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Economic Analysis

by: Dr. Janiya Bernier

Economic Analysis ECON 100B

Dr. Janiya Bernier

GPA 3.77


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This 3 page Class Notes was uploaded by Dr. Janiya Bernier on Thursday October 22, 2015. The Class Notes belongs to ECON 100B at University of California - Berkeley taught by Staff in Fall. Since its upload, it has received 12 views. For similar materials see /class/226713/econ-100b-university-of-california-berkeley in Economcs at University of California - Berkeley.


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Date Created: 10/22/15
ECON 100B Economic AnalysisMacro Review of Econ 1 Concepts GSIJuan Sebastian Lleras Email jsllerasec0nberkeleyedu University of California Berkeley 1 GDP GDP is simultaneusly a measure of production or output value added approach spending expenditure ap proach and income income approach Remember that the three approaches should give you the same outcome GDP is the total market value of a country s output It is the market value of all nal goods and services produced within a given period of time by factors of production located within a country GDP ignores all transactions in which money or goods change hands but in which no new goods or services are produced 1 In contrast GNP is the total production by factors of production owned by that country Q How do 460 million dollars earned by a Japanese car factory enter in the calculations for Japan and US GDP and GNP 2 The Production Function Production functions tell us output related to its inputs Usually the inputs we are going to deal with are K capital and N labor can you think of something else that could be added The general form of the production function is Y FK7 N we will see examples of speci c production functions that economists usually use For example CobbDouglas or Leontief think about K and N having a price Y KaNlio Y minKN Capital K are physical and production facilities like buildings machinery etc It is not stocks bonds money nancial paper etc those are called nancial assets by economists Labor N is the number of workers which is a subset of the labor force some books denote L as labor this implies some unemployment by the way Unemployment rate l NL 3 The Keynsian Model In the short run Keynsian model we have the following ADCIGX7M Where AD is Aggreagete Demand I is investment G is government purchases X is exports M is im ports In equilibrium Output Y AD Q What happens ifY g AD Y 3 AD in this model Consumption depends positively on disposable income Yquotl Y 7 T according to this model The frac tion of a marginal increase of income that is spent is called Marginal Propensity ro Consume MPC in the principles classes the consumption function followed the form C C0 M PC 96 Y Investment I depends negatively on interest rates R However interest rates are not the only factor affecting investment Can you think of something else Government purchases G are exogenous determined outside the system and do not include transfer payments treated as negative taxes Any change in government purchases are part of scal policy Net Exports NX are exogenous as well in the principles class Towards the end of lOOb we are going to look at the international sector and make imports and exports endogenous They will depend on the exchange rate and imports will also depend on domestic income Equilibrium is reached when YCIGXM or as it is stated above YAD This is the Keynsian cross model Short term model and the intersection of the 45 degree line and the AD line will determine the equilibrium point This is the aggregate expediture approach Where you put on the horizontal axis aggregate output and on the vertical axis planned aggregate expenditure AE CIG Example Without external sector 0 10075Y 7 T 1100 GT20 In this example it does not matter What taxes are since they are transfered back by the government spend ing Such that YCST GT Adjustments Adjustments in the shortterm Keynsian cross model occur though changes in output Y because of inventory changes Think about GM producing 500 SUV s one year and selling only 300 they are going to have 200 in their inventory so production is going to slow down because there in no need to produce as much as during the previous year Adjustments in the longrun occur through changes in the price levels and wages leaving the economy at the potential GDP This is going to be generalized in this class with in ation and unemployment Fiscal and Monetary policy Fiscal policy is changes in government spending and taxes to achieve macroeconomic goals Monetary policy is changes in the money supply or shortterm interest rates in order to achieve the same goals References 1 Karl E Case and Ray C Fair Principles of Economics Prentice Hall 7th edition 2004


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