Macroeconomics Final Exam Notes

We might be cooked...

Welfare Economics

The study of how the allocation of resources affects economic well-being, including the benefits buyers and sellers receive from market transactions and how to maximize those benefits.

Equilibrium

A state in a market where supply equals demand, maximizing the total benefit of both buyers and sellers.

Consumer Surplus

The benefit buyers receive from a good as they perceive it, represented as the area below the demand curve and above the price.

Effect of Lower Price on Consumer Surplus

A lower price raises consumer surplus, particularly increasing the surplus for existing buyers.

Producer Surplus

The amount a seller is paid for a good minus the seller’s cost of providing it.

Total Surplus

Calculated as total willingness to buy minus total cost.

Efficiency in Economics

The property of resource allocation that maximizes total surplus received by all members of society.

Equality in Economics

The property of distributing economic prosperity uniformly among all members of society.

Market Failures

Include situations like market power (e.g., monopolies) and externalities (e.g., pollution) that lead to inefficiencies.

Invisible Hand

The concept that individuals pursuing their own interest can lead to positive social outcomes.

Tax Burden

The distribution of tax effects between producers and consumers, determined by their elasticities.

Deadweight Loss (DWL)

The fall in total surplus that results from a market distortion such as a tax.

Impact of Elastic Supply Curve on DWL

More elastic supply curves result in larger deadweight loss from taxation.

Impact of Elastic Demand Curve on DWL

More elastic demand curves result in larger deadweight loss from taxation.

GDP

Gross Domestic Product, which measures the market value of all items produced and services provided within a country.

Formula for GDP

GDP = Consumption + Investment + Government Spending + Net Exports.

Real GDP

Removes inflation from GDP calculations, valuing goods and services at constant prices.

GDP Deflator

The ratio of nominal GDP to real GDP multiplied by 100, showing price level changes relative to base year prices.

CPI (Consumer Price Index)

An index that measures the average change in prices paid by consumers for goods and services.

Nominal Interest Rate

The interest rate as typically reported, not adjusted for inflation.

Time Machine Equation

A formula used to convert amounts from past dollars to today’s dollars by adjusting for inflation.

Foreign Direct Investment

Capital investment that is owned and operated by a foreign entity.

Foreign Portfolio Investment

Investment financed with foreign money but operated by domestic residents.

Law of Diminishing Returns

A principle stating that benefits gained will represent smaller gains as more resources are invested.

Importance of Productivity

Key determinant of living standards; growth in productivity leads to higher living standards.

R&D (Research and Development)

Activities that help drive innovation, leading to productivity improvements and economic growth.

Economic Welfare Components

Includes consumer surplus for buyers, producer surplus for sellers, and tax revenue for the government.

Tax Wedge Definition

The difference between the price paid by buyers and the price received by sellers due to taxation.