Introductory Economics and Macroeconomics Fundamentals

A comprehensive set of practice flashcards covering fundamental economics concepts, comparative advantage, PPF, GDP calculations, expenditure components, and real vs. nominal GDP.

What is economics?

The study of how individuals and societies allocate their limited resources to satisfy their practically unlimited wants.

What is scarcity?

The condition that resources are limited, meaning we cannot have everything we want and must make choices.

Why is scarcity a key concept in economics?

Because scarcity implies that we must always make choices and give some things up.

What is microeconomics?

The study of individual units that make up the economy, focusing on individuals, businesses, and specific markets.

What is macroeconomics?

The study of the overall aspects and workings of an economy—the big picture.

What are the 5 foundations of economics listed in the notes?

Incentives, trade-offs, opportunity costs, marginal thinking, and trade creating benefit.

What is an incentive?

Anything designed to influence your behavior; it is not forced.

What is a direct incentive?

An incentive with a clear change and intended effect, such as studying harder or doing homework for a reward.

What is an indirect incentive?

An incentive whose effect is unclear or unintended, such as cheating on quizzes to keep good grades.

What is a trade-off?

The idea that scarcity forces us to make choices and give up things we want.

What is an opportunity cost?

The value of the next-best option—the value of what you miss out on by choosing another option.

What is marginal thinking?

Evaluating whether the benefit of one more unit of something is greater than its cost.

What is marginal benefit?

The additional benefit derived from consuming or producing one more unit.

What is marginal cost?

The additional cost incurred from consuming or producing another unit.

What does trade mean in economics?

The voluntary exchange of goods and services between two or more parties.

Why does trade create value?

Because trade is voluntary, and specialization can make everyone better off.

What are the steps of the scientific method in economics?

Observe a phenomenon; develop a hypothesis; construct a model to test it; test how well the model works; repeat as necessary.

What is a positive statement?

A statement that can be tested and validated or disproven; it describes what is.

What is a normative statement?

An opinion that cannot be tested or validated; it describes what should be or ought to be.

What are economic models?

Simplified versions of reality used to understand the complex real world.

Why do economic models use simplifying assumptions?

To make the world or economy easier to model and identify important mechanisms and relationships driving human behavior.

Are economic models perfect descriptions of reality?

No. They are simplified versions of reality and are not perfect descriptions.

What does ceteris paribus mean?

“Other things being equal”; hold all other variables constant and change one thing at a time.

Why do economists use ceteris paribus?

To identify the effect of a change in a single variable at a time.

What is model building?

Deciding which variables to include and exclude and determining the assumptions built into the model.

What simple relationship is listed under Building a Model?

$$\text{Income} = \text{Spending}$$

What are endogenous factors?

Factors that we account for and control.

What does a straight-line PPF imply?

A constant opportunity cost.

What does a bowed-out (curved) PPF imply?

Increasing opportunity costs; as more of a good is made, its opportunity cost increases.

What does the bowed-out PPF allow for?

Specialization.

What is the formula for Time Worth?

$$\text{Time Worth} = \frac{\text{Extra Cost}}{\text{Time Saved}}$$

Using the notes’ plane/bus example, what is the extra cost?

$$\$300 - \$150 = \$150$$

Using the notes’ plane/bus example, what is the time saved?

$$16\,\text{hours} - 6\,\text{hours} = 10\,\text{hours}$$

Using the notes’ plane/bus example, what is Time Worth?

\150 \div 10\,\text{hours} = \$15\,\text{per hour}$

What is absolute advantage?

The ability to make more overall.

What is comparative advantage?

The ability to make more with less opportunity cost.

How do you find comparative advantage according to the notes?

Divide the amount of the OTHER item by the amount of the item being evaluated.

If you can make $15$ lightsabers or $30$ starships, what is the opportunity cost of $1$ lightsaber?

$30 \div 15 = 2$ starships per lightsaber.

What are the three mass trackers listed in the notes?

GDP, unemployment, and inflation.

What is GDP?

The market value of all final goods and services produced in a country in a period of time.

Does a good have to be sold to count toward GDP?

No. The notes say it does not have to be sold; it just has to be put on the market.

What does “market value” mean for GDP?

Market value = market price.

Are goods and services with no market included in GDP?

No. Goods and services that have no market are not included.

What is an intermediate good?

A good used within the production process of another good or service.

What is a final good?

A good whose sale is intended for its final purpose, typically to consumers.

What does GDP count regarding production?

Only goods that are produced by the economy are counted.

Does consumption of a good determine whether it is counted in GDP?

No. Consumption of the good is irrelevant; GDP is about production.

What does “within a country” mean for GDP?

Production within the geographic and sovereign territory of the country.

Does ownership, nationality, or citizenship determine whether production counts toward GDP?

No. Ownership, nationality, and citizenship do not matter for GDP.

What are three uses of GDP listed in the notes?

Measuring economic growth, studying the business cycle, and measuring living standards.

