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CSU ECON 204 - Exam 1 Study Guide

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Midterm # 1 Study Guide Lectures: 1 – 6Lecture 1 (January 20)What is an economy? An economy is a system for coordinating society’s productive activities (Kurgan, 2009). Types of economies1. Command – controlled by governing force (ex: Egyptians, Mayans…).2. Tradition – economic system culture has grown accustomed to and continues to follow (ex: feudalism).3. Market – decisions about production and consumption made by individual producers and consumers (ex: America has a market economy, use of supply and demand). How can you think like an economist?1. All resources (any type of good used to produce something else) are scarce.2. Scarcity and choice are central to economics, specifically individual choice, meaning the decision by an individual of what to do (and what not to do). 3. Opportunity costs, the second option one misses when they choose option A, are important in decision-making and individual choices.4. Purposeful behavior is to maximize objective given constraints.5. Positive vs. normative economics: positive approaches economics objectively using data and scientific evidence while normative explores the “should” and varies depending on the economist.6. Agency is the ability to take actionWhat is the difference between Macroeconomics from Microeconomics?Macroeconomics views the economy as a whole from a larger, overall view.Microeconomics focuses on the individual and views the economy in a smaller scale.Examples:“What determines the overall cost of labor?” is a macroeconomic question.“What is the opportunity cost of going to college?” uses microeconomic thinking.The behavior of the macro economy is greater than the sum of individual actions andmarket outcomes.What are Macroeconomic Aggregates?1. Gross Domestic Product2. Employment3. Price LevelEcon 204 1st EditionWhat are National Income Accounts and Product Accounts?National income and product accounts are calculated by individual countries and used to measure the size of the economy.National income and product accounts help determine what a country should spend money on.Gross Domestic Product: only includes what has been produced in that specific country.Gross National Product: similar to GDP but includes imports as well. Lecture 2 (January 22) What is Gross Domestic Product?Gross Domestic Product measures economic output performance.The GDP measures the size of the economy as well as its growth using aggregate output for accuracy.Gross Domestic Product (GDP) is the total value of all final goods and services produced in a country in a given year.Final goods and services must be sold to the final user. Note: The purchase of a house, even if it is not newly built, is included in the GDP. What is aggregate output and economic growth?To measures the rise and fall of an economy’s output we look at aggregate output. Aggregate output is the total production of goods and services in a given time period. Aggregate output lowers during recessions and rises with prosperity.Economic growth: an increase in the maximum possible output of an economy.What is not included in the GDP?1. Intermediate goods are bought by one firm from another (generally the factors of production) and are not counted in the GDP.2. Financial assets (stocks, bonds, hedge funds etc…)3. Used goods4. Foreign goods/importsHow do you calculate the GDP?1. Add up the value of all produced.2. Add up all aggregate spending on domestically made final goods and services, known as the expenditure method. (Used most commonly)GDP= C+I+G+(X-M).C= Consumer/household spendingI= Investments/business spending G= Government spendingX=ExportsM=Imports(X-M) is also known as net exports and this number is usually negative for the United States. 3. Add up all income paid to factors of production. What is the difference between real and nominal GDP?Real GDP: includes inflation, puts everything in terms of pricesNominal GDP: does not include inflationLecture 3 (January 27) How do you calculate real GDP?In order to calculate real GDP you must pick a base/starting year and then the year you wish to find the real GDP of (we can call this year 2).The base year tells you the prices to use when calculating real GDP. Nominal and realGDP are only the same for the base year. You multiply the production of year 2 by the prices of the base year. Economists focus on real GDP because it accounts for inflation.What does real GDP not measure?1. A country can have a higher GDP due to a larger population (GDP per capita measures the average GDP per person but alone is not an appropriate policy goal because it neglects a lot of factors impact our everyday lives).2. Real GDP does not account for environmental degradation.3. Real GDP does not include informal, non-market social economies (underground, black markets etc…).4. Real GDP says nothing about how wealth is distributed (ex: a country could have a high GDP but only 5% of the population shares the majority of that wealth).5. Real GDP does not account for the degradation of capital.What is the business cycle? What terms are used when referring to the business cycle?The business cycle is the short run alternation between economic downturns and economic upturns.VocabularyDepression: a very deep and prolonged downturn.Recession: period of economic downturns when output and employment are falling.Expansions: also known as recoveries, periods of economic upturns when output andthe employment rate riseExpansion to recession: business cycle peakRecession to expansion: business cycle troughWhat is Employment?Employment is the number of people currently employed in the economy either full or part time.What is the labor force and labor force participation rate?Labor force: the labor force is equal to the sum of employment and unemployment.LF (labor force) = employment + unemploymentLabor force participation rate: % of the population aged 16 and over (in some countries 15+) that is in the labor force. LFPR (labor force participation rate) = LF/ppl 16/15+The LFPR can be used to divide LF in a number of ways, such as by gender or age.What are unemployment and the unemployment rate?Unemployment is the number of people who are actively looking for work but who are not currently employed. Unemployment rate: % of total number of people in labor force who are unemployed.Unemployment = unemployed/LFThe unemployment rate can overstate the true level of unemployment (frictional unemployment) for example people can be switching


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