ECON 101 - Midterm Exam #2

(Lesson 8 Notes) What is MACROECONOMICS?

• Macroeconomics is the study of the economy as a whole (as opposed to specific markets or decisions of individual people and firms)

(Lesson 8 Notes) GDP

• How do we measure “the economy”?

• Gross Domestic Product (GDP)

(Lesson 8 Notes) GDP

• What is GDP?

• the market value of all final goods and services produced in a country in a year

  • market value: not quantities, but what output is worth at market prices

  • final goods and services: bought for use by their final user (eg. NOT intermediate goods)

  • produced: production, not sales

  • in a country: within a country’s borders

(Lesson 8 Notes) GDP

• Describe GDP over the years.

(Lesson 8 Notes) GDP

• GDP = _____ __________ = _____ ______

1. Total Production

2. Total Income

(Lesson 8 Notes) GDP = Total Production = Total Income

• Draw the CIRCULAR FLOW DIAGRAM to show how households and businesses are linked.

(Lesson 8 Notes) GDP = Total Production = Total Income

• What is the EXPENDITURE METHOD?

• add up spending on goods and services

(Lesson 8 Notes) GDP = Total Production = Total Income

• What is the INCOME METHOD?

• add up income generated by production

(Lesson 8 Notes) GDP = Total Production = Total Income

• What is the VALUE-ADDED APPROACH?

• add up additional value created in each stage of production process

(Lesson 8 Notes) Components of GDP (expenditure methods)

• Write the equation for GDP.

Y (GDP/output/income) = C (Consumption Spending) + I (Household Spending) + G (Government Spending) + NX (Net Exports)

(Lesson 8 Notes) Components of GDP (expenditure methods)

• What is CONSUMPTION SPENDING?

• household spending on goods and services

(Lesson 8 Notes) Components of GDP (expenditure methods)

• What is HOUSEHOLD SPENDING?

• firm spending on capital goods (factories, buildings, machinery, etc.) AND change in inventories (goods produced but not sold)

(Lesson 8 Notes) Components of GDP (expenditure methods)

• What is GOVERNMENT SPENDING?

• government purchases of goods and services

• doesn’t include transfer payments → government writing checks to people

(Lesson 8 Notes) Components of GDP (expenditure methods)

• What are NET EXPORTS?

• Exports - Imports (X - M)

(Lesson 8 Notes) Measuring GDP: The Value-Added Methods

• What is VALUE ADDED?

• the market value that a firm adds to a product from its origins through each intermediate stage, to its final stage

(Lesson 8 Notes) Measuring GDP: The Value-Added Methods

• Example: A Cup of Coffee, P = $1.90 → Calculate the value added using the value-added method.

(Lesson 8 Notes) Measuring GDP: The Value-Added Methods

• Example: A Cup of Coffee, P = $1.90 → Use the income method to find total value added by the coffee.

(Lesson 8 Notes) Limitations of GDP (Poll Everywhere)

• Which of the following is an example of an intermediate good?

  • stocks and bonds purchased by a business executive

  • a cellular telephone purchased by a college student

  • a wedding ring purchased by an engineer for his fiancée

  • tires purchased from Goodyear by General Motors for newly produced electric cars

• tires purchased from Goodyear by General Motors for newly produced electric cars

(Lesson 8 Notes) Limitations of GDP (Poll Everywhere)

• Which of the following transactions would add to the value of U.S. GDP?

  • You buy a used car.

  • You sell your college textbooks from last semester back to the bookstore.

  • You buy a UNC shirt from student stores that was made in Bangladesh.

  • You buy a cup of coffee from the Open Eye Cafe.

• You buy a cup of coffee from the Open Eye Cafe.

(Lesson 8 Notes) Limitations of GDP (Poll Everywhere)

• Which of the following is not a limitation of GDP as discussed in the textbook?

  • Prices do not actually measure value

  • Non-market activities are not counted

  • The value of labor is not included

  • The value of leisure is not included

  • Environmental degradation is not counted

  • The shadow economy is not counted

  • GDP ignores distribution

• The value of labor is not included

(Lesson 8 Notes) GDP

• What is GDP PER CAPITA?

• = GDP per person = GDP / population

→ This allows us to conceptualize a very large number and also compare “living standards” across countries

(Lesson 8 Notes) GDP as a Measure of Well-Being

• Is there a positive or negative correlation between GDP and average life satisfaction?

(Lesson 8 Notes) GDP as a Measure of Well-Being

• Is there a positive or negative correlation between GDP and average years of schooling?

