ECON 104 NOTES QUESTIONS Section 1 Learning Goals In this section we re studying how economists measure two things the size of an economy with GDP and average prices in an economy with the GDP deflator and the Consumer Price Index We want to understand these so that we can measure how economies grow like the U S Australia or Botswana or don t like Haiti or the Democratic Republic of the Congo after you adjust for the effects of rising prices i e inflation The chapter numbers below are from the 4th and 5th editions so be careful if you have the 3rd Ch 8 deals with GDP and Ch 9 with unemployment and the CPI After you read the text study this material and we cover it is class you should Be able to calculate real and nominal GDP and explain what they measure Ch 8 1 8 3 and notes GDP measures production spending and income in a nations economy in a very precise way When measuring GDP by spending C I G NX not capital K Real GDP calculates GDP using the base year price Nominal GDP calculates GDP using year price from year in question Be able to explain i what fiscal and monetary policy are ii how they influence the economy and iii how they are currently being used in the U S notes 1 FISCAL government ex Taxes 2 MONETARY bank ex Interest rates 3 They influence the economy by the following affect what the general population can buy Be able to calculate the GDP deflator and CPI and explain what they measure Ch 8 3 9 4 and notes CPI price index that measures the price level for consumers averages consumer prices together but the things that consumers purchase more of are more heavily weighted o Limitations of GDP and CPI GDP deflator uses nominal and real GDP to measure the Price Level avg price of all goods and services in an economy it measures prices relative to their values in the base year Inflation deflator measure economic growth by the percentage change in real GDP Be able to calculate the inflation rate core and headline real wages and real prices and to be able to explain what they measure Ch 9 4 9 5 and notes Calculations real GDP Nominal GDP GDP deflator and CPI Calculate Inflation rate core and headline real wages and real prices o Core rate of inflation measures inflations w o food and energy better sense of underlying inflation o Headline inflation measures inflation with food and energy o Real price what a price would be if there was no inflation Be able to calculate real interest rates and explain their importance Ch 9 6 and notes Real Interest Rates nominal interest rates inflation rate It provides a better measure of the truth cost of borrowing and truth return to lending than does the nominal interest rate Be able to explain what economists mean by money both the definition and how money is measured in the U S Ch 14 1 14 2 and notes Money assets that people are generally willing to accept in exchange of goods and services or for payment of debts An asset is anything of value owned by a person or a firm People are interested in the money supply because as we will see changes in the money supply can affect other economic variables including employment gross domestic product GDP and inflation Know the current values for real GDP nominal GDP the CPI the GDP deflator and the CPI and inflation deflation and disinflation as measured by the last two Also be able to describe their behavior since 1970 from our charts This means knowing their trends as well as behavior over expansions and recessions notes Section 1 handout and material below Nominal GDP 17 3 trillion 2014 II Real GDP 16 0 trillion 2014 II Economic Growth by the change in real GDP 2 6 from 2013 II to 2014 II at an annual rate Behavior since 1947 general substantial growth with 11 recessions Be able to describe the harm from inflation Ch 9 7 and notes Describe harm of inflation most of what we deal with is are nominal money values such as contracts prices gas salaries tuition these do not automatically adjust with inflation 1 Harm from unanticipated inflation can reduce real wages can reduce real interest rates carries larger costs that anticipated inflation Be able to use the key terms in these chapters see the end of the chapter for the list and definitions used in class Ch 8 9 4 to 9 7 2 Value added the additional market value a firm gives to a product and is equal to the difference between the price for which the firm sells a good and the price it paid other firms for intermediate goods 3 Produces price index an average of the goods and services at all stages of the production process Section 2 Learning Goals In this section we re studying how economists explain growth over decades and centuries We build upon what we did in the first section in that we often use real GDP to measure production a well as income The chapter numbers below are from the 4th and 5th editions so be careful if you have an earlier one as you d expect both deal with long run growth After you read the text study this material and we cover it is class you should Be able to explain why economic growth isn t zero sum notes 1 Economic growth is not zero sum because real GDP per person has risen over time Be able to explain the relationship between human health and economic growth Ch 10 1 2 Labor productivity Y L real GDP worker a rise in productivity results in more capital per worker hour K L more workers more things getting made 1 Technological change the idea that there can be more production without more inputs workers K L machines replacing people which would lead to more human capital better capital and better organized production these shift the curve up ONLY and determine how fast the economy grows Be able to explain how long run economic growth has dramatically changed life and how novel the last two centuries have been Ch 10 1 and notes sustained economic growth depends on sustained technological change due to diminishing returns to capital 3 Real per capita GDP12 8400 4 Real per capita GDP 77 350 5 the real per capita per gdp grew 10 a year Be able to calculate growth rates and doubling times with the Rule of 70 Ch 10 1 and notes Rule of 70 an approximation for the approximate of years something takes to double Be able to explain why small differences in growth rates matter dramatically over long periods Ch 11 1 and notes Per capita in Argentina was larger than that of Italy but Italy had 2 7 percent of growth rate and Argentina had 1 5 percent Italia s GDP has risen and Argentina lowered because of a small difference in the growth