ECON 201 Lecture Notes for Chapters 9, 23 and 24
ECON 201 Lecture Notes for Chapters 9, 23 and 24 ECON 201
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This 8 page Class Notes was uploaded by AnnMarie on Thursday April 14, 2016. The Class Notes belongs to ECON 201 at Louisiana Tech University taught by Menuka Karki in Spring 2016. Since its upload, it has received 13 views. For similar materials see Economic Principles & in Economcs at Louisiana Tech University.
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Date Created: 04/14/16
Chapter 9: International Trade The Equilibrium without Trade Trade: Import: Goods that are made by foreign countries that are brought and sold within the country. Export: Domestic goods that are sold to foreign countries. Domestic Price: The price at Equilibrium. The World Price and Comparative Advantage The world price is the price of a good that prevails in the world market for that good. To determine if a country wants to import or export a good is based on the comparative advantage. 1. You will export if the domestic price is less than the world price. 2. You will import if the domestic price is greater than the world price. The Winners and Losers from Trade 1. Gain and Loss of an Exporting Country The figure above shows that Domestic Producers are better off with trade because their surplus increases by B, C, and F. Domestic Consumers are worse off because they now have to pay at the world price instead of the domestic price thus the consumer surplus deceases by B and C. With trade, the economic well being increases by F. 2. Gain and Loss of an Importing Country The figure above shows that Domestic Consumers are better of because the domestic price of the good decreases to the world price. Domestic producers are worse off because of the lower price of the good. The economic wellbeing increases by C and D. Effects of a Tariff Atariff is a tax on an imported good. The tariff generates a revenue and is suppose to decrease the amount of import on that good. Thus helping domestic suppliers. When a tariff is placed on an import it decreases the quantity of that imported good. This benefits the producer because they now supply at Qs2. The consumer's demand changes from Qd1 to Qd2 because of the price increase due to the tariff. This makes the consumer worse off. However, the government is better off because it makes a revenue from the tariff. The whole economy is worse off due to the dead weight loss. Chapter 23: Measuring a Nation's Income Microeconomics: The study of economy-wide phenomena, including inflation, unemployment, and economic growth. GDP – Gross Domestic Product • We use GDP to determine how well an country is doing. • GDP is the price of all goods and services produced in the country multiplied by quantity produced. • GDP is the market value of all final goods and services produced within a country in a given period of time. • GDP → Higher Income → Higher Standard of Living. • GDP can be found in two different ways – Expenditure and Income. ◦ Income for Seller = Expenditure for Buyer Circular Flow Diagram The following diagram shows that the flow of goods and services, factors of production, and what is considered GDP. We can see that the total amount spent by households in the market for goods and services is the expenditure which is part of GDP. We can also see the income which is paid by firms in the market for factors of production. This is also part of GDP. Measurement of GDP A) “GDP is the market value” – value of goods using market price. B) “ ________ all” –All goods and service. The following list some goods and services that are included and not included. 1. Housing : Investment by household (Rent Value, Rent Paid) – is included. 2. Illicit transactions are not included. 3. Goods and services produced and consumed by household are not included. C) “________ final” - final goods and services. 1. Inputs are not included – no double counting. 2. Inventory included but deducted from GDP when sold. D) “goods and services” – Tangible and intangible goods. E) “produced within a country” - goods made within the country including exports. 1. Exports are included 2. Imports are not included 3. Non-citizen producing including F) “in a given period of time.” 1. New car produced in 2015 will be part of 2015 GDP 2. Used car sale in 2016 will not be part of 2016 GDP Components of GDP Y = C + I + G + NE (Income = Expenditure), where C is Consumption, I is investment, G is government expenditure, and NE is Net Export ( Export – Import ). Social Security + Unemployment Insurance = Transfer Payment ( Not part of GDP). Misrepresentation of Economic Growth There are two different ways that GDP can increase which represent economic growth – Quantity increase and Price increase. However, if price is only increasing and quantity is staying the same this causes a misrepresentation of the economic growth of a country but does display the inflation rate on an economy. Real vs. Normal GDP • The total spending increases because of a) the economy is producing more goods and services or b) goods and services are being sold at a higher price. • Real GDP is the years GDP if goods and services are valued as of last year or any base year. Real GDP 2015 = P 2013* Q 2015 Normal GDP = P * Q 2015 2015 2015 • GDP Reflector measures the current level of prices relative to prices in the base year. GDP Deflector = (Normal GDP / Real GDP ) * 100 = [( P 2015 * Q 2015 / ( P2013 * Q 2015 ] * 100 = (P 2015P 2013 * 100 • The real GDP gives the best measurement of economy. • If price remains the same → GDP Reflector is constant. • If price increases over time → GDP Reflector increases due to Normal GDP > Real GDP. • Inflation is equal to the difference in GDP Refyear 2d GDP Reflector year1divided by GDP and multiplied by 100. year 1 Chapter 24: Measuring the Cost of Living What is Consumer Price Index? Consumer Price Index (CPI) is a measure of the overall cost of goods and services bought by a typical consumer. The goods and services are a fixed set (Basket) of goods and services. How is CPI calculated? 1. The Fixed Basket Determine which prices are most important to the typical consumer i. Food, Housing, Transportation, Health, Education, Recreation. ii. Each category is given a weight percentage that depends on the share of cost for given good/service. 2. Find the prices of the goods/services. Priceof Basket∈CurrentYear CPI = ∗100 Priceof Basket∈BaseYear This is similar to GDP Deflector. = CPI Current yearIbase year 3. Compute Basket’s Cost 4. Choose a Base Year and Compute the Index 5. Inflation rate = percent change in CPI CPI of Year2−CPI of Year 1 Inflation Rate = ∗100 CPI of Year1 Problems in Measuring the Cost of Living 1. Substitution Bias: Overestimates the cost of living People consume more goods when prices increase less. People consume less goods when prices increase more. CPI uses fixed basket and ignores the possibility of consumer substitution. 2. Introduction of New Goods: New goods create more choices which causes the price of substitute goods to decrease. This is not reflected in CPI, thus overestimates the CPI. 3. Unmeasured Quality Changes Does not reflect actual standard of living. GDP Reflector vs. CPI NominalGDP ∗100 GDP Reflector = RealGDP Priceof CurrentYear = Priceof BaseYear ∗100 GDP is restricted to goods/services produced within the country. CPI contains only goods/services for a typical consumer. CPI compares Price of a Fixed Basket of goods/services. GDP compares Price of current produced goods/services. Effects of Inflation 1. Compare dollar figures from different times Salary2013= $80,000 Salary1931= $80,000 CPI = 15.2 1931 CPI2013= 229.5 t∗Priceleveltoday Salary2013in dollars = Amount∈Year Price Level∈yeart 80000∗229.5 = 15.2 = 1.2 Million in 2012 Correcting Effect of Inflation 1. Indexation – automatic correction by law 2. Real and Nominal interest rate Nominal interest rate - without a correction of effect of inflation. Real interest rate – with a correction for effect of inflation.
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