Macro Final Review Background and Micro 1 How do economists measure the value of anything market price is determined by supply reflecting costs and scarcity and demand reflecting tastes 2 What determines the price and quantity of any good or service the intersection of the supply demand graph shifts movements 3 What is opportunity cost and why is there new free lunch opportunity cost what you give up to get something there is no free lunch because everything has its own opportunity costs 4 What does the invisible hand mean and why does it suggest laissez faire invisible hand self guided interest no government involvement free market laissez faire hands off 5 What are the three questions answered by any economics systems and how are they answered under a market based system What determined by dollar votes of consumers in their daily purchase decisions demand How determined by competition among producers goal is to keep costs at minimum profit maximizing For whom supply and demand in the markets for factors of production 6 What is the difference between capitalism socialism communism Capitalism self guided interest decisions made by firms limited government control market systems Socialism means of production other than labor should be owned by community Communism complete government control state owns and controls means of production particularly industrial capital 7 What is the definition of Microeconomics Macroeconomics Economics Microeconomics how people firms households make decisions Macroeconomics the aggregate of microeconomic principles interacting causing fluctuations in the economy as a whole unemployment price level output foreign trade etc Circular Flow and National Income Accounts and Other Measurements 1 2 Important points of the Circular flow model 1 Flow of final products spending Flow of total costs or incomes of inputs received by workers both approaches yield exactly the same measure of GDP 2 What are 5 key points in the definition of GDP Consumption largest component 2 3 of GDP in recent years spending on durable goods automobiles nondurable goods food services medical care Investment consists of the addition to the nation s capital stock of buildings equipment software and inventories during a year etc Gross investment is NOT adjusted for depreciation which measures the amount of capital that has been used up in a year NET investment gross investment depreciation Gov spending some are consumption type goods food military some are investment type schools roads excludes transfer payments payments to individuals that are not made in exchange for goods or services supplied unemployment insurance veterans benefits old age disability payments taxes must take them into account when using the earnings or cost Y T Income taxes disposable income when goes up approach to GDP consumption goes up Net Exports exports minus imports of goods and services open economy GDP vs GNP GDP depreciation NDP National Domestic Product GNP gross national product the total output produced with labor or capital owned by US residents while GDP is output produced with labor and capital located inside the US 3 3 ways to calculate GDP Value Added is one Flow of products market prices of final goods includes I G NX Flow of cost earnings approach costs of production income plus taxes and depreciation if you own your own home you are paying rent to yourself Value Added p 88 sales of each stage of production minus the costs of intermediate products avoids double counting National Income NI the total incomes received by labor capital and land constructed by subtracting depreciation from GDP equals total compensation of labor rental income net interests income of proprietors and corporate profits Disposable Income DI Y T the market and transfer incomes received by households and subtract personal taxes Savings and Investment measured savings is always equal to measured investment investment part of national output that is not consumed output approach C savings part of national income that is not consumed earnings approach C 4 What is the relation between Gross and Net Investment and Depreciation Gross investment is NOT adjusted for depreciation which measures the amount of capital that has been used up in a year 2 NET investment gross investment depreciation 5 Definition of Real and Nominal GDP Real GDP the quantity of goods and services produced in a nation during a year strictly a quantity no price involved Real GDP takes nominal GDP and corrects for price increases inflation Nominal GDP the value at current market prices of the total final output produced inside a country during a given year 6 How do you calculate Real GDP from Nominal Formula Real GDP Nominal GDP GDP deflator Real GDP Nominal GDP Price Index 100 7 What is meant by deflating Nominal GDP in terms of GDP taking in account any price changes 8 How do we measure calculate Unemployment Labor Force Employment Labor Force all those who are either employed or unemployed Employed people who perform paid work as well as those absent from work because of illness strikes or vacations Unemployed people who do not have a job but have been actively looking for work in the prior 4 weeks and are currently available for work Okun s Law for every 2 percent that GDP falls relative to potential GDP the unemployment rate rises about 1 percentage point Equilibrium frictional unemployment voluntary unemployment as people move from job to job or out into labor force teenagers gap in between jobs because people cannot find work instantaneously Structural unemployment mismatch between the supply and demand for workers demand of one kind of labor is rising while demand for another is falling Cyclical Unemployment overall demand for labor declines in business cycle downturns for structural cyclical unemployment supply and demand are not at equilibrium 9 What are Discouraged Workers and Hidden Unemployment Discouraged working people who give up looking for employment Hidden Unemployment people who are not seeking jobs but are still jobless and thus not included in the unemployment rate 10 What is the CPI What is it used for Consumer Price Index a price index that measures the cost of a fixed basket of consumer goods in which the weight assigned to each commodity is the share of expenditures on that commodity in a base year food and beverages breakfast cereal milk and snacks housing rent of primary residence owner s equivalent rent bedroom furniture apparel