Chapter 2 Economic Problem Macroeconomics Final Study Guide Choice is a tradeoff exchange comes from a tradeoff Factors of Production FOP and get modified with time Opportunity cost However at a particular point of time the stock of FOP that an economy has is FIXED o gives rise to Scarcity thus we have to make choices regarding the good Services that we can produce Production Possibility frontier PPF that the economy can produce and those that it can t produce with its fixed amount of Product Resources at a given time Boundary between the combination of good services Each of the points on PPF are points of Production Efficiency Trade off o Neg relation between production of each of the goods o If you want to produce more of a good you have to give up production of another good occurs when we can t produce more of a good without producing less of Production Efficiency another good o Points lying inside of PPF are inefficient o Misallocation of resources or production resources being unemployed we have inefficiency in the economy Economic Problem Production Possibility frontier PPF o Every point on the PPF represents a TRADEOFF POINTS ON PPF PRODUCTION EFFICIENCY Points below or inside PPF Inefficient points o Inefficiency arises from Unemployment or Misallocation of resources PPF PPF represents a neg relationship gets steeper as we go on increasing the production of a particular good o Can be explained through Opportunity cost Along a PPF opportunity cost of a good increases as you go on increasing the production of a particular good the opportunity cost of that good in terms of another good increases Opportunity cost of a good can be related to the slope of PPF Allocative Efficiency We look at the whole economy CONSUMERS PRODUCERS Economy gains when the objectives of Consumers and Producers are achieved Concept of Allocative Efficiency is derived from the 5th Key idea Optimal choices are made at Margin of 6 key ideas determining economic way of thinking Marginal Cost Producers MC of a producer is the Opportunity Cost OC of producing one additional unit of a good o MB MC we perform more of an activity o MB MC we perform less of an activity Marginal benefit Consumers unit of a good Marginal Benfit of a good is the additional benefit that we derive from consuming an additional o MB is measured by our willingness to pay for a particular good Principal of Marginal Benefit as we keep on consuming more and more of a particular good our MB declines with each additional good Allocative efficiency Point on the PPf for which Marginal Benefit from consuming a good Marginal cost of producing a good Allocative efficiency is achieved when we cannot produce more of a good without giving up the production of another good that we value more highly Economic Growth PPF The expansion of production possibilities an increase in the standard of living is called economic growth Two key factors influence economic growth o Technological change o Capital accumulation Technological change is the development of new goods and of better ways of producing goods and services Capital accumulation is the growth of capital resources which includes human capital Economic Growth has an Opportunity Cost We give up consumption today to have a Growth in the future We give up the production of consumers goods to have Capital Goods International Trade We gain from trade by exchanging goods and services among different nations A person has a Comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else A person has an Absolute advantage if that person is more productive than others Absolute Advantage compares PRODUCTIVENESS Comparitive Advatage Compares OPPORTUNITY COST 4 institutional Factors ensure economic activities to produce smoothly A firm is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services A market is any arrangement that enables buyers and sellers to get information and do business with each other Property rights are the social arrangements that govern ownership use and disposal of resources goods or services Money is any commodity or token that is generally acceptable as a means of payment GDP is the market value of all final goods and services produced in a country in a given time CHAPTER 4 GDP Gross Domestic Product period This definition has four parts o Market value o Final goods and services o Produced within a country o In a given time period 2 Approcahes Expenditure and Income Expenditure Approach Spending occurred on Finals Goods and Services Y C I G X M Y shows total income paid by firms to households C Consumption expenditure is the total payment for consumer goods and services I investment is the incurred on productive resources goods services for future G Government expenditure goods services bought by the gov for public provision X M The value of exports X minus the value of imports M is called net exports the red flow X M o net exports are positive the net flow of goods and services is from U S firms to the rest of the world o net exports are negative the net flow of goods and services is from the rest of the world to U S firms Income Approach Aggregate value of all the incomes occurred by FOP Compensation of Employees wages salaries retiring benefits taxes withheld pensions SS contributions earned by workers of economy Net operating Surplus Income earned by all 3 FOP Land capital and entrepreneurs o Rental Income LAND o Net Interest CAPITAL o Proprietors Income ENTERPRENEURS o Corporate Profits ENTERPRENEURS NET DOMESTIC INCOME Compensation of Employees Net operating Surplus 2nd approach of income Indirect Taxes Subsidies When we have indirect Taxes we ADD indirect taxes to the Domestic income When we have subsidies we SUBTRACT subsidies to the Domestic income Factor Factor cost cost NET DOMESTIC INCOME Compensation of Employees Indirect Taxes Subsidies 3rd approach of income Add depreciation of capital to convert the Net value of Gross Value NET DOMESTIC INCOME Compensation of Employees Depreciation GROSS DOMESTIC PRODUCT is a GROSS value In the expenditure approach we have investment expenditure as a part of the total expenditure We indicate Gross Investments as investment expenditure o Depreciation is the decrease in the value of a firm s capital that results from wear and tear and obsolescence o Gross investment total value of the new capital purchased by the firm o
View Full Document
Unlocking...