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Economic Thinking

by: Annabelle Romaguera

Economic Thinking ECN 5050

Annabelle Romaguera
GPA 3.83

Francisco Larios

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Francisco Larios
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This 10 page Class Notes was uploaded by Annabelle Romaguera on Monday October 19, 2015. The Class Notes belongs to ECN 5050 at Nova Southeastern University taught by Francisco Larios in Fall. Since its upload, it has received 42 views. For similar materials see /class/224388/ecn-5050-nova-southeastern-university in Economcs at Nova Southeastern University.


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Date Created: 10/19/15
Notes February 12 2011 0824 AM Subject Macro Macroeconomics Read all macro book in the next 2 weeks How to allocate resources so the standards ofliving rises and nd explanations on how economics work but looking fromto top down starting with economy wide 1 Wueu 39 39 pike index which is a weighted average of many price indexes and not the individual price of a good This means that we look at economy as a w o e Mea min 39 39 39 CimiLLhLumi quotJ p 39 howthe uLqumyWnrk Investing39 39 uiiug for 39 39 b acriiicin 39 orro wrrire sacrificing future consumption Anyway we have to spend to either invest in present or future and 39 39 money from income f39 39 rquot land interest incomeAll is generated within the economy Within this circular ow in the economy there are Leaks and in ows Leaks are to export and in ows are imports These are leaks and inflows ofthe US economy but if we look at world economy there are no leaks or in ow because the circle is closed since we of course don t trade outside the world Consumption includes both goods and services In the graph llouseholds borrow resources to use currently either on goods or products The revenue from this investment by the households goes to the firm sector which at the same time produces more resources for household to buy closing the circle At the same time both household and firms borrow from nancial markets and both also pay to the government sector as taxes Also there are foreign markets buying quot39 umue tic rouuus Lo and from our economy Adding all these gives you the total imlue created by the economy All added incomes top part of chart should equal all added expenses bottom part of chart Concept ofvalue added 1000 in raw materials that already exists the u ose of roduction rocess is to g Erahpsform those 1000pto something else and sell it at a higher price Your input leather glue string costs you 233le 531 1000 and you build a shoe with these materials and sell it for 2000 The Learhm Glue 5mg Woe Dr ereure swan rent And whatever is le is profit for a total ofthe 1000 The landlord uses the rent money on something else the employee also buys something for himself and the economy keeps moving in a closed circle GDP gross domestic product Consumption investment exports government imports GDP Measuring GDM comprehensive measure of the market value of all currently produced final goods and services within a country in a given period oftime by a domestic and foreignsupplied resources Currently produced means that the period of time is ongoing these 3 months and that we are looking at the value that is added not the leather and glue used because that value already existed but the one we are producing with those extra 1000 And final goods and services is because we are measuring how much the economy is creating so we subtract the original 1000 because those were already created Within the economy is because it is inside the country Toyota is part of the US GDM employing people and using goods and services ofthe US Ifit is produced here but then sold to another country we are still measuring the GDP on the US because it used and created resources in the US Also it will show up in the other country s GDP for example Iapan as an import and will be subtracted from their GDP see formula above But the value created within the US is still the same and used to calculate the US GDP National income accounting system is a system of accounts developed for each country see slide Final vs Intermediate goods and services Final are goods sold to the end users like the shoe which is a final product Intermediate goods and services are the ones used to produce the final good like the leather glue and string used to create the shoe Nominal GDP current value of a final good or service Example price of the pair of shoes today 2000 Versus the cost of these shoes 20 years ago which could have been 100 which is NOT the nominal GDP this in a way measures the standard of living this is measured as P times Qwhere P is