econ final exam

trade-off

The concept of giving up one thing in order to obtain another, reflecting the idea that resources are limited and choices must be made.

• “guns and butter” the more society spend on national defense (guns) to protect its shores, the less it can spend on consumer goods (butter) to raise the standard of living at home

social trade off: efficiency vs. equality

efficiency - society is getting the greatest benefits from its scarce resources (the economic pie) - market failure

equality - those benefits are distributed uniformly among society’s members (how evenly the pie is sliced)

market failure

a situation in which the market does not produce an efficient allocation of resources on its own

causes:

• externality (the impact of one person’s actions on the wellbeing of another)

• market power (the ability of a single person or firm to unduly(excessively) influence market prices)

positive

descriptive (how the world is)

normative

prescriptive (how the world should be)

absolute advantadge

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

• comparing one person, firm, or nation

comparative advantadge

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

nominal GDP

goods and services produced valued at current prices

real GDP

good and services produced valued at constant prices, adjusted for inflation

nominal gdp growth rate (annual)

and

gdp deflator growth rate

and

real gdp growth rate

100 x [(ending value/beginning value)^ (1/n)-1]

n = number of years

real gdp

100 x (nominal gdp/gdp deflator)

USUALLY (not always) why is the growth rate of nominal gdp higher than real gdp?

inflation

The participation of women in the U.S. labor force has risen dramatically since 1970.
How do you think this rise affected GDP?

increased GDP

problems in the measuring of CPI

• substitution bias (increased personal computer purchases in response to decline in price)

• introduction of new goods (invention of cell phone)

• unmeasured quality change (introduction of airbags in cars)

standard percentage change in prices formula

((new-old)/(old))x100

midpoint formula for price change

((new-old)/(new+old/2))x100

monetary policy

the central bank changes interest rates or money supply to help the economy

ex; lowering interest rates to help people borrow and spend more

fiscal policy

the government changes spending or taxes to help the economy

ex; giving people tax cuts or spending money on roads and schools to create jobs

2024 gdp growth rate

2.7%

inflation rate

2.5%

unemployment rate

4%

interest on T-bills

5%

trade balance

3% of GDP

budget balance

6% of GDP

federal debt

120% of GDP

personal saving rate

4%

population growth

0.5%

GDP: consumption

68%

GDP: investment

18%

GDP: government spending

17%

GDP: net exports

-3%

1970s inflation rate

closer to 8%

trade deficit 1980s

-4%

growth rate 1990s

4%

savings rate 1990s

5%

2010s T-bill rate

0%

2020s debt-to-GDP

120%

long run average unemployment rate

5-6%

long run average population growth rate

<1%

long run average inflation rate

2-3%

oil price shocks

1970s

• big oil price spikes

• caused inflation and recessions

recessions

• 2008 (financial crisis)

• 2020 (covid)

housing boom & crisis

2000s leading to 2008

tariff wars

U.S. china trade tensions late 2010s

• raised tariffs

• trade slowed

covid19 deaths

7 million worldwide

• 1.2 million were in the U.S.

elasticity

perftectly inelastic is vertical

the more elastic the curve, the smaller effect on interest rate