ECON 2020 Macroeconomics Final Review (Coppock)

Five foundations of economics

Incentives, Trade-offs, Opportunity Cost, Marginal Thinking, and Trade Creates Value

Positive Statement

Can be proven or validated

Normative statement

cannot be tested or validated; a question of what should be, not what is

Ceteris Paribus

the process of examining a change in one variable while holding the rest constant

Endogenous factors

factors we know about and can control

Exogenous factors

factors outside of our control

Production Possibilities Frontier (PPF)

a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently; any point between the frontier curve and the axis represents an inefficient use a resources

Law of Increasing Relative Cost

the opportunity cost of producing a good rises as a society produces more of it

Absolute Advantage

ability to produce more than a competitor with the same resources

Comparative Advantage

ability to produce a good at a lower cost than another producer

Consumer Goods

produced for present consumption

Capital Goods

help produce other valuable goods and services in the future

Competitive Markets

markets in which there are so many buyers and sellers that each has only a small impact on the market price and output. In fact, the impact is so small it's negligible

Imperfect Markets

markets in which either buyers or sellers have an influence on the market price

Law of Demand

all other things being equal, the quantity demanded falls when the price rises, and the quantity demanded rises when the price falls

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded

Demand Curve

a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices

Market Demand

the sum of all the individual quantities demanded by each buyer in a market at each price

Shift Demand Curve Left

Income falls (demand for a normal good)

Shift Demand Curve Left

Income rises ( demand for an inferior good)

Shift Demand Curve Left

The price of a substitute good falls

Shift Demand Curve Left

The price of a complementary good rises

Shift Demand Curve Left

The good falls out of style

Shift Demand Curve Left

There is a belief that the future price of the good will decline

Shift Demand Curve Left

The number of buyers in the market falls

Shift Demand Curve Right

Income rises (demand for a normal good)

Shift Demand Curve Right

Income falls (demand for an inferior good)

Shift Demand Curve Right

The price of a substitute good rises

Shift Demand Curve Right

The price of a complementary good falls

Shift Demand Curve Right

The good is currently in style

Shift Demand Curve Right

There is a belief that the future price of the good will rise

Shift Demand Curve Right

The number of buyers in the market increases

Normal Good

Something purchased out of choice

Inferior Good

Something purchased out of necessity

Complements

two goods that are used together; prices and quantity are directly related

Substitutes

two goods that are used in place of each other; prices and quantity are inversely related

Quantity Supplied

the amount of a good or service that producers are willing and able to sell at the current price

Law of Supply

All other things being equal, the quantity supplied increases when the price rises, and the quantity supplied falls when the price falls

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices

Market Supply

the sum of the quantities supplied by each seller in the market at each price

Price Change

does not cause a shift in supply; causes movement along the supply curve but does not shift it

Shift Supply Curve Left

The cost of an input rises

Shift Supply Curve Left

Business taxes increase or subsidies decrease

Shift Supply Curve Left

The number of sellers decreases

Shift Supply Curve Left

The price of the product is anticipated to rise in the future

Shift Supply Curve Right

The cost of input falls

Shift Supply Curve Right

Business taxes decrease or subsidies increase

Shift Supply Curve Right

The number of sellers increases

Shift Supply Curve Right

The price of the product is expected to fall in the future

Shift Supply Curve Right

Business deploys more efficient technology

Inputs

resources used in the production process; can include workers, equipment, raw materials, buildings, and capital

Equilibrium

where the demand and supply curves intersect

Equilibrium Price

price where the quantity supplied equals the quantity demanded

Equilibrium Quantity

quantity supplied equals the quantity demanded

Law of Supply and Demand

market prices adjust to bring the quantity supplied and the quantity demanded into balance

Shortage

Quantity supplied is less than the quantity demanded

Surplus

Excess supply , occurs when the quantity supplied is greater than the quantity demanded

Gross Domestic Product (GDP)

the market value of all final goods and services produced within a nation during a specific time period—usually one year; the primary measure of a nation's output but is also used to measure a nations income; used to measure economic growth

Per Capita GDP

GDP per person

Inflation

the growth in the overall level of prices in an economy; can cause GDP to rise even if there is no change in the quantity of goods and services produced

