ECO 2013 Exam 2 Study Guide CHAPTER 6 is indicated by government expenditures as a percent of U S GDP Size and Growth of the U S Government Size of government 1930 9 4 2013 36 3 Where is the government spending your money Federal Government 1 Medicare and Health 23 8 2 Social Security 20 3 3 National Defense 19 6 State Government 1 Education 27 6 2 Public Welfare and Health 22 1 3 Administrative Expenses 15 8 transfers of income from some individuals to others Ex social security unemployment benefits welfare etc Transfer payments comprise nearly of total government spending Transfer payments Rational ignorance effect information needed to cast an informed vote Marginal benefit of voting much you care that a certain candidate wins vote and actually going to vote Marginal cost of voting the chance that your vote was the deciding vote multiplied by how the cost of informing yourself information is costly registering to a rational individual can have little or no incentive to acquire the Median voter theory the idea that a vote maximizing politician in a two party system will be close to the middle so there is little difference between candidates and the preferences of the median voter will be represented When the Political Process Works When the voters pay in proportion to the benefits whey receive then the productive projects require people who use a service more to pay a larger share of the cost will be passed and unproductive projects will not User charges Ex gas taxes When the Political Process Does NOT Work Special Interest Effect specialized interest groups Who should get your money American Interest Group AIG General Motors GM Special interest effect generating minimal costs to a large group In aggregate losses may exceed benefits How is this done an issue that generates substantial benefits for a small group by the practice of trading votes by a politician to get the necessary support to Logrolling pass designed legislation Peark Barrel Legislation financed through the federal government a package of spending projects benefitting local areas politicians will favor programs that generate current visible benefits Short sightedness Effect even if the long term costs of the project outweighs the benefits Rents Seeking take the wealth of others actions taken by individuals and groups in order to use the political process to Ex GM 2007 14 5 million 2008 13 3 million 2008 GM gets 28 billion 2008 9 7 million AIG 2008 AIG gets 180 billion People spend time trying to gain political favors instead of producing unlike private firms the public sector lacks the incentive to produce Efficient budget gets cut profit Inefficient budget gets expanded loss out of business Lack of Profit Motive efficiently Ex Government Private CHAPTER 7 the market value of all final goods and services produces within a Gross Domestic Product GDP country during a specific period usually a year Final Goods and Services goods and serviced purchased by their ultimate user intermediate goods and services goods purchased for resale or for use in producing another good or service avoid double counting we don t count intermediate goods because their value is contained within the final good Ex Making Bread Producer Farmer Miller Baker Grocer Revenue 0 30 0 65 0 90 1 00 2 85 Cost 0 30 0 65 0 90 Value Added 0 30 0 35 0 25 0 10 1 00 only goods and services that are produced are counted in GDP transfer payments Ex not counted 100 graduation gift welfare payments financial transactions Within a Country GDP counts only goods and serviced produced within the geographic borders Produced are not of a country Ex production of a U S Nike factory in Indonesia is NOT INCLUDED in U S GDP During a Specific Period only goods produced in 2015 are included in the figure for 2015 GDP a house produced in 2003 and resold in 2014 is not included in 2014 s GDP but if you Ex rent it out you are producing a service as a landlord so that is contributed to GDP Expenditure Approach Y C I G NX Y GDP C Consumption I Private Investment G Government consumption and Gross investment NX Net exports Investment Inventory Investment Fixed Investment Inventory investment added inventory not sold yet Net Exports Exports Imports Inventory Investment Ending inventory Beginning inventory Gross National Product GNP total market value of all final goods and services produced by the Resource cost income approach Y GDP employee compensation proprietor s income rent corporate profits interest income indirect business taxes depreciation net income of foreigners citizens of a country Counts income of Americans abroad Ignores income foreigners earn in the U S Is different from GDP in that it counts all the citizens of a country no matter where on earth they are while GDP counts only within the boundary of a country regardless of what citizens are within it Nominal Values have been adjusted for the effect of inflation expressed in current dollars Real values To calculate real values you need to know Nominal Values Price index for current year and the year you are comparing it to Ex Real GDP2015 in 2000 dollars nominal GDP2015 x PI2000 PI2015 Price Index cost of bundle in current year cost of bundle in base year 2 Key Price Indexes how do prices affect households indicator of general level of Consumer price index prices Designed to measure the impact of price changes on the cost of the typical bundle of goods purchased by households rakes cookies shoes toasters GDP deflator how has inflation affected our nation reveals cost of items included in GDP broader than CPI includes capital goods and other goods purchased by businesses and government rakes cookies shoes toasters forklifts missiles policeman s salary highways Limitations of GDP Excludes non market production Excludes the underground economy Underground economy channels i e drugs prostitution unrecorded anything any transactions that take place outside the recorded market Excludes leisure and human costs We re producing more with less work hours and on overall safer environment and it is not being recorded in any way Difficulties measuring quality variation and introduction of new goods Excludes cost of harmful side effects Pollution destruction natural disaster etc Per Capita GDP Per Capita GDP GDP Population CHAPTER 8 Business Cycles fluctuations in the general level of economic activity Usually measure by 2 variables Change in real GDP Unemployment rate characterized by growing GDP and declining unemployment
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