Macro Exam 2 FlashCards

Imports

Goods and services bought domestically but produced in other countries.

Exports

Goods and services produced domestically but sold in other countries.

Net exports

Exports minus imports.

Opportunity cost

The cost of forgoing the next best alternative when making a decision.

Comparative advantage

The ability of a country to produce a good at a lower opportunity cost than another country.

Specialization

The process where countries focus on producing goods where they have a comparative advantage.

Free Trade

Trade between countries that is without government restrictions.

Tariffs

Taxes imposed by a government on imports.

Import quotas

Numerical limits imposed unilaterally upon countries on the quantity of a good imported by one country from another country.

Effects of a tariff on ethanol

U.S. production rises from 3.0 billion to 4.5 billion gallons; U.S. consumption falls from 9.0 billion to 7.5 billion gallons; imports are reduced from 6.0 billion to 3.0 billion gallons.

Winners from international trade

Consumers in China and the U.S. who pay lower prices for wheat and smartphones; Chinese smartphone producers and their workers; U.S. wheat producers and their workers.

Losers from international trade

Chinese wheat producers and their workers due to less demand for their product.

Protectionist measures

Policies like tariffs and import quotas that governments implement to protect domestic industries from foreign competition.

Production possibilities table

A table showing the maximum possible output combinations of two goods that can be produced with available resources.

Trade agreement example

China trades 1 smartphone for 1 bushel of wheat, trading a total of 1,500 smartphones for 1,500 bushels of wheat.

Economic supplies

The total quantity of goods available in the market.

Area T

The area representing tariff revenues that goes to the U.S. government.

Labor hours in autarky

Each country has 1000 hours of labor available to produce smartphones and wheat.

Labor allocation

Each country devotes 250 hours to producing smartphones and 750 hours to producing wheat.

Consumer benefits

Chinese consumers have more money due to lower prices for wheat; U.S. consumers have more money due to lower prices for smartphones.

Demand increase

More demand for Chinese smartphones and U.S. wheat due to international trade.

Gross domestic product (GDP)

The market value of all final goods and services produced in a country during a period, typically one year.

Final good or service

A good or service purchased for final use by a consumer.

Intermediate goods and services

Inputs into another good or service, such as a tire on a truck.

GDP measures output

GDP measures output produced within a country's borders, regardless of the ownership of that production.

Government purchases

Include federal, state, and local government spending on goods and services, excluding transfer payments.

Net exports

Calculated as exports minus imports.

Household production

Goods and services people produce for themselves, which are not captured by GDP.

Example of GDP counting

If a carpenter makes and sells a bookcase, the value is counted in GDP; if made for personal use, it is not.

Shortcomings of GDP

GDP does not account for household production, such as services provided by a homemaker.

Concealment of production

Individuals and firms may conceal buying and selling, leading to underreporting in GDP.

Reasons for concealment

1. Dealing in illegal goods and services. 2. Avoiding taxes on income. 3. Avoiding government regulations.

Real GDP calculation example

Suppose we have a simple economy in which only 3 final goods and services are produced: eye exams, pizza, and shoes.

Production by U.S. firms

Production by a U.S. firm or a foreign firm counts equally in GDP if it occurs within U.S. borders.

Example of U.S. GDP inclusion

U.S. GDP includes the market value of Ford automobiles produced by an American-owned factory in Michigan.

Homemaker services

The value of services provided by a homemaker, such as caring for children and cleaning, is not included in GDP.

Impact of homemaker employment

If a homemaker works outside the home and hires services, GDP increases by the amount paid for those services.

Transfer payments

Payments that do not result in the immediate production of new goods and services and are excluded from GDP.

Illegal goods and services

Goods and services that are not reported in GDP due to their illegal nature.

Tax avoidance

Individuals may conceal income to avoid paying taxes, which leads to underreporting in GDP.

Government regulations

Individuals may conceal production to avoid compliance with government regulations.

Nominal GDP

The total market value of all final goods and services produced in a country in a given year, calculated using current prices.

Real GDP

The total market value of all final goods and services produced in a country in a given year, adjusted for inflation and using the prices from a base year.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Gross National Product (GNP)

The value of final goods and services produced by a country's residents, regardless of where the production occurs.

Labor Force

The sum of employed and unemployed workers in the economy.

Unemployment Rate

The percentage of the labor force that is unemployed.

Labor Force Participation Rate

The percentage of the working-age population that is in the labor force.

Working-Age Population

The total number of individuals who are eligible to work, including those in the labor force and those not in the labor force.

Discouraged Workers

Individuals who are available for work but have given up actively seeking employment due to the belief that no jobs are available.

Frictional Unemployment

Short-term unemployment that arises from the process of matching workers with jobs.

Structural Unemployment

Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.

Cyclical Unemployment

Unemployment caused by a recession.

Full Employment

The condition in which all unemployment is frictional and structural, and cyclical unemployment is zero.

Natural Rate of Unemployment

The normal rate of unemployment, consisting of only frictional and structural unemployment.

Consumer Price Index (CPI)

A measure of the average prices that a typical urban family of four pays for the goods and services they purchase.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

CPI Calculation

CPI is calculated as the price of a basket of goods in the current year divided by the price of the same basket in the base year, multiplied by 100.

Ticket Price Inflation Example

In 1975, the average price of a ticket to an Atlanta Braves game was $4.01, and in 2023, it was $37.06.

CPI in 1975

The Consumer Price Index was 53.8.

CPI in 2023

The Consumer Price Index was 304.7.

GDP Calculation in 2017

Nominal GDP in 2017 is calculated by multiplying the price of each product in 2017 by the quantity produced in 2017 and summing the values.

GDP Calculation in 2025

Nominal GDP in 2025 is calculated by multiplying the price of each product in 2025 by the quantity produced in 2025 and summing the values.

Real GDP Calculation in 2025

Real GDP in 2025 is calculated by multiplying the price of each product in 2017 by the quantity produced in 2025 and summing the values.