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What is a Flow Variable?
A variable that requires a time frame to be defined (e.g. "how much did you spend?")
What is a Stock Variable?
A variable that can be measured at any time (e.g. a price).
What is market value (in terms of defining GDP)?
Price x Quantity of all goods and services. (P1Q1+P2Q2...)
What are the "Factors of Production" in GDP?
1. Land (any natural resource, actually) 2.Labor (brain and muscle power) 3.Capital (things produced by people and used in production, like tractors) [Check on this definition]
What are the 3 aspects of GDP?
1. Production 2. Total Expenditure 3. Total Income
What does an increase in GDP mean? What is an accurate way of measuring an increase?
An increase in P x Q... so if all prices go up (i.e. inflation), GDP can go up, even if nothing extra is produced. Multiply old price times new quantity to measure true GDP
What are Real GDP and GDP Deflator indexes of?
Real GDP: Index of goods produced GDP Deflator: Index of Prices
What are Marginal Benefit and Marginal Cost to a consumer?
Marginal Benefit: Maximum the consumer is willing and able to pay Marginal Cost: Amount the consumer actually pays
What are Marginal Benefit and Marginal Cost to a producer/seller?
Marginal Benefit: The money they will receive Marginal Cost: The minimum they are willing to accept
According to microeconomics, how do consumers decide whether to buy goods/services
Based on price and income (wages, rent, profit, interest).
What is the fallacy of composition?
What may be true for one individual is not necessarily true for all individuals (e.g. if one farmer produces more vs if all farmers produce more)
What is the substitution effect?
If prices go up, consumers will substitute the good with a cheaper good.
What is the income effect?
If prices go up, the same good takes up more of your income.
What are the aggregate economic variables?
1. Aggregate Level of Output 2. General Price Level 3. Overall Employment
What are the 3 markets in macroeconomics?
1. Goods and Services Market 2. Factor Market (Households supply, firms consume) 3. Financial Markets
What are surplus and deficit spending units?
Surplus: those who earn more than they can spend Deficit: Those who spend more than they earn.
What are the Aggregate Economic Variables in Macroeconomics?
1. Aggregate Level of Output 2. General Price Level 3. Overall Employment
What are the macroeconomic concerns?
1. Growth and Business Cycles 2. Inflation and Deflation (Increase/Decrease in prices over time. 3. Unemployment
What are economists interested in with regards to the macroeconomic concerns?
1. What are the social costs and benefits? 2. What are the causes? 3. What are the policy options?
What are the 3 kinds of policy?
1. Fiscal policy: The government buys goods and services or alters taxes --> regular government spending (e.g. roads) is not included! 2. Monetary Policy: Dictated by the Fed -- When the Fed changes interest rates. 3. Supply Side Policy: Policy that influences corporations to do research, innovate, produce something, etc (e.g. subsidies)
What are the main causes of growth of Real GDP over time?
1. Increase in population 2. Technological Progress (An increase in the knowledge of how to produce things).
Why is growth considered a good thing?
Greater real GDP means more things for people which means a better standard of living.
What is Potential GDP? What is a depression?
Potential GDP is the amount GDP would be at a theoretical "full employment" level. A Depression is a long recession.
How do macro variables map onto economic concerns?
1. Aggregate Output --> Growth and Cycles 2. General Price Lvl --> Inflation/Deflation 3. Overall Employment --> Unemployment
How do you calculate Growth, Inflation and Unemployment?
Growth % = (y2-y1)/2 x 100 Inflation % - (p2 - p1)/2 x 100 Unemployment % = # People Unemployed/Labor Force x 100
Can you have unfilled jobs and full employment?
Yes, "natural unemployment" occurs due to the lag time it takes to find a job. Full employment is when there are jobs available to everyone who is looking for one (whether or not they have jobs currently).
What components make up natural unemployment?
Frictional Unemployment (finding jobs takes time) and Structural Unemployment (industries rise and fall, e.g. manufacturing).
What makes up total unemployment?
Cyclical Unemployment (due to business cycles) and Natural Unemployment (Frictional and Structural)
Costs of Unemployment?
1. Economic -- Lowers GDP 2. Social -- Crime up, Morale lower, etc.
How is unemployment calculated? What is meant by labor force and civilian population?
Unemployment = (Unemployed/Labor Force) x 100. Labor Force = civilian population willing and able to work. Civilian population = population - military workers, inmates, the elderly, and the young.
What are the benefits of unemployment?
1. Lower inflation rates 2. Efficiency --> companies cut costs 3. Balance of Payments (U.S. buys fewer foreign goods) This argument is weak apparently.
How do you calculate inflation (pi)?
(P2-P1)/P1 x 100
What is the difference between deflation and disinflation?
Deflation: Price Levels Fall Disinflation: Rate of increase of prices falls
What is the ex-ante real interest rate?
Interest Rate minus Expected Inflation (PI^e)
What is stagflation?
Inflation and recession at the same time
What were the major recessions in last 40 years?
- 1974-75: Oil Prices - 1980: Caused by Volcker to combat inflation --> high unemployment -1991: Gulf War -2001: 9/11, tech bubble burst -2008: Housing Bubble
Type up eqtns from discussion section.
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What is the National Income Identity? What if there is overproduction?
The amount produced is equivalent to the amount purchased (Real GDP = Real Expenditure). --For overproduction, those goods are considered an unplanned change in inventory --> Purchased by the producer.
What are the sub-components of real GDP?
Consumptions (C), Government Spending, (G) Business Investment ( I ) and Change in Inventory
What is aggregate demand?
C + G + I
If aggregate demand is less than Real GDP, what is the change in inventory (what sign does it have?)
Change in inventory is positive
What is it called when Real GDP is equal to Aggregate Demand? What is the Delta Inventory in that case? What big assumption is being made?
Y = AD is called goods market equilibrium. Change in inventory is zero. Assumption: The market responds to changes in demand by altering production and restoring equilibrium.
What is a "Clear Market"?
Market at equilibrium
How do you calculate GDP Deflator?
(Nominal GDP/Real GDP) x 100
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