Hcc Macro Exam 2

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functional distribution of income

Back 1

income distributed in accordance with the 4 figures of production. it's based upon who EARNED it. the proportion of income going to employees, landowners and owners of capital

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personal distribution

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who received the generated national income among the households (125 million). Based upon who RECIEVED it (includes unemployment compensation, transfer payments, income taxes, social security, etc.)

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durable goods (11%)

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goods lasting 3 or more years (cars, washing machines, etc.)

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non-durable goods (29%)

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goods lasting less than 3 years (food, clothes, gasoline)

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services (60%)

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intangible things like sports players (entertainment), lawyers, cosmetic surgery

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plant

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basic unit of production

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firm

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business that runs/owns the plant(s)

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3 kinds of firms

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1. horizontal firms: multi-plant; making the same products
2. vertical firms: multi-plant firm controlling one or more stages in the production process (ex: Exon Mobile controls all stages of producing gasoline)
3. conglomerate firms: multi-plant firm producing different products (Ex: GM)

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industry

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number of firms producing the same product(s) Ex: Auto Industry of the GM firm

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legal forms of business organization

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1. sole proprietorship
2. partnership
3. corporation

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sole proprietorship

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1 owner, owning all assets of the business and the profits generated by it. They assume complete responsibility for any of its liabilities or debts
ADVANTAGES: complete control, receive all income generated by the business
DISADVANTAGES: unlimited liability

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partnership

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2 or more people share ownership of a single business
ADVANTAGE: ability to raise funds may be increased, profits flow directly to to partners
DISADVANTAGE: unlimited liabilities, profits have to be shared, disagreements could emerge

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corporation

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a legal creation that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sure and be sued, and perform the functions of any other type of enterprise. It sells stocks (ownership shares) to raise funds but is legally distinct and separate from the individual stockholders.
ADVANTAGES: limited liabilities (ex: if something bad happens to Microsoft, sll you’ll lose is your stock in the corporation) DISADVANTAGES: double taxation (once at the corporate level, once at the personal level)

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principal-agent problem

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separation of ownership and control; one person, the principal, employs an agent (sales manager) to perform tasks on his behalf but he/she can't ensure that the agent always performs them in precisely the way the principal would like
*the incentives of the agent may differ from those of the principal

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4 economic functions of gov'nt. (public sector)

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1. Provides the legal framework: gov’nt. has to protect private property (and rights), Enforce contracts, patents, copyrights, regulation to a certain extent (can’t have too much power), provides goods and services.
2. Maintain competition: prevents monopoly emergence
3. Redistributing income: makes sure those who are unable to contribute (disabled, elderly, unemployed) to receive income, transfer payments, minimum wages, farmer subsidies
4 stabilization policies (stimulus package)

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externality

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a benefit or cost from production or consumption, accruing without compensation to nonbuyers and nonsellers of the product

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external (spillover) benefit

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benefit obtained without compensation by 3rd parties from the production or consumption of sellers or buyers. Refers ONLY to 3rd part NOT part of the market transaction EX: education, flu shots

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external (spillover) cost

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cost imposed on 3rd party by the production or consumption of sellers/buyers. EX: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sport fishers…pollution.

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public goods

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that everyone can simultaneously consume and from which no one can be excluded, even if they don’t pay. Can create free-loaders. EX: parks, national defense, street lights

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non-rivalry public goods

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one person’s consumption of a good doesn’t preclude consumption of the good by others

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non-excludable public goods

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there is no effective way of excluding individuals from the benefit of the good once it comes into existence

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private goods

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: goods that people individually buy and consume and that private firms can profitably provide because they keep people who don’t pay from receiving the benefits

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rivalry (private goods)

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if one person buys and consumes a product, it is no longer available for another person to buy or consume it

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excludability

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sellers can keep people who don’t pay for a product from obtaining its benefits. Creates free-loaders

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federal part of government finance

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fmajor source of Revenues (PIT, SST, CIT), Expenditures (income security, health, national defense, interest)

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3 parts of Government Finance

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1. federal
2. state
3. local

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state part of government finance

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major source of Sales Tax*, State Income Tax, Education

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Local part of Government Finance

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major source of Property Taxes, Education

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expectations

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anticipation of the future economy

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shocks

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when the demand (and sometimes supply) has changed in a way that individuals and firms were not expecting (demand and supply shocks)

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demand shock

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unexpected changes in the demand for G & S

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positive demand shock

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refers to a situation in which demand turns out to be higher than expected

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negative demand shock

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refers to a situation in which demand turns out to be lower than expected

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supply shock

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unexpected changes in the supply of G & S

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positive supply shock

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refers to a situation in which supply turns out to be higher than expected

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negative supply shock

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refers to situation in which supply turns out to be lower than expected

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very short run (immediate)

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during a negative demand shock, input and output prices that are completely inflexible (sticky) and must be dealt with by government policy within days, weeks, or months. Changes in output and employment absorbs the shocks.

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short run (as long as 10 years)

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during a negative demand shock, input prices are fixed and output prices are flexible. Both input fixed prices and output price changes absorb shocks.