What is the business cycle?

The ups and downs of the economy, including recessions and expansions.

What is the goal of macroeconomics listed in the notes?

To increase living standards over time.

What are the four components of GDP expenditure?

Consumption, investment, government spending, and net exports.

What is the GDP expenditure equation?

$$Y = C + I + G + NX$$

In $Y = C + I + G + NX$, what does $Y$ represent?

GDP (technically real GDP).

In $Y = C + I + G + NX$, what does $C$ represent?

Consumption spending: spending by households on goods and services.

In $Y = C + I + G + NX$, what does $I$ represent?

Investment spending: purchases of capital goods by firms, inventory accumulation, and purchases of new houses by individuals.

What are capital goods?

Goods used to produce other goods in the future, such as warehouses, machines, land, factories, computers, and software.

In $Y = C + I + G + NX$, what does $G$ represent?

Government spending on goods, including government consumption and investment expenditures at local, state, and federal levels.

What is included in government spending according to the notes?

Government employees’ salaries, contracts to build roads/infrastructure, military spending, and other government consumption and investment expenditures.

What does $NX$ represent?

Net exports.

What is the net exports equation?

$$NX = \text{Exports} - \text{Imports}$$

What are exports?

Goods and services produced in the U.S. and consumed internationally.

What are imports?

Goods and services produced internationally and consumed in the U.S.

A country has $C = \$500$, $I = \$200$, $G = \$150$, and $NX = \$50$. What is GDP?

$$Y = 500 + 200 + 150 + 50 = \$900$$

A country has $C = \$700$, $I = \$100$, $G = \$250$, exports = $\$80$, and imports = $\$130$. What is GDP?

$NX = 80 - 130 = -50$; $Y = 700 + 100 + 250 - 50 = \$1{,}000$

What is nominal GDP?

Nominal GDP = current prices $\times$ current quantities.

What is real GDP?

Current production measured using base-year prices.

Why is real GDP useful?

It removes the effects of inflation from GDP measurements.

What is the real GDP equation?

Real GDP = base-year prices $\times$ current quantities.

What is per capita GDP?

GDP divided by the population.

What is real GDP per capita?

Real GDP divided by population; the notes describe it as average real income per person per country.

What is the price level?

A measure of the average prices of goods and services in an economy.

What is the relationship between nominal GDP, real GDP, and price level?

$$\text{Nominal GDP} = \text{Real GDP} \times \text{Price Level}$$

If real GDP is $\$2{,}000$ and the price level is $1.10$, what is nominal GDP?

$$\text{Nominal GDP} = 2{,}000 \times 1.10 = \$2{,}200$$

What is the percent-change relationship between nominal GDP, real GDP, and price level?

$$\%\,\text{change Nominal GDP} = \%\,\text{change Real GDP} + \%\,\text{change Price Level}$$

If nominal GDP increases $5\%$ and the price level increases $2\%$, what is real GDP growth?

$$5\% - 2\% = 3\%$$

If nominal GDP increases $8\%$ and real GDP increases $3\%$, what is the price-level growth?

$$8\% - 3\% = 5\%$$

What is the nominal GDP per capita equation?

$$\text{Nominal GDP per capita} = \frac{\text{Nominal GDP}}{\text{Population}}$$

What is the percent-change relationship for nominal GDP per capita?

$$\%\,\text{change Nominal GDP per capita} = \%\,\text{change Nominal GDP} - \%\,\text{change Population}$$

If nominal GDP grows $10\%$ and population grows $4\%$, what is nominal GDP per capita growth?

$$10\% - 4\% = 6\%$$

What is the percent-change relationship for real GDP per capita?

$$\%\,\text{change Real GDP per capita} = \%\,\text{change Real GDP} - \%\,\text{change Population}$$

If real GDP grows $3\%$ and population grows $7\%$, what is the real GDP per capita growth according to the notes?

$$3\% - 7\% = -4\%$$

What does the notes’ recession definition say?

A recession occurs when real GDP declines for at least two consecutive quarters.

What base year convention is listed for tables on tests?

Use the first year as the base year.

What is the GDP deflator equation?

$$\text{GDP Deflator} = \left(\frac{\text{Nominal GDP}}{\text{Real GDP}}\right) \times 100$$

If nominal GDP is $\$1{,}200$ and real GDP is $\$1{,}000$, what is the GDP deflator?

$$(1{,}200 \div 1{,}000) \times 100 = 120$$

If nominal GDP is $\$900$ and real GDP is $\$1{,}000$, what is the GDP deflator?

$$(900 \div 1{,}000) \times 100 = 90$$

What does the Gini coefficient measure?

The distribution of wealth or income within an economy.

What does real GDP per capita measure?

Average well-being within a country by dividing GDP by population, assuming everyone gets an equal slice.

Why can real GDP per capita be misleading as a measure of well-being?

It assumes everyone gets an equal slice, which the notes say is not a realistic assumption.