Principles of Macroeconomics ECO2013 Prof Joab Corey Exam Study Guide When the political process works When voters pay in proportion to the benefits they receive then productive projects will be passed and unproductive projects will not be passed o User Charges Requires people who use a service more to pay a larger share of the cost When the political process does not work 1 Special Interest Effect 2 Shortsightedness Effect 3 Rent Seeking 4 Lack of Profit Motive 1 Special Interest Effect An issue that generates substantial benefits for a small group by generating minimal costs to a large group In aggregate losses may exceed benefits A Logrolling The practice of trading votes by a politician to get the necessary support to pass desired legislation B Pork barrel Legislation a package of spending projects benefitting local areas financed through the federal government 2 Shortsightedness Effect Politicians will favor programs that generate current visible benefits even if long term costs of the project outweigh the benefits 3 Rent Seeking Actions taken by individuals and groups in order to use the political process to take the wealth of others People spend time trying to gain political favors instead of producing 4 Lack of Profit Motive Unlike private firms the public sector lacks the incentive to produce efficiently Chapter 7 Taking the Nation s economic pulse Gross Domestic Product GDP The market value of all final goods and services produced within a country during a specific period Market Value Goods are weighted according to the purchase price of the good or service Price Product 05 5 apples 10 5 oranges Contribution to GDP 25 50 75 Total GDP Goods that are worth more add more to GDP Final goods and services Goods and services purchased by their ultimate user Intermediate goods services Goods purchased for resale or for use in producing another good or service GDP 60 Avoid double counting we don t count intermediate goods because their Product Price 3 apple juice 20 value is contained within the final good Revenue Producer 30 Farmer 65 Miller 90 Baker 1 00 Grocer Cost 30 65 90 Value Added 30 35 25 10 1 00 Final value added should equal the same as final revenue Production Only goods and services that are produced are included in the GDP transfers are NOT Sales commission isn t counted in GDP Within a country GDP counts only goods and services produced within the geographic borders of a country During a Specific Period Only goods produced in 2014 are included in the figure for 2014 GDP 2 ways to measure GDP 1 Expenditure approach 2 Resource cost income approach Expenditure Approach Y GDP C Consumption I Investment G Government consumption NX Net Exports Y C I G NX Consumption Household spending on goods and services during current period Largest component of GDP 1 Durable Goods Cabinetry furniture 2 Nondurable Goods Toilet paper food 3 Services Landscape plumbing Investment Production or construction of capital goods that provide future service 1 Fixed investment forklift 2 Inventory investment Ending Inventory Beginning of year inventory Government expenditures Does not include transfer payments 1 Goods services Paper stapler 2 Capital goods Missiles highways Net Exports Exports Imports Resource Cost income Approach 1 Employee compensation 2 Proprietor s income 3 Rents 4 Corporate profits Interest income 5 6 Indirect business taxes 7 Depreciation 8 Net income of foreigners GDP Gross National Product GNP Total market value of all final goods and services produced by the citizens of a country o Counts the income Americans earn abroad o Ignores the income foreigners earn in U S Nominal values Values expressed in current dollars Real values Values that have been adjusted for the effects of inflation Price Index Measures the cost of purchasing a market basket of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period PI Cost of bundle in current year Cost of same bundle in base year 1 Consumer Price Index Indicator of general level of prices Compares the cost of a typical market basket in a specific period to the cost of the same basket in a different period 2 GDP deflator Reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year o Use CPI for household consuming o Use GDP deflator for economy inflation To calculate real values you need to know 1 Nominal values 2 Price Index for current year and the year you are comparing it to Limitations of GDP 1 Excludes non market production nobody s getting paid 2 Excludes the underground economy Weed paraphernalia Underground economy Any transactions that take place outside recorded market channels 3 Excludes leisure and human costs 4 Difficulties measuring quality variation and introduction of new goods 5 Excludes the cost of harmful side effects Per Capita GDP is a broad indicator of general living standards Per Capita GDP GDP Population Chapter 8 Economic fluctuations unemployment inflation Business Cycle Fluctuations in the general level of economic activity Measured by two variables 1 Changes in real GDP 2 Unemployment rate Business Cycle definitions 1 Expansion characterized by growing GDP and declining unemployment 2 Peak boom The height of the expansion phase 3 Contraction Characterized by falling GDP and rising unemployment 4 Trough The lowest point of the contraction phase 5 Recession A decline in real GDP for two or more consecutive quarters 6 Depression a prolonged and severe recession 1 Employed Person is employed if he or she has worked full or part time in the Labor Market Definitions past week or is on vacation or sick leave from a regular job 2 Unemployed A person who is not currently employed but is 1 Actively seeking employment in last 4 weeks or 2 Waiting to start or return to a job Those who do not have a job and are not seeking employment are not considered unemployed I Population 1 Under 16 years and or institutionalized 2 16 and older and non institutionalized A Not in labor force Students retirees disabled homemakers B discouraged workers In labor force a Employed b Unemployed 3 Civilian Labor Force Number of people age 16 or older who are employed or unemployed Civilian labor force Employed Unemployed 4 Labor Force participation rate Percent of population age 16 and over who is in the civilian labor force Civilian labor force population 16 5 Unemployment rate Percentage of people in
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