CH 6 ECONOMICS OF COLLECTIVE DECISION MAKING *SEE ATTACHED PAGE #4 summarych6A. Chapter 71. GDP: the market value of all FINAL goods and services PRODUCED WITHIN a country during a specific period.a) market value:the purchase price of goods and services easiest way is use DOLLARSb) Final good and services: only includes good/services that are purchased by the ultimate user or basically the person that bought it first and that first time is only time that is counted (this avoids counting items more than once)(1) ex: a used car bought for $2,000 dollars does that get added? no but if you add a new speaker system for $100 dollars $100 is addedc) produced: that means no transfer payments(1) money from neighbors for graduation? no(2) welfare? no(3) a finance transaction for 100$ with 10% commission? just the 10% commission of 10$ addedd) within a country: must be within borders no matter if american chinese or both just has to be within our borderse) specific period: usually over a year of time to compare with other gdp from prior years2. 2 ways to calculate GDPa) 1) Expenditure approach Y = C + I + G + NX(1) Y=total gdp(2) C= consumption; what households spend on goods and services durable: last a while like laundry machine, and non-durable like the laundry detergent and lastly services(3) I= investment; two kinds fixed like building machines etc. and inventory that is things added to business inventory Net Investment= investment-depreciation(4) G= government expenditures ARE COUNTED AT COST NO VALUE!!; goods/services everything govt has to buy paper pens etc, police etc. and capital goods are things such as highways missiles etc. NO TRANSFER PAYMENTS!(5) NX= net exports= exports- imports3. Resource Cost Income Approach another way to calc. GDP dont need to know how to calc. just be aware largest component is EMPLOYEE COMPENSATION4. GNP= gross NATIONAL product simply means no longer is it worried about the geographical borders, but instead WHAT US ARE ABLE TO PRODUCEa) therefore anything produced by an American Citizen no matter if in japan or india goes towards GNP of the US, but if a Chinese company has a factory in the US and makes millions of dollars of goods those are NOT in GNP b.c not made by american citizen (although it does count towards american GDP b.c within our borders)5. Nominal and Real Values?a) nominal value is in CURRENT dollars; whereas real values have been adjusted to reflect INFLATION6. PI compares purchasing same items from current year in comparison to x amount of yrs agoa) PI= $ of bundle current year/ $ exact same bundle of exact same items of base yearb) base year= whatever year you are comparing too or converting to7. 2 most common price indexes are...a) CPI - consumer price index is a GENERAL PRICE INDICATOR OF PRICE particularlly on what household buyb) GDP Deflator- much BROADER than CPI and includes capital goods and other goods purchased by govt and business8. REAL GDP= nominal gdp x (gdp deflator base yr/gdp deflator current yr)9. Whats some issues with the GDP calculations?10. what is a broad indicator of GENERAL LIVING CONDITIONS? per capita GDPa) per capita GDP= total GDP/ populationB. Chapter 81. the general fluctuations in the basic level of economic activity = Business cycle (yes recessions are actually normal)2. what 2 variables are usually used to measure fluctuations?a) 1= changes in REAL GDPb) 2= the unemployment rate (how to calc later in guide)3. Expansion: characterized by growing GDP and declining unemployment4. Peak (boom): the height of the expansion phase5. 3. Contraction: characterized by falling GDP and rising unemployment6. 4. Trough: The lowest point of the contraction phase7. 5. Recession: A decline in real GDP for two or more consecutive quarters8. Depression: is a very prolonged recession9. Labor Market Definitions SEE SCANNED DOCUMENT FOR SIMPLE EXAMPLES/ EXPLANATION!!!! *SEE ATTACHED PAGE #5a) Employed: he/she is employed is has worked (full OR part time) within past week OR is *sick or *vacation leave!b) Unemployed: he/she NOT currently employed but(1) must be ACTIVELY SEEKING JOB LAST 4 WEEKS(2) WAITING TO RETURN OR START NEW JOBc) Civilian Labor Force: those 16+ who are employed or unemployed10. 3 Types of Unemploymenta) Frictional- unemployment results from IMPERFECT INFO. that prevent workers from being matched with employersb) Structural-C. Chapter 91. Labor Market - *SEE ATTACHED PAGE #6a) price axis is Wage and quantity is Employment2. Loanable Funds Market- *SEE ATTACHED PAGE #7a) price axis is real interest rate, and quantity is the quantity of amount saved3. Aggregate Goods/Services Market *SEE ATTACHED PAGE #8a) price axis is the Price index and quantity is Y real GDP(1) **long run supply is vertical b.c its inelastic because in the long run people have tim to adjust to the overall increase in Price indexb) Foreign Exchange Market -*SEE ATTACHED PAGE #9c) Interest Ratesd) Nominal Interest Rates- the % of total amt that was borrowed that the lender must re-pay in addition to the total amt.e) Real Interest Rate- the interest rate adjusted for inflation (basically the real cost of lending/borrowing)f) if ACTUAL rate of inflation > ANTICIPATED(1) borrowers gain, lenders looseg) if ACTUAL rate of inflation < ANTICIPATED(1) borrowers loose, lenders gainh) INFLATION DOESNT HELP BORROWERS NOR LENDERS IN A SYSTEMATIC WAY CANT PREDICT IT OR TAKE ADV OF IT!i) Interest Rate and Bond prices are INVERSELY RELATED(1) if interest rate rises then market value of already issued bonds riseD. Chapter 101. SHIFTERS OF LONG RUN AGG. SUPPLYa) Change in Resource Base(1) resource base increases= LRAS increasesb) Change in Technology(1) technology increases= LRAS increasesc) Change in Institution Arrangements(1) more free trade and less strict= LRAS increases2. SHIFTERS OF SHORT RUN AGG. SUPPLYa) Change in Resource Price(1) resource price increases= SRAS increasesb) Change in expected rate of inflation(1) expected inflation decrease= SRAS increasesc) Supply Shocks(1) positive shocks= increase in SRAS; negative shocks= decrease in SRAS3. WHENEVER LRAS SHIFTS SRAS SHIFTS WITH IT!!!!4. What causes a RECESSION?a) #1 An unforeseen FALL in AGGREGATE DEMANDb) #2 an unforeseen FALL in SRAS5. OK.. Well what causes EXPANSION?a) #1 unforeseen RISE in ADb) #2 unforeseen RISE in SRAS6. 3 REASONS OF THE SELF CORRECTING ECONOMY7. #1Permanent Income Hypothesis- simply that people’s consumption depends on their long run EXPECTED income rather than
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