price of shoes in the US in 2011 and Q is quantity sold of shoes in 2011 Real GDP value of currently produced final good measured in constant prices or nominal GDP adjusted to price level changes GDP 2010 100price of shoe x 20 total shoes sold2000 GDP 2011 200price of shoe x 20 total shoes sold4000 With these calculations and looking only at the final GDP value 2000 or 4000 we can t see if we sold more shoes because the price of the shoes increased with in ation So with real GDP we measure the shoe at the old price of 100 to see if the sale of shoes increased ifvalue added increased or not in this case it didn t By adjusting the price to the previous years we get the following numbers Nominal GDP 2010 100price of shoe X 20 total shoes sold2000 Real GDP 2011 100price of shoe X 20 total shoes sold2000 GDP didn t change the economy is static and didn t grow in this example because what matters is that we didn t produce more product See slide for a real example ofthe Nominal and Real GDP ofthe US in 2000 and 2001 GDP formula GDP C I G XM Consumption is very stable because consumers need to have that at screen tv or that new iphone 4 Gross private domestic investment Amount of spending on nonresidential structures equipment and software residential structures and business inventories in a given period of time Inventories are volatile since they jump up and down they are goods to be sold on the future Government consumption expenditure and gross investment G Total amount of spending by federal state and local governments on consumption outlays for goods and services and for depreciation charges for existing structures and equipment and on investment capital outlay for newly acquired structures and equipments in a given period of time Read about trade deficit It has a reputation of being bad but its not Read about trade surplus sell more than you buy It is not always good Slides 22 and 23 study national income slides CHAPTERZ Basic lrdmlwork oldeniand and supplyanalysis Demand benavioroi consumers pp dogednerdedermine dne price and oudpuddnad occurin a marked sniiding demand or oicnanges on dne marked uandidvdemanded CHAPTERB Production 3 cost in the short run Producdion iuncdionmak amound oi oudpud iirm is proddcingdne mak possible oudpudwidn a givencombinadion oi inpuds Economic demandsniiiingvaiues I I imome indnesnord iurial ieasd one inpud is iked indne iong iuriaH inpuds are variable PK price oi reiaded goods i i T orsumeilasles k i it Fonllula AP OL Fe ekpecded price u 39 Noiconsumers dne price oidne goodvarv wnen price cnanges e Dederminands oiSupplyorsuppiv ii rdrd m nrd iin shillingvaiues PPnceoidne ood dne good n n ad 39 iaiiiiig p p PiPnceoidneinpuds m Pr price oigoods reiaded in ail TC TVCTFC producdion odnerneidconsdard WhenlhePchangesOschangesloo en Tlechrioiogy su i iin 39 Peekpe dp oiierediorsaie adagiven price ordne min price dne suppiv price neededdo ged Averagetotal cost dodai cosd divided bvoudpud ATCTCO or AVCAFC FoHiiiiEcapacily roducers2oiierapardicuiarguandiwiorsaie snort run marginal cost cnange in eidnerdodai vanabie cosd ordodai cosd per unid iiarginai anaivsis quot 39 39 39 TVCAO or ATCAO iiPsmarginairadeoisubsdidud demand and suppivcurve Features lora set ol snort run costcurves dAPc decreasescordinuodsiv as NU nai udiii s Ad dnis poind 0o 0 Eddie maikedciears wnen demand tsuppi corsdard oudpud increases 2 Ave is Urshaped 3 ATC is Urshaped 4 SM is Urshaped arginai beneid arginai cosd Corsumersurpids measured area underdemand above marked price updodne eguiiibnum guardidv price accepdabiedo produce good Producersurpius measured area below marked price and above suppiv updodne eguiiibnum guardidv iiiiiiiiiiuiiip mi dab r MC bodnAvc andAic overdne oudpud rangeiorwnicndnesecurvesiaii rise E eiasdici ine iink bedween producd curves andcosdcurves in dnesnord runwnen one inpud is E come eiasdicidv a d AVCwAP Ext Cross price eiasdicidv wnen MP is increasing SMC is decreasing Cosd wnen MP is decreasing SM is increasing A erage producd iabor g is decreasing T daicosd wnen AP is decreasing Ave is increasin ivcdodai vanabie cosd nen iiP e uais AP ad AP S mak value 8M0 eguaisAvc ad Avcs minvaiue iPciodaiiikedcosd 0 similar bud nod iderdicai reiadions noidwnen more dnan one inpud is variable Oulpul R 9 AFCaveiage iiked cosd 39 Avcaverag guardidvcnanges bud nod bodn wnicn demand and suppiv sniid Ceiling priceiioorprice prevend price iromireeiv moving tori docieardne marked quotbesdcase ru an sdradegic decision making purposes LAciong run averagecosd CHAPTER3 Marginal analysis 0pdimizadion problems aresoived using marginal analysis can iiiiiiiiiiiaiiii i isiiaiiiu i Unconsdrainedvaiues oi dnecnoice variables are nod resdricded rule io makimize ned