Macroeconomics Exam 1

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3 basic questions facing all economic systems

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1. what gets produced?

2. how is it produced?

3. who gets it(how to distribute)?

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command economy

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and economy in which a central government either directly or indirectly sets output targets, incomes and prices

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laissez-faire economy

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-free market

-an economy in which individual people and firms pursue their own self-interest w/out any central direction or regulation

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market

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the institution through which buyers and sellers interact and engage in exchange

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price theory

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Ina free market system, the basic economic questions are answered without thehelp of a central government plan or directives. This is what the “free” infree market means—the system is left to operate on its own with no outsideinterference. Individuals pursuing their own self-interest will go intobusiness and produce the products and services that people want. Otherindividuals will decide whether to acquire skills; whether to work; and whetherto buy, sell, invest, or save the income that they earn.Thebasic coordinating mechanism is price

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capital

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things that are produced and then used in the production of other goods and services

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factors of production

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the inputs into the process of production

(another term for resources)

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production

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the process that transforms scarce resourses into useful goods and services

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inputs/resources

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anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants

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outputs

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goods and services of value to households

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opportunity cost

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the value of the best alternative that we give up when we make a choice or decision

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concepts of constrained choice and scarcity...

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...are central to the discipline of economics

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production possibility frontier (ppf)

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a graph that shows all the combinations of goods and services that can be produced if all of society's resources are sued efficiently

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points below and to the left of the curve

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representcombinations of capital and consumer goods that are possible for the societygiven the resources available and existing technology.

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points above and to the right of the curve

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represent combinations that can't be reached

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marginal rate of transformation (MRT)

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the slope of the production possibility frontier (ppf)

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determinants of household demand

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-price of the product

-income

-accumulated wealth

-prices of related products

-tastes and preferences

-expectations

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quantity demanded

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the amount of a product that a household would buy in a given time period if it could buy all it wanted at the current market price

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demand schedule

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a table showing how much of a given product a household would be willing to buy at difference prices

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demand curves...

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...are usually derived from demand schedules

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demand curve

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a graph illustrating how much of a given product a household would be willing to buy at different prices

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law of demand

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states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price (this means that the demand curves slope downward)

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normal goods

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goods for which demand goes up when income is higher and for which demand goes down when income is lower

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inferior goods

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goods for which demand falls when income rises

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substitutes

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goods that can serve as replacements for one another; when the price of one increase, demand for the other goes up

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perfect subsitutes

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identical products

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complements

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goods that "go together", a decrease in the price of one results in an increase in demand for the other, and vice versa

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a change in demand is not that same as...

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...a change in quantity demanded

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higher price causes...

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...lower quantity demand

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changes if determinants of demand, other than price causes...

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...a change in demand, or a shift in the entire demand curve from Da to Db

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demand shifts to the right

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demand increases

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demand shift to the right causes...

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quantity demanded to be great that it was prior to the shift for each and every price level

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change in price of a good or service leads to

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change in quantity demand (movement along the curve)

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change in income, preferences, or prices of other goods or services leads to

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change in demand (shift of curve)

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higher income decreases what?

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the demand for an inferior good

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higher income increase what?

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the demand for a normal good

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market demand

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the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service

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supply schedule

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a table showing how much of a product firms will supply at different prices

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quantity supplied

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represents the number of units of a product that a form would be willing and able to offer for sale at a particular price during a given time period

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supply curve

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a graph illustrating how much of a product a firm will supply at different prices

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law of supply

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there is a relationship between price and quantity of a good supplied

(this means that supply curves typically have positive slope)

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determinants of supply

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- price

- cost: price of required inputs (labor, capital, and land), technologies (can be used to produce the product)

- prices of related products

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change in supply is not the same as...

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...a change in quantity supplied

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when supply shifts to the right....

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...supply increases

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excess demand

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(shortage) is the condition that exists when quantity demanded exceeds quantity supplied at the current price

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when quantity demanded exceeds...

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...quantity supplied price tends to rise until equilibrium is restored

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excess supply (surplus)

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condition that exists when quantity supplied exceeds quantity demanded at the current price

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higher demand leads to...

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...higher equilibrium price and higher equilibrium quantity

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higher supply leads to...

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...lower equilibrium price and higher equilibrium quantity

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lower demand leads to...

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...lower price and lower quantity exchange

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lower supply leads to...

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...higher price and lower quantity exchanged

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relative magnitudes of change

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in supply and demand determine the outcome of market equilibrium

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when supply and demand both increase...

