Principles of MacroeconomicsECO2013Prof. Joab CoreyExam Study GuideWhen the political process works….When voters pay in proportion to the benefits they receive, then productiveprojects 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 Effect2. Shortsightedness Effect3. Rent Seeking4. Lack of Profit Motive1. 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 currentvisible 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 7Taking the Nation’s economic pulseGross 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. Product Price Contribution to GDP 5 apples $.05 $.255 oranges $.10 $.50$.75 Total GDP- Goods that are worth more add more to GDPFinal 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. Product Price GDP 3 apple juice $.20 $.60- Avoid double counting: we don’t count intermediate goods because their value is contained within the final goodProducer ( Revenue - Cost) )= Value Added Farmer $.30 ------- $.30Miller $.65 $.30 $.35Baker $.90 $.65 $.25Grocer $1.00 $.90 $.10$1.00-Final value added should equal the same as final revenueProduction: 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 GDP1. Expenditure approach2. Resource cost-income approachExpenditure Approach:Y= C+I+G+NXY: GDPC: ConsumptionI: InvestmentG: Government consumptionNX: Net Exports- 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 – ImportsResource Cost-income Approach1. Employee compensation +2. Proprietor’s income +3. Rents +4. Corporate profits +5. Interest income +6. Indirect business taxes +7. Depreciation +8. Net income of foreigners GDPGross National ProductGNP: Total market value of all final goods and services produced by the citizens of a country.o Counts the income Americans earn abroado 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 year1. 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 consumingo Use GDP deflator for economy inflation- To calculate real values you need to know:1. Nominal values2. Price Index for current year and the year you are comparing it to- Limitations of GDP1. 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 costs4. Difficulties measuring quality variation and introduction of new goods5. Excludes the cost of harmful side effectsPer Capita GDP=GDP/Population-Per Capita GDP is a broad indicator of general living standardsChapter 8Economic fluctuations, unemployment & inflationBusiness Cycle: Fluctuations in the general level of economic activity- Measured by two variables:1. Changes in real GDP2. Unemployment rateBusiness Cycle definitions1. Expansion: characterized by growing GDP and declining unemployment2. Peak (boom): The height of the expansion phase.3. Contraction: Characterized by falling GDP and rising unemployment4. Trough: The lowest point of the contraction phase5. Recession: A decline in real GDP for two or more consecutive quarters6. Depression: a prolonged and severe recessionLabor Market Definitions1. Employed: Person is employed if he or she has worked full or part-time in thepast 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) or2. Waiting to start or return to a job- Those who do not have a job and are not seeking employment are not considered unemployedI. Population1. Under 16 years and/or institutionalized2. 16 and older and non-institutionalizedA. Not in labor force: Students, retirees, disabled, homemakers, discouraged workersB. In labor forcea. Employedb. Unemployed3.
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