ECON 201 1st EditionExam # 1 Study Guide Chapters: 19 – 20Test #1: Chapters 19 & 20- Macroeconomics- the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth- Microeconomics- the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices- Business Cycle- alternating periods of economic expansion and economic recession (GDP going up and down)- Expansion- the period of a business cycle during which total production and total employment are increasing (when GDP continues to grow every year)- Recession- the period of a business cycle during which total production and total employment are decreasing (when GDP continues to grow every year)- Economic growth- the ability of an economy to produce increasing quantities of goods and services- Example of economic growth- 2014 GDP- 17416B, 2014 GDP-16768B, 2012 GDP- 16163B (17416-16768/16768 X 100 = 3.9%, it is a 3.9% increase compared to the year prior)- Labor is the factor in the production process- Gross Domestic Product(GDP)- the market value of all final goods and services produced in a country during a period of time, typically one year- GDP is measured using market values, not quantities(because we all use different quantities)- The word value is important in the definition of GDP- Market Value- GDP is off what you produce and sell, not just produce for personal use- Final Good example:Person Amount Added Value ItemFarmer $1000 $1000 WheatMiller $5000 $4000 FlourBread Company $10,000 $5000 BreadThe bread company made the final good of bread and the market value is $10,000. You can also find the market value here by adding the added value together. Only the bread value would be added into the GDPThese 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.- GDP cannot count personal production or illegal transactions- GDP includes only the market value of final goods- Final Goods or Service- a good or service purchased by a final user(ex-bread)- Intermediate Good or Service- a good or service that is an input into another good or service, such as a tire on a truck(ex-wheat and flour)- Example of GDP:Product Quantity Price Per Unit Final/Intermediate Good ValueEye Exam 100 $50.00 Final $5,000Pizzas 80 $10.00 Final $800Textbooks 20 $100.00 Final $2000Paper 2,000 $0.10 IntermediateGDP= $7800- How to Calculate GDP-o 1st Step: classify intermediate and final goods and serviceso 2nd Step: eliminate intermediateo 3rd Step: calculate value of each product (quantity X price per unit)o 4th Step: add value of each product togethero Then you have GDP!- Circular Flow Diagram- shows interconnecting between different parts of the economy(firms provide goods and services to households, firms hire households, households are paid by firms)- Firms sell goods and services to three groups:o 1: domestic householdso 2: foreign firms and householdso 3: the government- To produce goods and services, firms use factors of production: labor, capital, natural resources, and entrepreneurship- Households supply the factors of production to firms in exchange for income in the forms of wages, interest, profit, and rent- Firms make payments of wages and interest to households in exchange for living workers and other factors of production- The sum of wages, interest, rent, and profit is total income in the economy- We can measure GDP as the total income received by households or total expendage- Households use their income to purchase goods and services, pay taxes, and save- Firms and the government borrow the funds that flow from households into the financial system, which consists of banks and stocks & bond markets- Domestic firms provide goods and services, domestic household, government, and foreign firms and households buy these goods and services,(foreign firms can also provide goods and services), the GDP is calculated from these goods and services by the formula to be explained later: Y=C+I+G+(EX-IM)- We save money in the bank and the firms and government use it- Transport payment is not included in GDP- Expenditures by foreign firms and households on domestically produced goods and services are called exports, and spending on foreign produced goods and services is known as imports- We can measure GDP by calculating the total value of expenditures or final goods and services, or calculating the value of total income- Transfer payments- payments by the government to individuals for which the government doesn’t receive a new good or service in return- Consumption- spending by households on goods and services, not including spending on new houses- Investment- spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households and firms on new houses- Government Purchases- spending by federal, state, and local governments on goods and services- Net Exports- exports minus imports- Equation for GDP: Y = C + I + G + NX (EX – IM)- Example:Household Consumption (C) $600 millionBusiness Investment (I) $300 millionGovernment Purchases (G) $150 millionGovernment Tax Revenues (T) $120 millionExports (EX) $300 millionImports (IM) $250 millionGov.’s Spend on SSN & Others $80 millionGDP(Y): (C) 600M + (I) 300M + (G) 150M + (NX) [(EX) 300M – (IM) 250M]GDP = $1100 million- Consumer spending on services is greater than the sun of spending on durable and non-durable goods- Business fixed investment is the largest component of investment- Purchases made by state and local government are greater than purchases made by the federal government- Consumption accounts for more than any of the other components- Imports are greater than exports, so net exports are negative- Example:Person Value Added Value