MESMriimum e icieril Scale combinadion anddne opdimizadion condidion may be ekpressed as NMEL NEK LAW OF DEAAND Quandidv ases wnen price eneiid idv eguais dne marginal cosd oi dne BCWW rChoicevaiiabie iscordinuous NE MC i rChoicevaiiabie is discrede ME MC iurdnerincreases indne acdividvresuid in marginal cosd ekceeding marginal beneiid iiarginai anai is ignores avera ecosds iikedcosds and sunkcosds To maximizeminimize an obiecdive iuncdion subiecd do a consdraind dne radios oi dne marginal beneiddo price musd be eguaiioraii acdividies 7 vaiuesoicnoicevariabiesmusdmeeddneconsdraind Pk Pa Pc Pz demanded incre a iaiis and guandidvdemanded decreases wnen price rises odner dnings neid consdand combinadion ior every level oi oudpud Longriuri cosd curves are derived irom dne ekparsion padn Tire longnin total cost ol producing any particular output level THE LAW OF DiMiNiSHiNG Long run average cost LAC LACLTCO NAPGiNAL PRODUCT Asdne Long nrnargi a c MC LMCALTCAO numberoiunidsoidnevariabieinpud Forces inlluencin a rm slon run coststnicdure dEconomiesoiscaie increases odnerin udsneid 2economies oi scope 3purcnasing economies and Aieaming economies consdand dnere ekisds a poird bevond nen LAC is decreasing increasing diseconomies oi scale are presend wnicn dne marginal producd oidne 39 39 39 variabieinpuddeciines Marginal rate ol subsdidudion l as t oi goodgtlt is consumed e oidne indiiierencecurvedne marginal rade oi subsdidudionradio oidne marginal udiiidies oidne dwocommodidies MRSiUyiUv Cori umlrs budgetlinewnad dnecorsumeris abie do consume sdraignd iinewidn a slope eguai dodne radio oidne prices oi dnedwocommodidies v viWPyX income cnangesdne budged iine sniids iPncecnangesdne budged iine rodades Mimi n irii ih sodne makimizadion condidioncan be egtpressed as MRSMUX PL 0 M M Pr odners consdand amp aider dne price oi one commodidv Price changes havez ellects a subsdidudion eiiecd and an income eiiecd d3ubsdidudion muidiproducd iirm can produce goods x and v dogedner ad lower dodai cosd dnan dwo separadesingieproddcd iirms one specializing iriX anddne odnerspeciaiizing inv Tow lt dim 0 LTC0W large buversdo obdain iowerinpud prices dnrougn guandidvdiscourds Ad dne dnresnoid dne i ALearning orekpenence economies arisewnen as cumuiadive oudpud increases curve do sniid downward undii ail gains irom ekperience nave been capdured narisi n pain iii ii ruri CHAPTERS Price eiasdicidv is dne radio oidne percendagecnange in guandiw demandeddo dne ekparsion erdenng new producd markeds or merging widn odneriirms iongriuricosl kikies ivpes eiasdicgtdunidarveiasdicd ineiasdicltd 39 Hi Hm iidemandiseiasdic ne dodai nuel Priceldodairevenuet iidemand is ineiasd pricet dodai revenuet Priced dodai revenuel a E CHAPTER 11 Prom m axirnizing niles lor managers who operate as pricetalrers ioragood i dneconsumers39 ii cnange iasdi is Calculatingpriceelasdic39 oldeniandmuidipivdnesiopeoi i 11 w i wnicndnevnavenocondroiAspricedakersdnemanagerscanonivreacddo demand AGAP bvdne radio oi price divided bv guandidv Po Aquot quot quot Measured elasticity d over an irdervai orarc along demand iiprice is large or2 ad W nil i mail along a demand curve for iirieardemandcurves price and la varv direcdiv net ncedne teiasdic ine l dne price leiasdic rForacurviineardemand no general rule aboud dne reiadion ekcepdiordne special case oi oaP wnicn nas a colic sdand price eiasdiciw eguai do b ior all prices in income eiasdicidv is posidive iidne good is normal negadive iidne good is inienor cnanges indne price oi reiaded goods subsdidudes or compiemerds eiasdicidv is posidive ii dnedwo goods aresubsdidudes negadive iidnev arecompiemends iiiiiiiiiii di inin i rin run will becompeded awavbv endrv oi new iirms Over a long enougn period dne owners are iikeivdo earn on average idsd enougn revenuedocover ail dne ekpiicidcosds oi earned by pudding dneir resources do dne besd aidernadive use CHAPTER 1amp 5 Gross Domestic Product GDP gross domestic product gross product gross income 3 Ways to measure GDP Value added approach 9 value added sales revenue non labor inputs Expenditure method 9 nation s spending on final goods and services Income 9 total income total output GDP National Output GDP C I G EX IM C 9 Consumption by households I 9 Investment in productive assets G 9 Government spending EX 9 Exports IN 9 Imports GrossincomeCIGEX IMCST TR C 9 consumption S 9 savings T9 taxes TR9 transfers So Investment I S T G TR IM EX Investment is the current output today that is intended to increate future output There are 2 types of investments Domestic savings 9 which reduces consumption today Borrowing from aboard 9 which reduces consumption tomorrow Investment is founded out of 3 items Private savings 5 Government savings gov