Columbia University Principles of Economics Final

Trade

What is the most basic economic function?

opportunity cost of cake

ice cream

----------

cake

comparative advantage

Produce at the lowest opportunity cost

Specialization

Produce more of what you're good at making (lower opportunity cost)

Absolute advantage

Simply able to make more

Value of ice cream

pCake

-------

pIcecream

Terms of trade: price

Oc cake for one person < x < Oc cake for another person

aggregate production function

series of smaller production functions; SUM total

Price point of good (line) needs to be...

Tangent to PPC curve: Based on demand

autorky

equilibrium, not trading at all

World price may be less than or greater than...

autorky price

If world price > autorky price

additional producer surplus; country benefits because SS is greater (PS+CS)

If world price < autorky price

additional consumer surplus (cheaper goods); country benefits because SS is greater (PS+CS)

Trade overall is:

Good - SS increases with trade

When world price is greater than autorky price, a country will _____ the difference between producing and consuming

Export: this meets the needs of the world

When world price is less than autorky price, a country will ____ the difference between producing and consuming

Import: Meet their own needs

Import tariff tax

On products made abroad; artificial increase in price

WHAT HAPPENS domestically when there is an import tariff?

Imports decrease and domestic production goes up

myopic

Not good long term (shortsighted)

GDP is, at it's core...

Just a way to measure the strength of an economy

What is economic activity?

Interactions between households and firms

GDP methods:

How much is produced by firms (output method), how much is spent by households (expenditures method), how much income a household makes (income method)

GDP definition

Market value of final goods and services, produced IN a country during a given period of time

Production method of GDP

Value added: sales of final good - sales of any intermediate good

Expenditure method of GDP *

How much money people are spending to buy goods

Expenditure method equation

Y (GDP) = C+I+G+(X-M)

C in GDP equation

consumption: NEW goods and services bought

I in GDP equation

investment: physical capital bought by firms and households. ex. new houses, factory equipment

G in GDP equation

government spending: all purchases

X-M in GDP equation

Exports - Imports

GDP per capita

GDP/population

Income method of GDP

Labor(wages), Return on capital (stocks, bonds)

GNP

Gross national product - counts production of all people associated with country (expats)

GDP may be...

< or > than GNP, depending on the country

Not counted in GDP...

underground/black market, home production (childcare), physical depreciation of value, externalities

Growth formula

final - initial

-------------

initial

Nominal GDP

production at current prices

Real GDP

production taking inflation into account; ONLY measuring increase in production

Real GDP growth is _____ than Nominal GDP growth because...

Slower, because it measures the actual increases in production and more accurately shows strength of economy.

GDP Deflator

NOMINAL GDP

----------------- x 100

REAL GDP

Calculating inflation from GDP deflator

example: 1.24 means 24% inflation from the base year

CPI

Consumer price index; price of 1 bundle of goods over time

Calculating inflation from CPI

year x - base year

------------------- x100, 1.24 = 24% inflation

base year

Purchasing Power parity

Compare amount of bundles able to be bought between countries

PPP DOES NOT EQUAL EXCHANGE RATE

Common bundle price across countries

How many bundles can be bought with xyz country's average income?

Income/bundle price

GDP growth beginner:

year x - base year

------------------

base year

GDP growth IMPLICIT GROWTH RATE (over large periods of time)

Y2020 = Y2015 (1 + growth rate)^5 years

TO FIND IMPLICIT GROWTH RATE:

g = (Y2020/Y2015)^1/5 - 1

Why is implicit growth rate more accurate?

It accounts for compounded growth over time

Aggregate production FUNCTION

Y = A x f(K,H)

Aggregate production definition

At a macro level, the amount a country produces is EQUAL TO tech, physical capital, human capital

K in aggregate production function

Physical capital: factories, machines, etc

H in aggregate production function

Human capital: labor force AND skills they have (educate!)

Breakdown of H in aggregate production function:

H = L x h

skills x efficiency

A in aggregate production function

Technology: how efficiently we use both kinds of capital (physical, human)

Breakdown of aggregate production function ; get it in there

GDP = tech x a function of (physical capital, (skills x efficiency of human capital))

Y = A x f(K,H)

(H = L x h)

Over time, the aggregate production function sees...

Diminishing marginal returns

For countries reaching limits of (K,H), the way to keep growing is _____. This will _______.

Technology; shift the APC outwards and maintain long term growth

Potential workers

NOT under 16, institutionalized, incarcerated, active military

Labor force

NOT caretakers, students, retired, disabled, not looking

labor force participation rate formula

labor force/population

Unemployment

Don't have a job, AND have been looking in the past 4 weeks

Unemployment rate

# UE

-------

labor force

A change in wage results in a ...

Movement along the demand curve for labor

Wage in the labor market is...

Price of labor

What shifts the demand curve for labor?

change in price of outputs, change in demand for output, technology, cost of inputs

What shifts the supply curve for labor?

changes in taste, changes in opportunity costs, population

frictional unemployment

Looking for work, taking time to find a job. Movement around equilibrium

cyclical unemployment

seasonal work (ex. summer intern)

Natural rate of unemployment

frictional + structural = matching jobs to people

structural unemployment

due to changes in labor demand, caused by factors uncontrollable to an individual.

wage rigidity / "sticky" wages

wages stay the same regardless of labor equilibrium, because firms are unwilling or artificially unable to change wage. (though they may lay people off)

How is structural unemployment solved?

Increasing labor demand

What are efficiency wages?

paying people more than necessary (well above equilibrium) to keep them interested, motivated, excited

Definition of credit markets

financial institutions that provide credit to people (I.e. banks)

Banks provide ...

loans to households and firms

Credit is...

a loan that the bank gives

A debtor is...

someone who borrows money

Increased inflation benefits:

the DEBTOR, because they need to sell less/make less to pay back the loan with interest (work less hard for it)

Increased inflation hurts:

the BANK, because they make less money (it's inflated)

Decreased inflation benefits:

the BANK (creditor) because they get more money back

Decreased inflation hurts:

the DEBTOR, because they need to sell more/make more to pay the loan + interest back

Fisher equation

r = i - π

r (fisher equation)

real interest rate

i (fisher equation)

nominal interest rate

Pi

INFLATION

Break it down: fisher equation

Real interest rate = Nominal interest rate - inflation

Price of credit:

Interest rate. -REAL

How much it costs to borrow money

the real interest rate

changes in real interest rates are...

movements along credit market demand curve

Shifters of demand in the credit market:

change in preferences, perception/expectation, government policies

Who supplies credit?

Households and firms savings

opportunity cost of consumption (vs. saving)

interest rate

shifters of supply in the credit market:

changes in savings, firms performance, perception/expectation of economy

Bank assets

reserves, cash equivalents, long-term investments

Bank Liabilities

Demand deposits, short-term borrowing, long-term debt

Demand deposits:

what we put into a bank - can demand back anytime we want

Short term borrowing

What banks loan to other banks

Long-term debt

When the bank takes out a loan greater than a year