ECON 205 1st Edition Final Exam Study Guide Chapter 7 Welfare economics explains the allocation of resources by answering how much is produced who is the producer and who is the consumer Look up Willingness to pay Consumer Surplus and Producer Surplus on Terms list Allocation in a market is determined by the interactions between self interested buyers and sellers Total surplus is a measure of society s well being since its like an everyone wins situation Efficiency maximizes total surplus Goods purchase by consumers who value them most highly Goods produced by producers with the lowest cost Adam Smith said that when individuals act in their own self interest they end up benefiting all of society and are therefore led by an invisible hand Chapter 8 Costs of taxation causes market inefficiencies Chapter 9 If PD PW then a country has a comparative advantage Export good Consumer surplus falls Producer surplus rises Total Surplus rises If PD PW then a country does not have a comparative advantage Should import the good Consumer suplus rises Producer surplus falls Total surplus rises A small economy is a price taker in world markets because its actions have so impact of PW Foreign competition decreases the market power of domestic firms and increase total welfare Trade increases the flow of ideas and facilitates the spread of technology worldwide Losses in trade often highly concentrated among small group of people whereas gains are often spread thinly over a large group Tariffs and Import quotas have the same basic effects on the market Chapter 10 Refer to GDP on terms list Diagram omits the government financial system and international sector GDP only considers FINAL goods intended for the end user Refer to GNI Y C I G NX consumption investment government net exports Refer to Inflation nominal GDP and real GDP GDP deflator is a measure of the overall level of prices 100 X nominal GDP real GDP Real GDP per capita is the main indication of the average person s standard of living Chapter 11 Refer to CPI Steps to calculate CPI Fix the basket decide what the average consumer buys in a given period of time Find the prices of items in the basket Compute the basket s total cost Choose a base year and compute the index 100 x cost of basket in current year cost of basket in base year Compute the inflation rate 100 x CPI of current year CPI of comparison year CPI of comparison year CPI does not have the flexibility to account for switches made to cheaper substitute goods the introduction of new goods or unmeasured quality change GDP and CPI graphs are typically very similar GDP and CPI do not account for the underground market To find out how much a dollar amount in T years would equal now Amount in today s dollar Amount in year T dollars x price level today price level in year T Used to convert nominal dollars to real dollars Refer to indexation Refer to nominal and real interest rates Chapter 12 High productivity means real GDP is large and incomes are high Determinants of Productivity and its growth are Physical Capital K Human Capital H Natural Resources N Technological knowledge An increase in any of these increases productivity and growth Y L measures productivity L is labor Government implementation K increasing policies only creates temporary growth because of Diminishing returns Refer to the catch up effect Inward oriented trade policies aim to raise living standards by avoiding interaction with other countries Outward oriented policies promote integration with the world economy Technological progress is the main reason why living standards rise over the long run Chapter 15 Labor Force statistics are produced by the Bureau of Labor Statistics BLS Divide population into the employed unemployed and people not in the labor force Refer to unemployed unemployed and not in labor force Unemployment rate U rate 100 x of unemployed labor force Labor Force participation rate 100 x labor force adult population U rate does not include the discouraged worker and does not distinguish between part time and full time workers Most unemployment is short term and well under 14 weeks Refer to cyclical unemployment natural rate unemployment frictional unemployment and structural unemployment Government employment agencies provide information about job vacancies to speed up job search Government also has Public training programs to train workers for certain jobs Unemployment insurance partially protects workers incomes when they become unemployed Increases frictional unemployment because it decreases the motivation to find a new job Refer to minimum wage laws and unions Unions increase wages which decreases the demand for labor increase in unemployment Refer to Efficiency wages Set for worker health turnover quality and effort Chapter 16 Refer to Double Coincidence of wants 3 functions of money Medium of exchange unit of account Store of value 2 types of money Commodity money takes the form of a commodity with intrinsic value Fiat Money used as money because of government decree no intrinsic value Money Supply quantity of money available in the economy Assets are considered part of the money supply Central Bank an institution that oversees the banking system and regulates the money supply Monetary Policy setting of the money supply by the policymakers in the central bank Federal Reserve Fed the central bank of the US Federal Open Market Committee FOMC decides monetary policy Fractional reserve banking system banks keep a fraction of deposits as reserves and use the rest to make loans Reserve requirements regulations established by the Fed on the minimum amount of reserves that banks must hold against deposits Reserve Ratio fraction of deposit that banks gold as reserves A T account is a simplified accounting statement that shows a bank s assets and liabilities Liabilities include deposits Assets include loans and reserves The banking system creates money but not wealth Money Multiplier amount of money the banking system generates with each dollar of reserves 1 R A more realistic balance sheet would include Bank capital resources a bank obtains by issuing equity to its owners Leverage use of borrowed funds to supplement existing funds for investment purposes Assets must always equal liabilities Leverage ratio ratio of assets to bank capital Capital requirement a government regulation that specifies a minimum amount of capital intended to ensure banks will be able to pay off depositors and debts Fed can