(Lesson 8 Notes) GDP as a Measure of Well-Being

• Is there a positive or negative correlation between GDP and infant mortality?

(Lesson 8 Notes) GDP as a Measure of Well-Being

• Is there a positive or negative correlation between GDP and life expectancy at birth?

(Lesson 8 Notes) Alternative Measure of Production and Income

• What are the alternative measures?

• GDP = value of final goods and services produced IN THE US

• Gross National Product (GNP) = value of final goods and services produced BY AMERICANS

• World Happiness Index (alternative measure of well-being)

  • 3 happiest countries: Finland, Denmark, Iceland, and Sweden

  • US = 24th (down 15 places from 2 years ago)

  • 3 least happiest countries: Lebanon, Sierra Leone, and Afghanistan

(Lesson 8 Notes) Nominal vs. Real GDP

• What is NOMINAL GDP?

• Nominal GDP is the value of all final goods and services measured in current year prices.

(Lesson 8 Notes) Nominal vs. Real GDP

• What is REAL GDP?

• Real GDP is the value of all final goods and services measured in constant prices

  • Sometimes a base year (= b) will be specified

  • When calculating GDP growth between two years, we use average prices between the two years

(Lesson 8 Notes) Nominal vs. Real GDP

• Example: Barbies Sold in 2022 and 2023 → Fill out the chart calculating Nominal GDP & Real GDP.

(Lesson 8 Notes) Conceptualizing Large Numbers

• What are some ways to conceptualize large numbers?

• Evaluate per person

• Compare big numbers to the size of the economy (e.g. deficit spending or national debt as a fraction of GDP_

• Compare big numbers to their own history (e.g. measure growth rates)

• Use the rule of 70 to evaluate growth rates

(Lesson 8 Notes) The Rule of 70

• How long will it take something to double?

• 70 / g years to double

  • g = annual growth rate (eg. 2% per year)

  • eg. 70/2 = 35 years to double (2% growth rate)

(Lesson 9 Notes) The Business Cycle v. Long-Run Growth

• Describe the graph.

• doesn’t go up smoothly…

  • fluctuations = business cycle (expansion + recession (gray patches))

• over time = economic growth (upward trend)

(Lesson 9 Notes) Growth Rates (percentage change)

• How do you calculate growth rates between one year and the next?

• Growth rate b/w one year (t-1) and the next (t) =

(Lesson 9 Notes) Growth Rates (percentage change)

• What does it mean if percent change from year ago of real GDP per capita is above 0 and below 0?

• above 0 = real GDP per capital is grow

• below 0 = real GDP per capital is dipping

(Lesson 9 Notes) Economic Growth Model

• What is ECONOMIC GROWTH?

• increasing real GDP per capita (standard of living)

(Lesson 9 Notes) Economic Growth Model

• What is PRODUCTION FUNCTION?

(Lesson 9 Notes) Economic Growth Model

• What is CONSTANT RETURNS TO SCALE?

• increasing all inputs by some proportion will cause output to rise by the same proportion

(Lesson 9 Notes) Economic Growth Model

• How can we increase output?

• More labor (L) → more workers

• More physical capital (K) → equipment, buildings, factories

• More human capital (H) → knowledge/skills

• Technological progress

(Lesson 9 Notes) The Aggregate Production Function

• Draw the graph.

(Lesson 9 Notes) The Aggregate Production Function

• What is the LAW OF DIMINISHING RETURNS?

• when one input is held constant, increases in the other inputs will, at some point, begin to yield smaller and smaller increases in output

(Lesson 9 Notes) _____________ _________ is the key to economic growth.

1. Technological progress

(Lesson 9 Notes) Technological Progress

• Ideas…

• Can be freely shared

  • nonrival (one person’s consumption doesn’t reduce available amount for others)

• Do not depreciate with use (don’t wear out)

• Promote other ideas

• Can be nonexcludable (can’t prevent use)

(Lesson 9 Notes) Technological Progress

• Why do economics fail to grow?

• because of governments and institutions

(Lesson 9 Notes) Technological Progress

• What factors can encourage innovation and economic growth?

• Secure property rights

• Political stability and rule of law

• Effective (not arbitrary) regulation

• Strong R&D innovation policies

• Investment in human capital

• Investment in physical capital that embodies new ideas

• Competition and openness to trade

(Lesson 9 Notes) Technological Progress

• What factors can inhibit growth?

• Weak or insecure property rights

• Political instability, conflict, or high corruption

• Bad or unpredictable regulation (red tape)

• Poor R&D and education systems

• Underdeveloped or decaying infrastructure and capital

• Trade barriers and lack of competition

(Lesson 9 Notes) Poll Everywhere

• Which of the following is NOT counted as a part of GDP?

