Exam 1 Study Guide Introduction Macroeconomics vs Microeconomics Macroeconomics Relevant to an average American family or all American families Aggregate statistics total statistics Examples An average American exercises 20 minutes every day An average household in the US has 2 6 members Microeconomics Relevant to a specific family or families used for comparisons The family economy A unit of economically interdependent individuals whose goal is to attain their desired level of living Macro or Micro 1 To have or not to have a child 2 US fertility Rate 3 Homeownership Foreclosure Rates 4 To borrow money or not 5 Labor force participation rates 6 To buy or rent housing 7 To get a paid job or not Answers 1 Micro 2 Macro 3 Macro 4 Micro 5 Macro 6 Micro 7 Micro Micro Decision Making for a specific family Economist s Principle Assumes that decision makers are rational Cost benefit Principle you are always rational you can make poor decisions but still be rational If Benefits Costs take If Costs Benefits don t take Two types of Costs Objective easier to measure Subjective harder to measure Traditional Measures of Well Being Gross Domestic Product GDP total market value of all final goods and services produced in an economy during a given period Given period usually a year Final goods sold to the final consumers Formula GDP 2011 GDP 2010 GDP 2011 3 97 Between 2010 2011 GDP Examples Housewives taking care of their children are NOT apart of GDP If you sell your used car it is NOT apart of GDP it was counted in GDP in the year that it was made If you buy a meal at a restaurant the vegetables that the restaurant bought to make the meal is NOT apart of US GDP Gross National Product GNP total market value of all final goods and services produced by an economy s factors of production irrespective of where it was produced during a given period Factors of Production Land Labor and Capital GNP Example Wages paid to Japanese citizens working in the US US wages are apart of GDP not GNP Japan wages are apart of GNP not GDP Difference between GDP and GNP GDP Gross Domestic Product the market value of everything produced within GNP Gross National Product the value of what s produced by a country s citizens no matter where they live a country Income Personal Income your earnings from all sources What you earn not just wages from ALL sources Income 10 000 Personal Income 10 000 Disposable Income money you have after tax income Income 10 000 Income taxes 1 000 Disposable Income 9 000 Discretionary Income money you have after tax income and after you spend on necessities bills ect Income 10 000 Income taxes 1 000 Necessities 8 000 Discretionary Income 1 000 Per Capita Income per person personal income Income divided by the number of people in a household Income 10 000 Number of people in household 4 Per capita Income 2 500 Median Household Income Amount that divides the distribution into two equal parts One having income above the median The other having income below the median Example 1 Incomes for 5 households are as follows 10 000 12 000 15 000 20 000 25 000 Median Household Income 15 000 middle number Example 2 Incomes for 4 households are as follows 10 000 12 000 15 000 20 000 Median Household Income 13 500 average of the middle two Median Real Household Income Median household income that has been adjusted for inflation Example from 2011 2012 13 299 1 13 063 0 13 063 0 1 81 Inflation Inflation definition rate at which prices of goods and services rise Always a percentage Your purchasing power fails Percentage change in CPI over the previous year CPI Consumer Price Index Index of prices of goods and services used by a typical household Inflation Rate new initial initial Non traditional Measures of Well Being Considers what makes people happy Index of economic wellbeing Based of 4 Components Consumption Flow how much people are consuming public government private Wealth Stock Housing Human capital education Income Distribution equality and inequality Economic Security Health money Human Development Index United Nations Consumer Confidence HDI Life expectancy Consumer Sentiment Index aka the Consumer Confidence Index CCI an indicator defined economy that activities of savings designed to measure consumer confidence which is as the degree of optimism on the state of the consumers are expressing through their and spending CCI is not measured globally it is measured country by country Scarcity requires that decisions choices trade offs must be made Decision Making Economic Perspective Scarcity is THE economic problem Economists assume that decision makers are rational Identify all alternatives Rank alternatives in order of tastes preferences Costs vs Benefits Select alternative that furthers one s goals Choose the best decision for you Cost Benefit Analysis Should I do activity x If B x C x then you should do activity x If B x C x then you should NOT do activity x B x benefits of activity x C x costs of activity x Economists include opportunity costs in C x Opportunity Costs the value of the next best alternative that is forgone when you decide to undertake a particular action Example You attended class today instead of doing something else such as Sleeping 20 Working 12 Homework for another class 8 Going to the gym 7 The opportunity cost of attending today s class is 20 because you could have taken a nap There is no clear right or wrong answer Decision Making Levels of Economic Decisions there are five levels of economic decisions Steve Took Polly s Coral Purse Strategic Tactical Policy Control Program Strategic crucial long lasting and have widespread effects made infrequently Examples Whether to go to college or go straight into the work force To buy or to rent a house to have a child or not Decision Making Decisions are conclusions or judgments about some issue or matter quotes Decision making the process of making a choice between two or Decision Making Model 5 steps more alternatives 1 Deciding to Act 2 Identifying Alternatives 3 Evaluating Alternatives 4 Committing to Decision 5 Evaluating Results If you do not like your results you can decide to act in a different way Identifying Alternatives in state or out of state Decision Making Model College Example 1 Deciding to Act to go to college 2 3 Evaluating Alternatives ranking colleges 4 Committing to decision deciding to go to UGA 5 Evaluating Results Do you like UGA If you like UGA stay in college here If you don t like UGA you can decide to