budget surplus T G TR Borrowing from aboard net imports IM EX Trade and Output Trade Deficit when consumption is greater than production When this happens the remaining needed to consume has to be imported When we import from other countries we create a debt with that country Trade Surplus when consumption is less than production When this happens the remaining produced has to be exported When we export to other countries the other country is in debt with us BOT Balance of Trade This is where all the transactions are recorded Amount of imports should be equal to amount of exports Deficit on accounts happens when there are more imports than exports Theory of comparative advantage This theory requires that to MAXIMIZE OUTPUT each country should specialize in its COMPARATIVE ADVANTAGE and TRADE THE REST This means that each country needs to produce only the product that they are best on import the rest and export the remaining of the product that they produce the best Ifa country dedicates all ofits employees to create only one good they will generate more than if the are broken up in groups to generate more goods Since they will generate more of the good than needed for the country they will then trade the remaining output for the rest of the goods they need with other countries Reasons why Output rises or falls Increase in labor labor Increase in capital capital Increase in efficiency oflabor and capital TFP TFP 9 total factor productivity 9 efficiency Recessions and depressions So a recession or depression doesn t happen there needs to be There has to be available labor There has to be available capital There has to be efficiency and expectations for good If there are expectations ofa recession there WILL be a recession Explanation of expectations preople think that there is a recession coming even if it isn t true on that moment they will start saving more and spending less While they are spending less stores are also selling less While stores are selling less they don t have money to pay employees so they have to fire them Once employees are fired there is more speculation more panic and eventually stores will close unemployment will rise and there WILL be a recession All because of speculations CHAPTER 2 Money 3 prices ofmoney Interest rates 9 price of holding money cost ofinvested funds Exchange rates 9 price of one currency in terms or another Aggregate price levels 9 average price of all goods ampsvcs in terms of Changes in quantity ofmoney affect the value ofmoney For example if a bank prints a lot of dollars the value of the US dollar will go down depreciate Money Relationships Increase in money supply will cause Interest rates to fall because there is more money to lend Exchange rates to depreciate because of supply and demand law Price levels to rise because ofin ation people have more money to spend so prices of things go up Decrease in money supply will cause Interest rates to rise because there is less money to lend Exchange rates to appreciate because of supply and demand law Price levels to fall because of de ation people don t have money to spend so prices of things go down to promote sales Nominal vs Real This theory can be applied to most money accounting concepts GDP Interest Rates Exchange rates GDP Nominal GDP 9 This measures the total gross domestic product ofa country in a certain year and it increasesdecreases with either price change or quantity change Real GDP Q 9 This measures ONLY the quantity of goods ampsvcs produced in a country in a specific year It only increasesdecreases with a change on quantity and NOT with changes in price Formula 9 Nominal GDP P x Q P price de ator amp Q Real GDP Price De ator Nominal GDPReal GDP Implicit price de ator 9 Nominal GDP Real GDP This formula is used to track in ation or de ation through time INTEREST RATES Nominal Interest Rate 9 Rate that is quoted at a bank or listed at a newspaper Real Interest Rate 9 Interest rate without in ation Ex The nominal interest rate for a 5 year investment at a bank is 8 because the bank charges 5 interest rate today and they anticipate a 3 in ation in those 5 years So 5 real rate 3 in ation 8 Nominal rate Formula 9 IN IR Pe lN Nominal interest rate lR Real interest rate ampPe expected in ation EXCHANGE RATES Nominal Exchange rate 9 This is the rate quoted at exchange banks Real Exchange rate 9 This is the nominal rate minus in ation of the rate in contract with other countries Formula 9 Real exch rate nominalexch rate Oln ation 0 Real amp nominal exchange rates is the change in rate Oln ation is in ation in ation When currency depreciates imports fall every other currency becomes too expensive to purchase export rise foreigner can purchase more items with the