  • the purchase of 100 shares of AT&T stock by your grandmother

  • the purchase of a snow plough by the city of Minneapolis

  • the unsold additions to inventory at an appliances store

  • the purchase of flour by your father

• the purchase of 100 shares of AT&T stock by your grandmother

(Lesson 9 Notes) Poll Everywhere

• Which of the following accurately describes what happens to US GDP and each of its components?

  • US GDP increases by $5 million, net exports increase by $2 million, consumption increases by $2 million, and investment increases by $1 million

  • US GDP increases by $4 million, net exports increase by $2 million, consumption increases by $2 million

  • US GDP increases by $3 million, net exports decreases by $2 million, consumption increases by $2 million, and investment increases by $1 million

  • US GDP increases by $1 million, net exports decreases by $2 million, consumption increases by 2 million, and investment decreases by $1 million

  • There is no change to US GDP, net exports decreases by $2 million and consumption increases by $2 million

• US GDP increases by $5 million, net exports increase by $2 million, consumption increases by $2 million, and investment increases by $1 million

(Lesson 9 Notes) Poll Everywhere

• If Real GDP is growing at 5% per year, how many years will it take for Real GDP to double?

  • 1400 years

  • 35 years

  • 14 years

  • 3.5 years

  • It's impossible to say

• 14 years

(Lesson 9 Notes) Poll Everywhere

• Assume the US and the UK both have real GDP per capita of $50,000 today, but the RGDP per capita in the US is growing at 3% per year while in the UK it is only growing at 2% per year. How many MORE years than the US will it take for the RGDP per capita in the UK to reach $100,000.

  • 11.67

  • 14

  • 23.33

  • 35

• 11.67

(Lesson 9 Notes) Poll Everywhere

• Which of the following would NOT be considered technological change?

  • A dry cleaner buys 2 more steam presses

  • An accounting firm purchases new software that cuts the time to complete an audit in half

  • A dry cleaner adopts a more efficient and specialized production technique where they have one employee each sorting, cleaning, pressing, and organizing the garments, and one employee to deal with customers

• A dry cleaner buys 2 more steam presses

(Lesson 9 Notes) Poll Everywhere

• Based on the reading, which of the following would NOT encourage innovation and economic growth?

  • Clearly defined and enforced property rights

  • Regulations that involve large bureaucracies and red tape

  • Intellectual property laws

  • Subsidized education

  • Political stability

  • Subsidies for research and development

• Regulations that involve large bureaucracies and red tape

(Poll Everywhere: Lesson 9 Review) If US GDP is currently $27 trillion, and it were to grow at a constant rate of 1% per year, what would US GDP be after 100 years?

• $27.27 trillion

• $7303 trillion

• $1,890 trillion

• $2,727 trillion

(Poll Everywhere: Lesson 9 Review) Which of the following is consistent with a move from point A to point B?

• An increase in literacy rates Increased rates of college attendance

• Companies replacing their broken copiers

• Development of quicker copiers

• Companies buying new copiers

• Increased rates of college attendance

• Tornadoes rip through NC damaging many homes and businesses

• Companies buying new copiers

(Lesson 10 Notes: Unemployment) Why do we care about unemployment? The Economic Costs

• _____ ___ for decades → loss of ______/____/_____________ _______ ____-_____ __________

  • Men laid off in a mass layoff lose ___ years of earnings, on average (____ years when the unemployment rate is high)

1. Lower pay

2. skills

3. hope

4. discrimination against long-term unemployed

5. 1.4

6. 2.8

(Lesson 10 Notes: Unemployment) Why do we care about unemployment? The Economic Costs

• What is HYSTERESIS?

• a period of. high unemployment leads to a higher equilibrium employment rate → if unemployment spikes, it can stay high for longer

(Lesson 10 Notes: Unemployment) Why do we care about unemployment? The Economic Costs

• Explain a squeezed government budget.

• The government receives lower tax revenues but spends ore.

(Lesson 10 Notes: Unemployment) Why do we care about unemployment? The Social Costs

• What are the SOCIAL COSTS for the UNEMPLOYED?

• Less structured days, more stress and isolation

• More depression, anxiety, divorce, and poverty

• Higher risk of death, including suicide

• Permanent earnings losses and more health problems

(Lesson 10 Notes: Unemployment) Why do we care about unemployment? The Social Costs

• What are the SOCIAL COSTS for the CHILDREN OF LAID-OFF WORKERS?

