Macro Ex 2 - Feb 25 recording Final review

Study Guide Overview

• Prepare for problems from chapters 9, 18, and 19.

• Expect two short answer questions on the exam.

Chapter 9: Comparative Advantage

Key Concepts

• Short Answer Question: Focus on opportunity cost between China and Pakistan producing earrings and shoes.

  • Provided Table: Fill in opportunity costs for earrings and shoes for both countries.

  • Opportunity Cost Calculation:

    • China: 4 shoes / 8 earrings = 0.5 shoes per earring.

    • Pakistan: 4 shoes / 2 earrings = 2 shoes per earring.

    • Comparative Advantage:

      • China has comparative advantage in earrings (lower opportunity cost).

      • Pakistan has comparative advantage in shoes.

Production Hours

• Both countries have 1000 hours of labor.

• Example assumes even split (500 hours to earrings/500 hours to shoes).

• Adjust calculation if the split differs (e.g., 600 hours to earrings).

Specialization and Trade

• If China specializes in earrings (1000 hours), produces 8000 earrings and 0 shoes.

• If Pakistan specializes in shoes, produces 4000 shoes and 0 earrings.

Trade Implications

• Example of trade: China trades 2000 earrings for shoes.

  • After trade: China has 6000 earrings and 2000 shoes, Pakistan has 2000 earrings and 2000 shoes.

Chapter 18: Gross Domestic Product (GDP)

Key Concepts

• Final vs. Intermediate Goods:

  • Example: Purchase of flour for baking (intermediate) vs. selling baked goods (final).

• GDP Calculation:

  • Use formula: Y = C + I + G + NX (where C=Consumption, I=Investment, G=Government Spending, NX=Net Exports).

  • Net Exports Calculation: Exports - Imports.

  • Expected Question: Given spending values, calculate GDP using provided data (e.g. Consumption, Government Purchases).

• Nominal vs. Real GDP:

  • Nominal uses current prices, Real uses base year prices.

  • Important to know how to calculate and differences.

GDP Deflator and Inflation Rate

• Formula for GDP deflator: Nominal GDP / Real GDP x 100.

• Use for calculating inflation rate between years based on CPI (Consumer Price Index).

Chapter 19: Unemployment

Key Concepts

• Labor Force Calculation:

  • Labor force = Employed + Unemployed.

• Unemployment Rate Calculation:

  • Formula: (Number of Unemployed / Labor Force) x 100.

• Definitions to Know:

  • Frictional Employment: Short-term unemployment during transitions.

  • Structural Employment: Mismatch of skills with job requirements.

  • Cyclical Employment: Linked to economic downturns.

• Full Employment: No cyclical unemployment present; combination of frictional and structural still exists.

• Working Age Population: Total of labor force + those not in labor force.

Inflation & CPI

• Calculate CPI using expenditures:

  • CPI = Current Year Expenditures / Base Year Expenditures x 100.

• Be prepared for calculations relating to CPI and adjusting dollar values for inflation.

• Practice examples will be similar to content covered in class and the problem set.

General Preparation Notes

• Expect a mix of calculation questions and definitions.

• Review key definitions and be able to identify differences (e.g., tariffs vs. import quotas).

• Focus on understanding economic concepts and how to apply them to problems.