ECON 0110 1st Edition Lecture 3 Last lecture: in the last lecture, we talked about the common errors in economic reasoning and the four types of economic decision makers.Current lecture: Today, we talked about the negative externality and the positive externality. Additionally, we talked about the first major macroeconomics goal which is to promote the economic growth. EXTERNALITYA cost or benefit that affects people not involved in an activity or market transaction and is therefore ignored by the individuals involved in the activity or market transactionNEGATIVE externalities impose costs on third parties:noise, polluted air, litter, auto emissions, polluted water, unkempt yards, bright headlights, bald tires on snowy mountain roadsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Government uses laws, regulations, fines and taxes to limit negative externalitiesPOSITIVE externalities confer benefits on third parties:Good schools, educated citizens, medical improvementsGovernments promote positive externalities through subsidies and tax reductionsMAJOR MACROECONOMIC GOALS(EMPLOYMENT ACT OR 1946)Full employmentPrice stabilityEconomic growthAdditional major goal: smooth out the business cycleGOAL 1PROMOTE ECONOMIC GROWTHIncrease output of goods and servicesBoost output per capita.HOW DO WE MEASURE TOTAL OUTPUT?NOMINAL GROSS DOMESTIC PRODUCT (GDP)The dollar value of final output of goods and services produced in the United States.The growth rate of NOMINAL GDP is a deceptive indicator or economic growth.1. IF OUTPUT INCREASED 10%:This is economic growth2. IF PRICES INCREASED 10%:This is not economic growthThis is inflationCALCULATION OF A GROWTH RATE:Growth rate = (New – Old)/Old x 100%Example:New value = 2,200Old value = 2,000Growth rate = (2200 – 2000)/2000 x 100%= .10 x 100% = 10%NOMINAL GDP:Value of output calculated using prices that existed during the year when the goods and services were producedValue of output in 2005 using 2005 pricesTO GET NOMINAL GDPThe 2014 Economic Report of the President has 26 data tables: See Table B-2http://www.gpo.gov/fdsys/browse/collection.action?collectionCode=ERP&browsePath=2014&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=0CREATION OF A CONSUMER PRICE INDEXTo create a price index, we first choose some year to be the base year, say, Year 0. Next we choose a representative set of quantities of items Q0 that are purchased by consumers.Next we determine how much those quantities cost using the prices that existed during various years.That is, we calculate, say, P0Q0, P1Q0, P2Q0, etc.PRICE INDEXThe index for Year n is equal to:(PnQ0/P0Q0) x 100SOME MINOR GOALSProvide for the disadvantagedRedistribute income to help the poor via taxes and transfer
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