• Worse academic outcomes

• Worse mental health outcomes

• Worse employment outcomes, and lower earnings as adults

(Lesson 10 Notes: Unemployment) Classifying the Population

• Who makes up the WORKING AGE POPULATION (P)?

• All people 16 years old and older who are civilians are are non-institutionalized (not in prison/military)

(Lesson 10 Notes: Unemployment) Classifying the Population

• Who makes up those NOT IN THE LABOR FORCE (NLF)?

• Not working or seeking work

(Lesson 10 Notes: Unemployment) Classifying the Population

• Who makes up those IN THE LABOR FORCE (LF)?

• # employed + # unemployed

(Lesson 10 Notes: Unemployment) Classifying the Population

• Who makes up the EMPLOYED (E)?

• Anyone with a job

(Lesson 10 Notes: Unemployment) Classifying the Population

• Who makes up the UNEMPLOYED (U)?

• Not working, but seeking work

(Lesson 10 Notes: Unemployment) Labor Force Participation Rate

• What is the LABOR FORCE PARTICIPATION RATE?

(Lesson 10 Notes: Unemployment) Labor Force Participation Rate

• What is the labor force participation rate today?

(Lesson 10 Notes: Unemployment) Employment-Population Ratio

• What is the EMPLOYMENT-POPULATION RATIO?

(Lesson 10 Notes: Unemployment) Employment-Population Ratio

• What is the employment-population ratio today?

(Lesson 10 Notes: Unemployment) Unemployment Rate

• What is the UNEMPLOYMENT RATE?

(Lesson 10 Notes: Unemployment) Unemployment Rate

• What is the unemployment rate today?

(Lesson 10 Notes: Unemployment) Unemployment Rate

• Unemployment rate varies by group…

(Lesson 10 Notes: Unemployment) Unemployment Rate

• Unemployment rate varies by country…

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What is FRICTIONAL UNEMPLOYMENT?

• unemployment due to time spent searching for a good job match

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What is STRUCTURAL UNEMPLOYMENT?

• arises from persistent mismatch between skills of workers and skills needed by employers OR from wages above the equilibrium level (excess supply of labor)

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What is CYCLICAL UNEMPLOYMENT?

• unemployment caused by recessions int he business cycle

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What is the NATURAL RATE OF UNEMPLOYMENT/EQUILIBRIUM LEVEL OF UNEMPLOYMENT?

• rate of unemployment if economy were operating at capacity; only includes frictional and structural unemployment (no cyclical unemployment)

  • @ full employment

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What are MARGINALLY ATTACHED WORKERS?

• would like to be working and has searched in the last year but not currently searching

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What are DISCOURAGED WORKERS?

• do not believe jobs are available

(Lesson 10 Notes: Unemployment) Types of Unemployment

• What does it mean to be UNDEREMPLOYED / INVOLUNTARY PART TIME?

• people who are overqualified for their job or who are working fewer jours than they would like to be working

(Lesson 10 Notes: Unemployment) Alternative Methods of Calculating Unemployment

(Lesson 10 Notes: Unemployment) Protecting Yourself from the Harmful Effects of Unemployment

• What are some methods?

• Do more job searching than you really want to do.

  • Consider the marginal benefits and marginal costs of filling out an additional application.

• Build up a nest egg.

  • Save three to six months of expenses.

• Build new skills.

• Keep an eye out for better opportunities when you’re employed.

  • Begin searching long before you think your current position emds.

• Build a strong professional network and tap into it if you become unemployed.

  • More likely to get hired if you have a referral.

• Avoid long-term unemployment.

  • Settle for Mr. Not-So-Right Job, and then keep searching for a better job.

(Lesson 10 Notes: Unemployment) Poll Everywhere

• According to the textbook, which of the following is NOT a reason that we have seen large increases in female LFP over time?

  • A decrease in infant mortality

  • Increased access to birth control

  • Change in societal norms

  • New household production technology

  • Anti-discrimination laws

• A decrease in infant mortality

(Lesson 10 Notes: Unemployment) Poll Everywhere

• Barbieland, a small country, has a working age population of 250,000. 120,500 people are employed, and 4,050 people do not have jobs but are looking for work. Calculate the unemployment rate in Barbieland.

  • 1.62%

  • 3.25%

  • 3.36%

  • 48.2%

  • 49.82%

• 3.25%

(Lesson 10 Notes: Unemployment) Lesson 10 HW

• Frictional, Structural Unemployment, or Neither?

  1. _____ unemployment includes those involved in job search.

  2. ____ unemployment can be caused by a minimum wage.

