Econ 2133 1st EditionExam # 1 Study Guide Lectures: 1-5US trend growth: - since WW2 = 2.5 – 3% - 2014, we got 2.6%.... now 9 years in a row of below 3%. - On average it grows 2.5 percent and that’s REAL GDP. - 17.5$ trillion dollars is nominal current GDPCyclical turning points of the US business cycle since 1960A. Periods of Economic Expansion 1. Longest Period of Economic Expansion: March 1991 to March of 2001 (121 months) 2. Second Longest Period of Economic Expansion: Feb 1961 to December 1969 (106 months)3. Third Longest Period of Economic Expansion: November 1982 to July of 1990 (92 months)B. Periods of Economic Contraction (Recession)1. The Great Recession: December 2007 to July 20092. Second worst recession: July 1981 to 19823. OPEC Recession: November 1973 to March 1975Real GDP vs. Nominal GDP: what is the difference?- Inflation makes this comparing apples to oranges- P1971 x Q1971 vs. P2015 x Q2015NEED INFLATION FREE PPC, need to measure level of output in terms of prices back in 1971.- Nominal GDP: GDP measured in current prices which contains inflation- Real GDP: GDP measured in constant prices which does not contain inflationWhat is counted in GDP and what are the equivalent measures (C+I+G=National Income=Aggregate Demand=PxQ)? Current value? What’s not counted?Gross Domestic Product (GDP): measure of overall economic activity- Nominal GDP = Aggregate Market Demand = Total Spending = Sum of all Good Spending = National Income- Aggregate Market Demand: total sum of demand for goods and services- ∑ spending = ∑ payments of factors of productionEx) Wages are a cost to a producer but an income for their workers.*** All the same and mean the same depending from you viewpoint (if you are an individual, consumer, or government) - GDP = C + I + G - C: consumption/ consumers- I: investment/ capitol held by businesses- G: government federal money- GDP = P x Q- P: Overall price level- Q: Output of goods and services produced and consumed- Therefore C + I + G = P x Q- Examples of GDP Spending and what it can tell us:- WWII, 52% of US GDP spent on war by government- 2014, 48% of US GDP spent by government but on what?^ Social programs/ entitlementsPro cyclical-counter cyclical-a cyclical and examples of each A. Pro cyclical: varies with the business cycle and goes up together then down together EX) tax revenues, employment rateB. Counter cyclical: varies with the business cycle and goes opposite EX) unemployment, federal deficit budgetC. A cyclical has no relation with Business CycleEX) Spending habits on citrus fruitThe Business Cycle: The Business Cycle: periods of economic growth above trend followed by “fits” and “spasms” if economic contraction below trend that repeat at an irregular interval Exponential or Linear Trend of economy?- Rule Number 3: Greed kills- Have Linear to have macroeconomic stability, a secular trend 1945-2010 = 2.5 to 3 % / year; 2014 finally peaked above 3% level which is historical average- We get above and below trend that repeats itself over and over again as an economy but irregularly Secular cycle has 4 phases:1. Expansion (upward positive economic growth), last for an average of 59 months so roughly 5 years2. Peak (highest level of growth then begins to fall)3. Recession/ Contractions (economic activity is falling and economy is retracting), last for an average of 11 months4. Trough (lowest point of economic growth and starts looking up to expansion)Amplitude and Periodicity in Business Cycle1. Amplitude: killer of dreams, bigger the amplitude the less economic stability, highs and lows of cycle swings. Goal is to minimize amplitude and it creates economic instability 2. Persistence/ periodicity: length of time for the cycle to return to trend after a disturbance. Minimize inevitable recessions, take a blow and get right back up there. Longer it takes the greater the forgone cost of economic production the longer it will take 3 questions every society needs to answer (what to produce, how to produce it, and for whom)Fundamental questions (3) for every society (abundance or deprivation)1. What to produce? - Inputs (land, labor, capitol, entrepreneurship) to production process to outputs (goods & services that increase peoples’ welfare and make them happier) 2. How to produce? - To most efficiently produce goods and services with scarce resources. - Why perfect competition called so because it allocates resources to make best/ mostgoods3. For whom to produce? - One way or the other we have to figure out who gets what and how much they get- How to allocate economic output? In US we use mixed economy: mixture of markets and government intervention- 3 Questions in the US are answered by a mixture of markets and govt intervention- Laws of Supply & Demand with individuals choices- But wait need government to help make it fair for others and help with fair allocation of scarce resources. - So we have income redistribution programs^ Govt decides who they are taking money away from to give to who is determined to need it Egalitarianism: being your neighbors/ fellow citizens keeper… share your wealth because you have a duty to do so aka social safety net 5 macroeconomic goals (full employment, price stability, economic growth are trinity, other 2 still important-1. Full Employment: on the production possibilities curve (PPC)- Without full employment it’s not using resources in best way or maximum way so being fully employed is doing so.- 5-6% national unemployment (5.6%) because big change to employment population ratio (percentage of people working and has been falling over last 8 years)- 2007: 63% of working age who are working or seeking work - 2015: 58% - Because 5% of adults retired, huge opportunity cost Economic Activity (17.5 mil/yr)Class A Class B Class C Class D- Demographically disaggregate- Ex) male college graduates have lower unemployment rate b/c college education and matrimony makes for a good worker - Ex) high school dropout have higher unemployment rate - Geographically disaggregate- Ex) Raleigh has smaller unemployment than Greenville -2. Price Stability (low and stable inflation)- Inflation: percent goes up on the overall generation of level of prices- Ever 1 dollar decrease per gallon of gas puts 276 billion dollars back into American pockets that used to go to oil producers- Ṗ = percentage growth rate Pt- Pt-1/ Pt-1 x 100 - Inflation alters the purchasing power of income and moves down ladder of