ECON 201 MIDTERM 1 STUDY GUIDE 06 11 00 12 03 2014 Macro History Great Depression 1929 1933 o World economic crisis o Goods and services dropped by over 25 o Unemployment reached 25 John Maynard Keynes 1963 o Book The General Theory of Employment Interest and Money o Replaced classical theory with his own theory Classical theory laissez faire His theory was based on aggregate wage and price rigidities Economy does not work well on its own and needs help from the government Was a capitalist not a socialist Fiscal stimulus increase in federal government spending by borrowing funds to spend on a variety of programs and products Positive what actually is Normative what should be ECONOMISTS AGREE ON THREE MACROECONOMIC GOALS Economic growth Full employment Stable prices Economic Growth increase in production of goods and services over long periods of time Real gross domestic product real GDP total quantity of goods and services produced in a country over a year Real GDP per capita real GDP population High employment low unemployment Bad for overall economy high unemployment rate means not achieving full economic potential those who want to work cannot less goods and services being produced decrease in standard of living Unemployment rate the percentage of the work force who is searching for a job but hasn t found one o Target rate of unemployment 4 Full Employment and Balanced Growth Act Employment and the business cycle o When firms produce more goods and services they hire more o When production drops they lay off workers o Business cycle periodic fluctuations in GDP the bumps of workers the graph Expansion output rises Recession output falls Depression recession is severe and long lasting Stable Prices Inflation is costly to society o Purchasing power of the currency declines so people don t want to hold it take it from others o In order to fix high inflation corrective action by the government is required can cause output to decrease and unemployment to increase o Some inflation is good o Deflation negative rate of inflation The macroeconomic approach Studies the economy as a whole Aggregation combining different things into a single category and treating them as a whole o Ex I applied for 5 jobs last month 5 different work places o Microeconomists market for automobiles lumping together into the category jobs Toyota Ford BMWs etc o Macroeconomists Consumption goods pizza couches medical care Investment goods forklifts factory buildings office computers Labor doctors teachers construction workers 12 03 2014 06 11 00 Gross domestic product GDP total value of all final goods and services produced for the market place during a given period within the nation s borders Total value adds up the dollar value of all goods and services regardless of its units hours pounds etc o Good allows us to add up apples and oranges assures that a good that uses more resources counts more in GDP than something that does not ex computer chip vs tortilla chip if price increases so does GDP even though we aren t producing more o bad of all final o intermediate goods goods used up in the process of producing something else example lumber mill paper mill office supply manufacturer etc o final good good sold to its final user example the actual notebook goods and services o good something physical can hold it in your hands o service not physical ex medical check up for the market place goods with the intention of being sold during a given period only produced and sold during that period NOT USED GOODS Within the nation s borders include output produced by foreigners on US ground but exclude output produced by Americans in other countries GDP deflator 100 x nominal GDP real GDP Tracking and reporting GDP Annualization o GDP is a flow variable it measures as a rate of production Government measures GDP as an annual rate Real vs nominal o Real GDP adjusted for the dollar s changing value o Nominal GDP no adjustment for the dollar s changing value economists tend to focus more on the real GDP because it tells us more about the economy What s happening to total production Growth rate how much growth occurs from one quarter to the next 70 The expenditure approach to GDP Consumption goods and services C purchased by households o Imported consumption goods and components o Imputed items Two items are included in consumption spending even though they are not actually purchased Total value of food produced on farms and consumed by their families themselves Total value of housing services provided by owner occupied homes Government estimates how much the crops could have sold for houses could have been rented for Private investment goods and services I purchased by businesses o Business purchase of plant equipment and software Not used up during production can last many years o Change in inventory Inventory what is produced but not sold Still counted because even if it s not sold it goes into the firms inventory If 100 billion worth of automobiles is produced but 120 billion is sold we subtract 20 billion because it was counted in previous GDP o New home construction benefits will provide for many years o Private investment and the capital stock Private investment spending adds to the nation s capital in the future stock agencies etc Government goods and services G purchased by government o Paper in government offices salaries of military personnel o Transfer payments represent money redistributed from one group of citizens taxpayers to another the poor the unemployed the elderly While transfers are included in government budgets as outlays they are not included in the government purchases component of GDP Net exports NX purchased by foreigners o Total exports total imports GDP C I G NX Other approaches to GDP the economy goods The value added approach sum of the values added by all firms in o Adding up the firm s contribution as it is produced o Revenue it receives for its output cost of all intermediate Example paper mill buys 1 00 worth of wood chips turns wood chips into paper which sells for 1 50 1 50 1 00 50 50 is the value added do this for each step add them up at the end and should end up with final cost The factor payments approach adding up all the income earned by all households in an economy o Factor payments value added what is paid to owners of resources land labor capital and entrepreneurship Wages Rent Interest Profit factor payments o Total output of the economy GDP total income earned in the
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