same money Ifin ationrate diff domestic foreign gt nominal rate of depreciation of exch rate then the real exchange rate will appreciate placing downward pressure on the BOT Ifin ationrate diff domestic foreign lt nominal rate of depreciation of exch Rate thenthe real exchange rate will depreciate placing upward pressure on the BOT Money Supply Money supply M1 includes Currency in circulation Demand deposits Money in bank accts is not part ofM1 because its out of circulations unless the bank uses it to lend to other customers then its back as part of M1 3 Tools ofMonetary Policy Discount rate 9 Interest ratefrom theFED charged to commercial banks when they borrow money through the Federal Reserve System Reserve requirement 9 dictates what proportion of every deposit banks are required to hold in reserve not lend out Open market operations 9 Central bank purchases and sales of financial securities on the open market with the purpose to move a particular shortterm interest rate to a desired level CHAPTER 3 Expectations Solutions to control in ationary expectations Imposition of wage amp price controls 9 forbids increase in wages and prices so there is no reason for people to expect an increase Problems with this 0 There needs to be total control by the gov and punish violators 0 Rigid wages amp prices create a distortional economy amplt efficiency In ation targeting 9gov chooses an inglation target ex 2 and rise or lower interest rates as necessary to keep in ation at that rate 0 This will work if bank is credible and people believe that there will be no in ation Monetary policy 9 modification ofinterest rates so that investment seems more appealing This will work if there isn t a quotliquidation trap o Liquidation trap when there is more money out but people still prefer to hold on to that money and not invest because the investment risk is higher than the return investment Fiscal policy9 focuses on gov spending taxation amp budget deficits If the government starts spending aggressively and creating more demand individuals believe that better times are coming amp start spending also Keynesianism method is part of this fiscal policy theory Keynes 9 Paradox of poverty in the mist of plenty9 When productive capacity still exists but output falls as productive resources both people and equipment are left idle in the face of a collapsing demand Keynes theory says that DEFICIT SPENDING government spending finance by using bonds and NOT from increased taxes will make everyone start spending too as the economy starts moving again To compare if this method works we need to find out the increase in GDP in comparison with the original increase in deficit spending from the government if the gov spent more than the final output from individuals Change in GDP change in deficit spending by govx income multiplier Money multiplier 1proportion of leakage Proportion ofleakage amount ofnew income not spent I give you 100 you spend 80 leakage is 20 or 20 Cons of budged deficit Ricardian equivalent 9 rational ppl will assume that budget deficit will eventually requite tax raises so they may decide to save all of the extra income Crowding out 9 deficit spending may undercut private investment since the gov is competing with private borrowers in the extra spending they are doing Interest rates 9 banks may increase interest rates to counteract this excessive spending from the government specially if they believe it to be in ationary CHAPTER 5 GDP Accounting GDP accounting measures the value of all outputs a nation produces over a period of time normally year NDP 9 Net Domestic product 9 NDP GDP depreciation Measures amount of output that can be consumed leaving the capital stock intact Not used in measuring GDP DNP 9 Gross national product also called GNI or gross national income Measures output produced by a country s residents regardless ofwhere they produce it Ex People working aboard PPP 9 Index of purchasing power Parity 9table used to estimate and adjust GDP to compare internationally It uses a common country to compare BOP 9 Balance of Payment statement 9 provides a record of the country s cross border transactions looks like p116 All credits and debits must 0 credits9 every source of funds ex foreign exchange 9 increases in a liability or decreases in an asset debits9 use of funds importing of goods 9 increases in an asset or decreases in a liability Factors that make exchange rates change In general exchange rates are subject to pressure of supply and demand in the market but the most common reasons why it changes are Interest rates for short term movements In ation Current accounts imbalances from long term movement


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