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long run (over 10 years)

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prices are completely flexible (both input and output). Price changes absorb the shocks

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Gross Domestic Product (GDP)

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a measure of the market or money value of all final goods and services produced by the economy in a given year (GDP = total output X market prices)

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nominal GDP (NGDP)

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GDP measured in terms of the price level at the time of measurement; GDP isn’t adjusted for inflation. (NGDP = # of units of total output X market price per unit)

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Price Index (PI)

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converts the prices back to the base year in order to keep prices constant. PI = (Price in given year/ Price in base year) X 100

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real GDP (RGDP)

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GDP that has been deflated or inflated to reflect changes in the price level in a base period. RGDP = (NGDP / PI) X 100

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net exports

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Income – Exports. Currently -4% of U.S. GDP.

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Gross Private Domestic Investment (GDPI)

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made up of machines, all construction (including residential), and change in inventories. Gross Investment can never be negative.

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depreciation

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(consumption of fixed capital, CFC) annual charge estimating the amount of capital used in each yearly production

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net (new) investment

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a measure of a company’s investment in capital; Net Investment = capital expenditures - depreciation
a. If GDPI > depreciation → net investment is positive, GDP increase
b. if GDPI < depreciation → net investment is negative, GDP decrease
c. if GDPI = depreciation → net investment remains the same, stagnates

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expenditure components of GDP (who buys GDP)

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): Personal Consumption (70%) + Gross Private Investment (15%) + Gov’nt. Purchases (25%) + Net Exports (-10%) = GDP

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consumer price index (CPI)

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compares the price of a market basket of consumer goods and services in one period with the price of the same market basket in a base period; it’s a way to measure inflation

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GDP price index

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it more up to date determinant of inflation; it measures the total value of all the products in a country over a specific period of time. It focuses more on new products that are produced from start to finish in the economy. It is much broader scope than CPI because in addition to looking at how consumers have changed their buying habits and the changes in prices looks at all the goods produced in a time period and the market value of these goods.

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social accounts aside from GDP

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a. Net Domestic Product (NDP)
b. National Income (NI)
c. Personal Income (PI)
d. Disposable Income (DI)

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Net Domestic Product (NDP)

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NDP = GDP - depreciation (CFC)

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National Income (NI)

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income earned by all Americans, both here and overseas
NI = NDP + Net Foreign Factor Income (NFFI)

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Personal Income (PI)

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incomes that are partially earned and received
PI = NI - Taxes on Production and Imports (TPI)

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Disposable Income (DI)

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this is either spent or saved
PI - Personal Taxes

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4 shortcomings of GDP

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1. doesn’t take into account non-market transactions: (like leisure) something that is produced but not bought into the market to sell (except for farmers)
2. Quality isn’t taken into account
3. Environment (pollution) isn’t taken into account
4. Subterranean economy (10-30%): illegal, unreported

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business cycle

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short-run fluctuations caused by shocks (negative and positive changes in demand and supply) or changes in spending; the ups and downs of economic activity over periods of time

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4 phases of the business cycle

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1. trough
2. recession
3. expansion
4. peak

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trough (business cycle)

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the very bottom of each cycle (primary phase) resulting from a recession

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recession

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a period of decline in total output, income, and employment lasting 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. cyclical unemployment results

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expansion (recovery)

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increasing to the peak from the trough; a period in which real GDP, income, and employment rise

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peak (business cycle)

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the highest point of the business cycle when full employment is achieved.

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3 types of unemployment

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a. frictional: (match) unemployment associated with people searching for jobs or waiting to take jobs in the near future; “between jobs” moving voluntarily from one job to another. This type of unemployment is inevitable and desirable
b. structural: (mismatch) unemployment that is associated with a mismatch b/w available jobs and the skills or locations of those unemployed. Changes in technology that alter the structure of the total demand for labor, both occupationally and geographically
c. cyclical: unemployment associated with the recessionary phase of a business cycle. When unemployment rate is greater than 5%.

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full employment

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something less than 100% employment occurs when there is no cyclical unemployment, only the usual frictional and structural unemployment at 5% producing at full potential

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actual GDP

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$14T

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potential GDP

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the level of real GDP that would occur if there was full employment (on the curve)

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GDP gap

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GDP gap = potential GDP – actual GDP
-if actual > potential → positive GDP gap
-if actual < potential → negative GDP gap

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Okun's Law

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for every 1% of cyclical unemployment (above the natural rate of unemployment), the GDP gap increases by 2% EX: current GDP gap = 8%

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inflation

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a rise in the general level of prices in an economy; it reduces the purchasing power of money ($1 will buy fewer goods than it did before)

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2 types of inflation

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1. demand-pull inflation
2. cost-push inflation

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demand-pull inflation

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inflation caused by excessive spending; too much spending chasing too few goods; demand pulls prices upward

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cost-push inflation

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inflation caused by sharp rises in the cost of key resources; costs push the price level up. The major source of this is supply shocks because abrupt increases in the costs of raw materials or energy inputs have driven up per-unit production costs and thus product prices

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nominal interest rate (money)

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the percentage increase in money that a borrower pays a lender = real interest rate + inflation, i = r + inflation

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real interest rate (purchasing power)

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the percentage increase in purchasing power that a borrower pays a lender; real interest rate = nominal interest rate – inflation; r = i - pi