  3. ____ unemployment includes cyclical unemployment.

  4. ____ unemployment is affected by the pace of technological progress.

  5. _____ unemployment can be caused by efficiency wages.

  6. _____ unemployment arises from a labor surplus in a given market.

  7. _____ unemployment can result from new people entering the labor force.

  8. _____ unemployment typical declines in times of high economic growth.

  9. _____ unemployment can arise from the actions of labor unions,

1. Frictional

2. Structural

3. Neither

4. Structural

5. Structural

6. Structural

7. Frictional

8. Neither

9. Structural

(Lesson 10 Notes: Unemployment) Poll Everywhere

• Which of the following statements is FALSE?

  • A full-time student would be counted as being out of the labor force.

  • An economics major who has just graduated from college, but has not yet found a job is frictionally unemployed.

  • Jen's company had to lay her off due to a downturn in sales. She is cyclically unemployed.

  • As steel plants shut down in Pennsylvania, the workers become structurally unemployed.

  • A housewife is unemployed.

• A housewife is unemployed.

(Lesson 10 Notes: Unemployment) Poll Everywhere

• Eagleton has a total population of 1,000 people. 25% of that population is not of working age, and 80 of the total population are unemployed. How many people are in the labor force?

  • 895

  • 750

  • 670

  • 330

  • Need more information

    
    

• Need more information

(Lesson 10 Notes: Unemployment) Poll Everywhere

• If the working age population in Pawnee, Indiana is 45,000, the number of people with jobs is 30,000, and the number of people who aren't working but have been submitting applications is 2,000, by how many percentage points will Leslie's soda tax increase the unemployment rate?

  • 6.25 percentage points

  • .0625 percentage points

  • 0.3 percentage points

  • 0.003 percentage points

  • .2 percentage points.

  • 002 percentage points.

• 0.3 percentage points

(Lesson 11 Notes: Inflation, Money, and Banking) Inflation

• What is INFLATION?

• a generalized rise (not a rise in price of a single good/service) in the overall level of prices (decline in the purchasing power of money / a rise in the cost of living)

(Lesson 11 Notes: Inflation, Money, and Banking) Inflation

• What is INFLATION RATE?

(Lesson 11 Notes: Inflation, Money, and Banking) Measures of the Price Level

• What are the measures of the price level?

• CPI

• Personal Consumption Expenditure Deflator (PCE deflator)

• GDP Deflator

• Producer Price Index (PPI)

(Lesson 11 Notes: Inflation, Money, and Banking) Measures of the Price Level

• What is the PERSONAL CONSUMPTION EXPENDITURE DEFLATOR (PCE DEFLATOR)?

• used by the Federal Reserve

• similar to CPI with continuously updated basket

(Lesson 11 Notes: Inflation, Money, and Banking) Measures of the Price Level

• What is the PRODUCER PRICE INDEX (PPI)?

• measures prices producers face

• can be an early warning of an increase in consumer prices

(Lesson 11 Notes: Inflation, Money, and Banking) Consumer Price Index (CPI)

• What is the CONSUMER PRICE INDEX (CPI)?

• measures the cost of purchasing a market basket of a typical household’s consumption, where the cost is normalized so that it is equal to 100 int he selected base year

(Lesson 11 Notes: Inflation, Money, and Banking) Consumer Price Index (CPI)

• How do you solve for CPI?

(Lesson 11 Notes: Inflation, Money, and Banking) Consumer Price Index (CPI)

• What do the different values of CPI mean?

• = 100 in the base year

• > 100 if prices in t > prices in b

• < 100 if prices in t < prices in b

(Lesson 11 Notes: Inflation, Money, and Banking) Consumer Price Index (CPI)

• What’s in the CPI Basket?

(Lesson 11 Notes: Inflation, Money, and Banking) Consumer Price Index (CPI)

• Example:

(Lesson 11 Notes: Inflation, Money, and Banking) Consumer Price Index (CPI)

• Example: Calculating Inflation Using CPI

(Lesson 11 Notes: Inflation, Money, and Banking) CPI Challenges

• What do CPI challenges lead to?

• lead CPI to slightly overstate inflation consumers face

(Lesson 11 Notes: Inflation, Money, and Banking) CPI Challenges

• What is SUBSTITUTION BIAS?

• people switch away from things that get pricier

• Ex> beef prices jump 20%, so you buy chicken instead

(Lesson 11 Notes: Inflation, Money, and Banking) CPI Challenges

• What is QUALITY BIAS?

• higher price can mean a better product

• Ex> this year’s laptop costs $100 more, but its battery lasts 2x longer