Econ 2305 1st Edition Exam 2 Study Guide Lectures 8 15 Lecture 8 9 Feb 12 14 Market failures occur when there are either too many or too less resources going towards one specific activity Externalities are any consequences of an economic activity that have a spillover effect on third parties Positive externalities benefit the third parties while negative externalities become costly for them Government can correct positive externalities by subsidizing regulating and financing the desired production of them Government can correct negative externalities by taxing and regulating them Three main functions of government include providing a legal system maintaining competition and redistribution of income through income tax price control and transfer payments The difference between public and private goods is that the consumption of a private good by one person excludes the consumption for another person while public goods can be consumed by multiple people at the same time Lecture 10 Feb 14 Micro failures include unemployment inflation national debt and trade deficit Labor force includes anyone who is over 16 currently employed or looking for a job and is noninstitutionalized Types of unemployment include frictional structural cyclical and seasonal Unemployment results in loss of output erosion of skills and mental depression Lecture 11 Feb 19 Different kinds of job unemployed include job loser reentrant job leaver and new entrant Discouraged workers are individuals who have stopped looking for a job because they are convinced that they will not find a suitable one Unemployment benefits reduce the incentive of looking for a job There is always some kind of frictional unemployment that exists in the economy even under full employment which is known as natural rate of unemployment Lecture 12 Feb 21 Price Index The cost of today s market basket expressed as a percentage of the same market basket in the base year Consumer price index Producer price index and GDP deflator are all different kinds of price indexes Cost of living adjustments can be used as a protection against inflation Nominal values are to the current dollar value Real values are adjusted to the base year dollar value Inflation is an increase in the average prices of all goods and services in an economy Lecture 13 Feb 24 Circular Flow consists of product and factor markets GDP is the total market value of all final goods and services produced during a year by factors of production located within a nation s borders GDP does not include securities transfer payments government private second hand goods illegal goods and household production GDP is a total of consumer expenditures investment government expenditures and net exports NDP Net Domestic Product GDP minus depreciation NI National Income Total of all factor payments to resource owners NDP minus indirect business taxes and transfers plus U S income earned abroad and other business income adjustments PI Personal Income The amount of income the households actually receive before they pay individual income taxes DPI Disposable Income Personal incomes after personal income taxes have been paid Lecture 14 Feb 26 NDP Net Domestic Product GDP minus depreciation NI National Income Total of all factor payments to resource owners NDP minus indirect business taxes and transfers plus U S income earned abroad and other business income adjustments PI Personal Income The amount of income the households actually receive before they pay individual income taxes DPI Disposable Income Personal incomes after personal income taxes have been paid In base year real GDP equals nominal GDP Real GDP Nominal GDP Price Index x 100 Lecture 15 Feb 28 Factors that affect aggregate demand include real balance effect interest rate effect and foreign goods effect Real balance effect deals with the purchasing power of the dollar The higher the purchasing power the higher the demand The lower the interest rate the higher the demand for goods and services The cheaper the foreign goods the higher the demand for imports