Macroeconomics Exam One Study Set

economics

the study of how society manages its scarce resources

what is scarcity?

idea that we have unlimited wants and limited resources

Two Branches of Econ

Mirco & Macro

Microeconomics

individuals making decisions

Macroeconomics

economy as a whole or group decision making

How many econ principles are there?

8 (well that we go over)

1. People face trade offs

since every resource is scarce and not enough time

2. Cost of something is what you give up to get it

Opportunity cost: the value of the best alternative that you give up when you make a choice

3. Rational people think at the margin

A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.

4. People respond to incentives

Behavior changes when costs or benefits change. (attendance policy)

5. Trade can make people better off

people specialize in different goods and services meaning that someone can make it possibly quicker and more efficiently so it makes more sense to trade something the other person may be able to do better

6. Markets are usually a good way to organize economic activity

under markets we have decisions to decide what to buy, what to sell, how much to sell for, etc.

7. Government can sometimes improve market outcomes

provide polices to provide stabilization

8. The 3 most important Marco variables are

GDP

Inflation

Unemployment

Father of Economics

Adam Smith

Model

Simplified version of the world

Circular Flow Diagram

shows firms & households and how they trade

Comparative Advantage

the ability to produce a good at a lower opportunity cost than another producer

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

Why economists disagree?

Differences in positive statements and normative statements

Positive Statements is

testable

Normative Statements is

not testable (opinion)

GDP

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

GDP equation

Y = C + I + G + NX

Y=

GDP

C=

Consumption

I=

Investment

G=

government spending

NX=

net exports (exports-imports)

Do imports effect GDP?

No they do not increase or decrease GDP

GDP deflator

Nominal GDP/Real GDP x 100

inflation deflator

( deflator current - deflator previous ) / ( deflator previous ) x 100

Inflation

general rise in overall prices

Consumer Price Index (CPI)

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

5 Steps to Calculate CPI (inflation)

1. Fix the Basket

2. Find Prices (things in basket)

3. Compute cost of the basket

4. Chose a base year & compute CPI

5. Compute inflation rate

inflation rate equation

CPI Year 2 - CPI Year 1/ CPI Year 1 x 100

CPI equation

100 x (cost of basket in current year/cost of basket in base year)

Shadow Inflation

occurs when prices stay the same but the quality of products declines

2 types of unemployment

Cyclical & Natural Rate of Unemployment

What does it mean to be unemployed?

out of work and actively looking for a job

Categories to measure unemployment

Employed: paid, work with family, temporary absences

Unemployed: not employed, available for a job, looked for a job in the last 4 weeks

Not in labor force: not employed & not unemployed (students & elderly people)

unemployment rate formula

unemployed/labor force x 100

labor force formula

employed + unemployed

labor force participation rate formula

labor force/adult population x 100