Economy Chapter 10

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

Inflation/deflation

The rate at which average prices are rising or falling

GDP measures…

Total income of everyone in economy and total expenditure on economy’s goods/services

A higher GDP means a country has a…

better economy

For the economy as a whole, income must equal expenditure (T/F?)

True, every dollar a buyer spends is a dollar of income for the seller

Quackity pays Roier $100 to mow his lawn. How does this affect GDP?

Total income rises by $100, and total expenditure rises by a $100

Based on the circular-flow diagram, households earn income when…

firms purchase labor and capital in markets for factors of production

What kind of inputs go INTO factors of production directly from hosueholds?

Labor, land, and capital

Describe the circular-flow diagram

Households buy goods and services from firms, and firms use their revenue from sales for wages to workers, rent to landowners, and profit to firm owners.

Gross Domestic Product (GDP)

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

“GDP Is the Market Value…”

GDP adds different products into a single measure of economic activity using market prices (reflects how much people are willing to pay for a product(s)

Regarding market prices and GDP, if Pepino costs twice as much as Tomate, then…

Pepino contributes twice as much to GDP than Tomate

“…of All…”

GDP includes items produced in the economy (including housing) and legally sold in markets

What does GDP exclude?

Products hard to value, items illegally sold, transfer payments, intermediate goods immediately used for final goods, transactions w/ items produced in past, and items produced/consumed at home

“…Final…”

GDP only incudes final goods and intermediate goods inventoried for later use/sale

“…Goods and Services…”

GDP includes tangible goods and intangible services

“…Produced…”

GDP only includes goods/services currently produced, not transactions including items produced in the past

Katie B. sells a used food truck to Ewroon for $999. What happens to GDP?

GDP is not affected

“…Within a country…”

GDP only counts goods domestically produced, regardless of the nationality of the producer

“…In a Given Period of Time…”

GDP measures production value within a specific time period (usually a year or quarter)

Juan Guarnizo and Graf are married. If Juan pays Graf $20 to mow their lawn, how does GDP change?

GDP does not change as Graf’s service is not in the market

What are the components of GDP?

Consumption, Inventory, Government purchases, Net Exports

Consumption

Spending by households on goods and services, except purchases of new housing

Investment

Spending on business capital, residential capital, and inventories