Macroeconomics Midterm

Positive economics

Describes what people actually do

Normative economics

Recommends what people should do

Optimization

Making the best choice possible when given information (essentially facing a trade off)

Budget contraint

The set of things that a person can choose to do (or buy) without breaking their budget

Cost benefit analysis

A calculation that identifies the best option by summing benefits and subtracting costs, with both benefit and costs denominated in a common unit of measurement

Cost benefit analysis

Used to identify the alternative that has the greatest net benefit

Opportunity cost

“Cost of our action”

Equilibrium

A situation in which no one benefits from changing their behavior

Free rider problem

Exists when an individual or group is able to enjoy the benefits of a situation without incurring the costs

Empiricism

Evidence based analysis

Coorelation

x related to y

Causation

X makes Y happen

Optimization

Trying to choose the most feasible (optimal) choice

Total value optimization

Total benefit — total cost = net benefit

Marginal analysis optimization

The change in net benefit of one option compared to another

Marginal analysis

Optimization using ___ is often faster to implement than optimization using total value because marginal analysis focuses only on the ways that alternatives differ

Marginal change

Change in value / number of units

Continue

If marginal benefit is greater than marginal cost ___ the benefit

Step back

If marginal benefit is less than the marginal cost, take a ___ ___

Optimum

If marginal benefit equals marginal cost, we are at ____

Principle of optimization at the margin

the best, or optimal, decision is reached by comparing the marginal benefits and marginal costs of an action

Market

Where two types of agents interact with each other

Buyers

Group that determines demand

Sellers

Group that determines supply

Perfectly competitive market

All goods are identical, there are many buyers and sellers, and no single buyer or seller can influence the market price

Quantity demanded

The amount of good that buyers are willing and able to produce

Law of demand

Other things being equal, when the price of a good rises, the quantity demanded falls, and when the price falls, quantity demanded rises

Demand schedule

A table that shows the relationship between quantity demanded and the price

Demand curve

A graph that shows the relationship between quantity demanded and the price

Downward

Demand curve will always have a ___ slope

Market demand

The sum of all individuals demands for a particular good or service

Along

Own price of good is movement ___ the demand curve

shift demand

Income, price of related goods, tastes and preferences, future expectations, and numbers of buyers all ___ the entire ___ curve

Inferior goods

Goods you’d substitute for when your income increases

Related goods

Two types: substitutes (coke-pepsi), complementary (peanut butter-jelly)

quantity supplied

The ___ ___ of any good is the amount of good that sellers are willing and able to sell

Law of supply

Other things being equal, when the price of a good rises, the quantity supplied rises, and when the price of the good falls, the quantity supplied falls

Supply schedule

A table that shows the relationship between quantity supplied of a good and the price of that good

Supply curve

A graph that shows the relationship between quantity supplied of a good and the price of a good

Market supple

The quantity supplied by all of the sellers at each price

along

Own price of good is movement ___ the supply curve

shift

Input prices, technology, future expectations, and the number of sellers ___ the entire supply curve

decreases

When input price increases quantity supplied ___

increases

When input price decreases quantity supplied ___

increases

When technology increases quantity supplied ___

decreases

When technology decreases quantity supplied ___

Increases

When the number of sellers increases, quantity supplied ___

Decreases

When the number of sellers decreases, the quantity supplied ___

as much as

When future expectations are that the price will increase, do ___ ___ ____ possible today

Stop

When future expectations are that price will decrease, ___ until tomorrow

Market equilibrium

Where demand and supply meet on the graph

Equilibrium price

The price of the point of intersection

Equilibrium quantity

The quantity of the point of intersections

Surplus

When we have more supply than demand

Shortage

Qhen we have more demand than supply

Macroeconomics

The study of economic aggregates and economy wide phenomena

Income per capita

The average income per person

Income per capita

Nations total income / number of people in the country

Income per capita

A measure of a country’s growth and standard of living

Recession

Two straight quarters in which aggregate income falls

Rises

Unemployment rate ___ during a recession

Gross domestic product

The market value of all final goods and services produced within a country during a specific period

GDP

A measure of the total (gross) amount of everything produced/consumed (income/expenditure) within a specific economy

Final goods

Goods intended for end user

Intermediate goods

Goods used as compnonets in production of other goods

Production approach

Number produced (quantity) * price

Expenditure approach

Price * number available (quantity)

Income approach

Total income — input prices

Production approach

Sums up each firms value added

Value added

The firms sales revenue minus the firms purchases of intermediate products from other firms

Income approach

Sums up payments (or income) received by labor and the owners of physical or financial capital

Expenditure approach

Sums up the purchases of goods and services of different groups or categories

Expenditure approach

Four main categories: consumption, investment, government purchases, and net exports

Consumption (C)

Any goods being purchased except the purchase of a new home

Investment (I)

Purchase of goods that are business capital, residential capital, and inventory accumulation

Government purchases (G)

Expenditure by the government on salaries and material but not transfer payments such as social security

Net exports (NX)

Exports - imports

Nonmarket Goods

Goods and services produced but not sold

Underground economny

Encompasses transactions that are not reported to the government and therefore are not taxed (most are legal such as tipping, but some are illegal like selling drugs)

Gross domestic product

Records production in the U.S. regardless of whose labor and capital is used

Gross national product

Records production of domestically owned labor and capital in the united states and abroad

Nominal GDP

The production of goods and services valued at current prices

Real GDP

The production of goods and services valued at constant prices

GDP deflator

A measure of the price level calculated as the ratio of nominal GDP to real GDP x 100

GDP deflator

Measures the current level of prices relative to the level of prices in the base year

ROW

Rest of world

Consumer price index

A measure of the overall costs of goods and services bought by a typical consumer that measures a change in the cost of living over time

Imported customer goods

Included in CPI but excluded from GDP deflator

Capital goods

Excluded from CPI but included in GDP deflator

CPI fixed basket

Prices of all goods and services bought by consumers

GDP deflator

Prices of all goods and services currently produced domestically

Productivity

The value of goods and services that a worker generates for each hour of work

Productivity

Human capital, physical capital, and technology are the reasons that ___ differs across countries

Human capital

Stock of skills embodied in labor to produce output

Physical capital

The stock of the business structures (plants) and equipment (machines) used for production

Technology

Superior knowledge in production or more efficient production processes so that more output can be produced with the same amount of human and physical capital

increase

An increase in either physical capital or total efficiency units of labor, holding all other factors constant, leads to an ___ in GDP

Diminishing marginal product

The marginal contribution of either physical capital or total efficiency units of labor to GDP diminishes when we increate the quantity used of that factor (holding all other factors constant)

Knowledge

A component of technology that refers to knowing more today than 40 years ago

Efficiency in production

A component of technology that refers to producing max output