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...quantity will increase, but price may go up or down

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3 major concerns of macroeconomics

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- output growth

- unemployment

- inflation and deflation

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national income and product accounts

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data collected and published by the government describing the various components of national income and output in the economy

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the department of commerce

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responsible for producing and maintaining the "national income and product accounts" that keep track of GDP

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gross domestic product (GDP)

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the total market value of all final goods and services produced within a given period by factors of production located within a country

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final goods and services

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goods and services produced for final use

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intermediate goods

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goods produced by one form to use in further processing by another firm

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GDP ignores what?

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all transactions in which money or goods change hands but in which no new goods and services are produced

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gross national product (GNP)

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measures output produced by a country's citizens, regardless of where the output is porduced

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value added

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the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage

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Calculating GDP

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- the expenditure approach

- the income approach

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the expenditure approach

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a method of computing GDP that measures the amount spent on all final goods during a given period

Equation: GDP=C+I+G+(X-M)

- M=import

- X= export

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the income approach

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a method of computing GDP that measures the income - wages, rents, interest, and profits - received by all the factors of production in producing final goods

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expenditure categories

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- personal consumption expenditures (C)

- gross private domestic investment (I)

- government consumption and gross investment (G)

- net exports (EX-IM)

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personal consumption expenditures (C)

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household spending on consumer goods

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gross private domestic investment (I)

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spending by firms and households on new capital: plant =, equipment, inventory and new residential structures

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net exports (ex-im)

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net spending by the rest of the world, or exports (EX) minus imports (IM)

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durable goods

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goods that last a relatively long time, such as cars and household appliances

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nondurable goods

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goods that are used up fairly quickly, such as food and clothing

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services

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the things that we buy that do not involve the production of physical things, such as legal and medical services and education

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investment

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refers to the purchase of new capital

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gross private domestic investment

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- total investment by the private sector

- includes the purchase of new housing by the private (or non-government) sector

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nonresidential investment

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includes expenditures by firms for machines, tools, plants and so on

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residential investment

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includes expenditures by household and firms on new houses and apartment buildings

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change in inventories

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computes the amount by which firms' inventories change during a give period (inventories are the goods that firms produce now but intend to sell later)

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gross investment

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the total value of all newly produced capital goods (plant, equipment, housing and inventory) produced in a given period

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depreciation

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the amount by which an asset's value falls in a given period

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net investment

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equals gross investment minus depreciation

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capital (end of period) =

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capital (beginning of period) + net investment

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government consumption and gross investment (G)

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counts expenditures by federal, state, and local governments for final goods and services

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net exports (ex-im)

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the difference between exports (sales to foreigners of US produced goods and services) and imports (US purchases of goods and services from abroad)

**can be negative or positive

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nominal GDP

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GDP measured in current dollars, or the current prices we pay for things

- includes all components of GDP valued at their current prices

- when a variable is measured in current dollars

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weight

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the importance attached to an item within a group of items

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base year

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the year chosen for the weights in a fixed-weight procedure

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fixed-weight procedure

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uses weights from a given base year

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underground economy

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the part of an economy is which transactions take place in which income is generated that is unreported and therefore not counted in GDP

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per capital GDP/GNP

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measures a country's GDP or GNP divided by its population

- per capita GDP is a better measure of well-being for the average person that its total GDP or GNP

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measuring unemployment

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- employed: any person 16+ yrs who work for pay

- unemployed: a person 16+ yrs who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks

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not in the labor force

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a person who is not looking for because he or she does not want a job or has given up looking

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labor force

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the number of people employed plus the number of unemployed

labor force=employed+unemployed

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population=

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labor force + not in labor force

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unemployment rate

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the ratio of the number of people unemployed to the total number of people in the labor force

=unemployed/employed+unemployed

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labor force participation rate

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the ratio of the labor force to the total population 16yrs old or older

=labor force/population

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discouraged-worker effect

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the decline in the measure unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force

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3 types of unemployment

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- frictional unemployment

- structural unemployment

- cyclical unemployment

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frictional unemployment

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the portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill-matching problems

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structural unemployment

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the portion of unemployment that is due to changes in the structure of the economy that results in a significant loss of jobs in certain industries

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natural rate of unemployment

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the unemployment rate that occurs as a normal part of the functioning of the economy. sometimes taken as the sum of the frictional unemployment rate and the structural unemployment rate

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cyclical unemployment

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unemployment that is above frictional plus structural unemployment

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consumer price index (CPI)

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a price index is computed each month by the bureau of labor statistics using a bundle that is meant to represent the "market basket" purchased monthly by the typical urban consumer

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producer price indexes (PPIs)

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measures of prices that producers receive for products at all stages in the production process

- fka wholesale price indexes

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base year

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the year chosen for the weights in a fixed-weight procedure

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fixed-weight procedure

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a procedure that uses weights from a given base year