Ec 202 Exam 2 NCSU

Microeconomics

The study of how households and firms make decisions and how they interact in markets

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period

Final Goods

Goods intended for the end user

Intermediate Goods

Goods used as components or ingredients in the production of other goods

Business Capital

Business structures, equipment, and intellectual property products

Residential Capital

Landlord's apartment building; homeowner's personal residence

Inventory Accumulations

Goods produced but not yet sold

Nominal GDP

The production of goods and services valued at current prices to value the economy's production of goods and services

Real GDP

The production of goods and services valued at constant prices (base year prices) to value the economy's production

GDP Deflator

A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Inflation

the economy's overall price level is rising

Inflation Rate

Percentage change in some measure of the price level from one period to the next

Consumer Price Index

A measure of the overall cost of the goods and services bought by a typical consumer

Producer Price Index (PPI)

Measures the change in prices that domestic producers receive for their goods and services

Core CPI

Measures of the overall cost of consumer goods and services, excluding food and energy prices. It is used to provide a more stable, long-term view of inflation

Financial System

Group of institutions in the economy that help match one person's savings (supply) with another person's investment (borrow)

Financial Institutions

Institutions through which savers can provide funds to borrowers

Financial Market

Financial institutions through which savers can directly provide funds to borrowers

National Savings (S)

Total income in the economy that remains after paying for consumption and government purchases

Discouraged Workers

Individuals who would like to work but have given up looking for a job

How is GDP's income and expenditure related?

Income = Expenditure

Components of GDP

Consumption (C)

Investment (I)

Government Purchases (G)

Net Exports (NX)

Consumption (C)

Spending by household on goods and services (excludes mortgage)

Investment (I)

Spending on business capital, residential capital, and inventories (excludes stocks and bonds)

Government Purchases (G)

Spending on goods and services by local, state, and federal government at all levels (excludes transfer payments)

Net Exports (NX)

Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Net Exports (NX) =

Exports - Imports

GDP (open economy) Formula

Y = C + I + G + NX

GDP (closed economy) Formula

Y + C + I + G

Real GDP

Uses base year prices to value economies production (corrected for inflation)

Nominal GDP

Uses current year prices to value economies production (NOT corrected for inflation)

Base year is when

Nominal GDP = Real GDP

GDP Deflator =

(Nominal GDP / Real GDP) * 100

Inflation rate in yr 2 =

[(GDP deflator in yr 2 - GDP deflator in yr 1) / GDP deflator in yr 1] * 100

CPI calculation steps

1. fix basket (given)

2. find the prices (given)

3. compute the baskets cost (total cost)

4. choose a base year (given) and compute the index (use CPI Formula)

5. Compute the inflation rate (using inflation rate in yr 2)

Problems in measuring the cost of living (CPI overstates increases in the cost of living)

Substitution Bias, introduction of new goods, and unmeasured quality change

How is the GDP deflator and CPI related on the graph?

Measures of inflation that generally move together but diverge a bit

Why does the GDP deflator and CPI diverge on the graph

imported consumer goods (only CPI), capital goods (only GDP deflator), the basket (CPI= all, GDP= domestic only

Nominal interest rate

Rate of growth in the dollar value of a deposit or debt

Real interest rate

Rate of growth in the purchasing power of a deposit or debt

Real interest rate (r) =

nominal interest rate - inflation (i-pi)

Financial Institutions main goal

Directing the resources of savers into the hands of borrowers

Financial Markets

Savers and borrowers meet directly, including the bond market and the stock market

The bond market

Debt finance; a certificate of indebtedness

The stock market

Equity Finance; claim to partial ownership in a firm and a portion of their profits

Financial Intermediaries

Savers and borrowers meet indirectly, including banks and mutual funds

Bank primary goals

Take deposits (from savers) and use to make loans (to borrowers)

Mutual Funds

Investors put their money together --> professional uses to buy various securities

Private Savings

Income remaining after households pay their taxes and consumption

Private Saving =

Y - T - C

Disposable income =

Y - T

Public Saving

Tax revenue that the government has left after paying for its spending

Public Saving =

T - G

National Savings =

S = (Y - T - C) + (T - G)

In national savings it is true that

NX = 0 (in a closed economy.

S = I

Budget Surplus

= + public savings = (T - G)

Budget Deficit

= - public savings = (G - T)

The market for loanable funds

The market in which those who want to save supply funds and those who want to borrow to invest demand funds

Supply and demand for loanable

Only uses one interest rate (real interest rate) for both the return to saving and the cost of borrowing

The supply of loanable funds

Savings (national, private, and public)

The demand for loanable funds

Investments (firms and households that want to borrow for investments)

Shortage of loanable funds

real interest rate < equilibrium (Qs < Qd) --> need to increase r

Surplus of loanable funds

real interest rate > equilibrium (Qs > Qd) --> need to decrease r

Employed

includes full-time, part-time, paid employees, self-employed, unpaid in the family business, temp absent

Unemployed

People not working, are available for work, have looked for work during the previous 4 weeks, and those waiting to be recalled to a job after a temp layoff

Not in the labor force

Full time students, homemakers, and retirees

Unemployment rate =

(# of unemployed / labor force) * 100

Adult population =

LF + Not in Labor Force

Labor-Force Participation Rate (LFPR) =

(100 * LF) / Adult population

Frictional unemployment

takes time to search for best fit, short term

Structural employment

Less jobs available in some labor markets to provide a job for everyone, long term

Job search sectoral shift

changes in the composition of demand across industries or regions of the country

Job search public policy

government employment agencies (info about vacancies) and public training programs

Unemployment Insurance (UI)

A government program that partially protects workers' incomes when they become unemployed (laid off only)

Reasons for structural unemployment

Minimum-Wage Laws

Unions

Efficiency Wages

Minimum wage laws

Surplus of labor = Ls - L

Unions

Worker association that bargains with employers over wages, benefits, and working conditions by exerting their market power

Theory of Efficiency Wages

Firms voluntarily pay above equilibrium wages to boost worker productivity