually take place  Money needs to be spent to actually lift the demand  Some people say deficit spending never works, some people say that it would but we’re just doing it on too small of a scale  When the government spends more money, more people get hired, government collects more taxes, there is much more circulation of money  Taxes are supposed to pay off the debt from the deficit spending  Doesn’t work because there are always people that try to spend it on other things  Government spends the money and more  Debt rises even more o Underground economy  How do you find it? You look at savings  People selling through vendors, etc. and charging you sales tax  Some things aren’t reported, government doesn’t really know how much you are making  Look at the amount of money saved and try to make an estimate of the size of the underground economy


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