Real GDP

GDP adjusted for changes in prices; used whenever GDP is being evaluated over time

Economic Growth

measured as the percentage change in real per capita GDP; starts with GDP data but then adjusts for both population growth and inflation

Recessions

short-term economic downturns that typically last 6-18 months; cause income levels to fall and many individuals lose their jobs

Great Recession

US recession lasting from December 2007 to June 2009

Business Cycles

short-run fluctuations in economic activity

Economic Expansion

a phase of the business cycle during which the economy is growing faster than usual

Economic Contraction

a phase of the business cycle during which the economy is growing more slowly than usual

Uses of GDP

To describe a short-run window of data, often to predict economic expansion or contraction; Show living standards; Economic growth rates

Services

the outputs that provide benefits without the production of a tangible product

Intermediate Goods

goods that firms repackage or bundle with other goods for sale at a later stage

Final Goods

goods that are sold to final users

Gross National Product (GNP)

the output produced by workers and resources owned by residents of the nation

Not Included in GDP

Sales of assets such as stocks and bonds; something that was included in a past GDP (used car that was once a new car); transfer payments (welfare)

GDP =

Consumption + Investment + Gov't Spending + Net Exports

or

C + I + GS + NX

Consumption

the purchase of final goods and services by households, with the exception of new housing; Services are usually a significant portion

Non-durable consumption

goods consumed over a short period of time

Durable Consumption

goods consumed over a long period of time; consumers tend to purchase more of these type of goods when the economy is strong

Investment

the process of using resources to create or buy new capital; private spending on tools, plant, and equipment used to produce future output; think macro and micro here. Purchasing a house is considered investment

Government Spending (GS)

spending by all levels of government on final goods and services; Gov't salaries considered part of GDP

Net Exports (NX)

exports minus imports of final goods and services; typically negative for US; negative is not necessarily bad

Nominal GDP

GDP calculated from current prices; add the actual prices of goods and services throughout the economy

Price level

an index of the average prices of goods and services throughout the economy; goes up when prices generally rise and falls when prices generally fall

GDP Deflator

includes the prices of the final goods and services counted in GDP

To compute real GDP

(Nominal GDP/Price level)*100

Calculating Real GDP Growth Rate for Year X=

(GDPx-GDPy)/GDPy *100

y = base year

use real GDP

Calculating Nominal GDP Growth=

Growth of Real GDP + growth of price level

% Change in Nominal GDP=

% change in real GDP + % change in price level

Shortcomings of GDP

Non-market goods; Underground Economy (Black Market); Quality of the Environment; Leisure Time not included/measured

Underground Economy (Black Market)

transactions not reported to the government and subsequently not taxed; some of the transactions are legal and some aren't (legal tips for waitstaff)

Non-market goods

goods and serviced that are produced but not sold; (Service example washing own car or doing dishes)

Leisure Time

how long the workweeks are in the respective GDPs

Unemployment

occurs when a worker who is not currently employed is searching for a job without success

Unemployment Rate (u)

the percentage of the labor force that is unemployed; (#unemployed/labor force)*100

Three types of unemployment

Structural, frictional, and cyclical

Structural Unemployment

unemployment caused by changes in the industrial (structure) makeup of the economy; often a result of Creative Destruction; Can cause transitional problems but often considered a sign of a healthy, growing economy

Ways to Reduce Structural Unemployment

Workers must often retrain, relocate, or change their expectations in some way before they can work elsewhere; Gov't can enact policies such as establishing job training programs and relocation subsidies

Frictional Unemployment

unemployment caused by delays in matching available jobs to workers; government regulations on hiring and firing contribute;

Ways to Reduce Frictional Unemployment

Information availability (INTERNET); less higher and firing regulation; a level of unemployment insurance that does not create dependence

Unemployment Insurance

a government program that reduces the hardship of joblessness by guaranteeing that unemployed workers receive a percentage of their former income while unemployed; cushions the harshness of getting laid off; can help to contain macro econ problems from spreading (laid off workers cannot purchase goods and services creating a panic); Think rotunda principle INCENTIVES regarding impact