ECON 203 Exam 2 Study Guide Lectures 7 10 Lecture 7 Main Ideas Point of Economics is to control the economy through policy Keynesian theory and statistics defined the economy to help create policies in order to properly control the economy they created the GDP in order to define this GDP GDP is the key concept economists use when dealing with the economy Real GDP is a measure of the actual product goods services the physical product a pair of jeans The issue with Real GDP is you can t combine the Markets since it is a measure of the physical good 3 jeans 2 shirts DO NOT MIX Nominal Value the value that comes from the GDP Calculation or the money value assigned to each product price x quantity nominal value The GDP equation Price of Product x Quantity Market Production Final Value unit of time Then you would just add the Final Value unit of time of the other Markets to calculate National GDP so if you had a nation that produced only 20 jeans at 5 dollars and 20 shirts at 3 dollars in one year 5 x 20 100 1 year 3 x 20 60 1 year 100 1year 60 1 year 160 year Since your jean market was worth 100 and your shirt market was worth 60 you d combine them for a National GDP of 160 this can get complicated when trying to combine a Nation s economy which includes thousands of goods and services Lawyer Maid and Chef make sure to use the final good however Final Goods Services the final value of the final product which is consumed or used by the consumer Wheat Flour Bread Bread would be the final product even though wheat was the initial good because the bread is being used by the consumer you use final goods in an economy in order to prevent double counting of a product and over estimating GDP GDP theoretically is supposed to be a measure of economic welfare high is good low is bad However GDP per capita is a more accurate representation of this since it represents the GDP per person or GDP Population If we had two nations with the same GDP at 300 one had 3 people and the other had 100 300 3 people 100 per person 300 100 people 3 per person Obviously the country with 3 people has better economic welfare since it has a higher GDP per person think about Chinas high GDP but high population Issues with GDP Housewife Problem if GDP is supposed to include services Lawyers does a Homemaker s chores such as cleaning cooking taking the kids to school factor into the GDP In theory yes but in practicality no since homemakers don t have a true market we can t place a value on their time leading to an underestimate of GDP Nominal Value issue Nominal Value can change while Real Production Real GDP does not leading to an increase of GDP without an increase of Real GDP inflation Here we will take the same jeans and shirt example from earlier only we will factor in a population of 10 100 1year 60 1 year 160 year 160 10 16 per person each person can buy 2 jeans and 2 shirts Now if we double the price of jeans and shirts but not the Real GDP quantity of goods then only inflation will happen without any positive benefit to the society 10 x 20 200 1 year 6 x 20 120 1 year 200 1year 120 1 year 320 year 320 10 32 per person Even though theoretically the GDP has doubled as well as the GDP per Capita the population can still only buy 2 jeans and 2 shirts since the only thing that changed was the nominal value not the production Lecture 8 Business Cycle refers to the ups and downs of the GDP Main Ideas Up in GDP is called Expansion Down in GDP is called Recession Contraction GDP is used to understand define the Business Cycle ups and downs of the Economy The Business Cycle In capitalism there is a general trend upward however in theory it suggests that the more you expand the more you go back down the economy balances itself Spending is related to the short run business cycle of the economy Ups and Downs fluctuations of the Economy reflect the ups and downs of spending fluctuations There are 3 Spending Sources 1 Consumers Buy Consumer Goods food clothes etc 2 Investors The person who buys Production Goods Oven for a restaurant they buy goods for businesses or goods that contribute to the production of a final good 3 Federal Government Expenditures Keynesian Economics To Keynes limiting the up was as important as limiting the down have some expansion limit it then have some depression to stabilize and not inflate the economy with the economy having a gradual trend upward as opposed to booms and then recessions Keynesian Economics focused only on the Short Term Business Cycles Lecture 9 Main Ideas Macroeconomics is specifically analyzed in relation to the fluctuations of the Economy Counter Cyclical Policy Supposed to pursue policies that have the opposite effect of what the economy is doing Keynesian These are used to slow expansion and stop recession since the goal is to smooth the GDP business cycle over time Fiscal Policy refers to government taxes and government expenditures Monetary Policy and Fiscal Policy are two types of economic policy Fiscal Policy Fiscal Policy Manipulation of Government Taxes and expenditures to influence the Economy ups and downs There are 2 types of Fiscal Policy both are Counter Cyclical in theory Automatic and Discretionary Automatic Policy Used as a stabilizer When the economy this pre established Policy goes into effect think cruise control up and down hills It is triggered based on economic events Discretionary Policy Make up policy as you see fit It is left up to the government political process to determine what Policies are made These are not always permanent and designed at the moment for the occasion Example Unemployment Payments if people lose their jobs then they start to receive unemployment checks automatically in order to keep up Consumption instead of a drastic fall and a deflationary gap Counter Cyclical because economy is going down so Government spends to keep it up However if people get jobs back then the checks automatically stop coming so people don t over consume and create an inflationary gap counter cyclical because economy going up government decreases spending to prevent over consumption Example People are making X amount of money with the economy in Expansion and Congress increases Taxes to slow spending because they predict this will help the economy fluctuations be smoother counter cyclical because increase in taxes slows expansion while there in expansion Lecture 10 Theory of Liquidity Preference interest rate adjusts to equate money supply and demand with a