EC 111: FINAL EXAM
92 Cards in this Set
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developing economies
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4/5 of the world lives in developing economies. not yet achieved high average incomes for their people, varied av. incomes but still lower than any advanced economy
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goods markets
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G & S bought and sold here
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factor markets
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services of FOP bought and sold here
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federal government
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major expenditures: G & S, corporate income taxes, SS taxes
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state and local government
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major expenditures: to provide G & S and welfare benefits
taxes paid to state and local gov.: sales, property, state income taxes
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four factors of production
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land
labor capital entrepreneurship
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PPF
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boundary between combos of G & S that can be produced and combos that cant be produced, given the available factors of production and state of tech.
attainable--> on PPF unattainable-->outside PPF inefficient-->inside PPF
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production efficiency
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when the econ. is getting all that it can from its resources and cant produce more of one good or service without producing less of something else
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tradeoff
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giving up one thing to get something else
-occurs when production is efficient
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free lunch
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when production is inefficient
-can produce more of one good or service without tradeoff
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opportunity cost
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the best thing you must give up to get something else
-magnitude of the slope of the PPF measures opportunity cost
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economic growth
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sustained expansion of PPF
-occurs when we develop better tech., improve quality of labor by education, on the job training, and work experience -consumption must decrease! -doesnt get rid of scarcity- still face opportunity costs
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comparative advantage
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one person's opportunity cost of producing a good is lower than another person's opportunity cost of producing that same good
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absolute advantage
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when one person is more productive than another person in several or even all activities
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law of demand
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price of a good increases, quantity demanded decreases
price of a good decreases, quantity demanded increases
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changes in demand
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occur when influences on buying plans change--> shifts demand curve!!!!
ex: price of related goods, expected future prices, income, expected future income and credit, # of buyers, perferences
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normal good
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income increases--> demand increases
income decreases-->demand decreases
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inferior good
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income increases--> demand decreases
income decreases--> demand increases
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change in quantity demanded
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occurs when price changes, all other influences on buying plans remain the same
-price increases-->QD decreases, movement up along demand curve -price decreases-->QD increases, movement down along demand curve
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law of supply
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price of a good rises, quantity supplied increases
price of a good drops, quantity supplied decreases
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change in supply
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change in quantity suppliers want to sell when any influences on selling plans other than price change-->shift S curve
ex: price of related goods, prices of resources and other inputs, expected future prices, # of sellers, productivity
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change in quantity supplied
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price falls, QS falls--> movement down along S curve
prices rises, QS rises--> movement up along S curve
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law of market forces
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surplus --> price falls
shortage --> price rises
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GDP
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gross domestic product: market value of all final G & S produces withing a country in a given time period
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consumption expenditure
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expenditure by households on consumption G & S
-nondurable goods (orange juice, pizza), durable goods (TVs, DVD players) and services (haircuts)
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investment
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purchase of new capital goods (tools, instruments, machines, buildings, etc) and addition to inventories
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government expenditure on G&S
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expenditure by all levels of gov. on G & S
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total expenditures
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Y=C+I+G+NX
consumption + investment + gov. expenditures + net exports
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savings
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amt. of income not paid in net taxes or spent on consumption goods and services
Y=C+S+NT
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expenditure approach
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measures GDP using data on consumption expenditure, investment, gov. expenditure, net exports
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income approach
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sum of all incomes equals net domestic product at factor cost. GDP equals net domestic product at factor cost plus indirect taxes less subsidies plus depreciation
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real GDP
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value of final G&S produced in a given year expressed in terms of the prices in a reference base year
-2005 for the US
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nominal GDP
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value of final G&S produced in a given year expressed in terms of the prices of that same year
-just a more precise name for GDP
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potential GDP
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level of GDP when all the econ's FOP are fully employed
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business cycle
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2 phases: expansion and regression
2 turning points: peak and trough
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recession
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period during which real GDP decreases (negative growth rate) for at least 2 successive quarters
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expansion
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period during which real GDP increases; in early stage, real GDP returns to potential GDP and as expansion progresses, potential GDP grows and real GDP eventually exceeds potential GDP
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chained-dollar real GDP
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3 steps:
1. value production in prices of adjacent years 2. find average of 2 percentage changes 3. link (chain) to the base year
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working age population
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total # of people aged 16 years and over who are not in jail, hospital, or some form of institutional care or in the US Armed Forces
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labor force
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# of people employed plus number unemployed
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employed
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during week before survey either... worked at least 1 hr. as a paid employee of worked 15+ hrs. as unpaid workers in their family business or were not working but had jobs or businesses from which they were temporarily absent
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unemployed
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during week before survey either... had no employment and were available for work and either a) had made specific efforts to find employment during the previous 4 weeks or b) were waiting to be recalled to a job from which they had been laid off
-must not only want a job, but also have t…
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unemployment rate
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percentage of people in the labor force who are unemployed
# of people unemployed / labor force x 100
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labor force participation rate
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labor force / working age population x 100
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marginally attached worker
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person who does not have a job, is available and willing to work, has not made specific efforts to find a job recently but has looked for work in recent past
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discouraged worker
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marginally attached worker who has not made specific efforts to find a job within previous 4 weeks because previous unsuccessful attempts were unsuccessful
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full-time
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work 35+ hrs. per week
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part-time
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work less than 35 hrs. per week
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sources of unemployment
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1. job losers
2. job leavers 3. entrants or reentrants
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job leavers
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voluntarily quits job
-only unemployed if they quit to spend time looking for better job
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entrants and reentrants
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entrant: just left school and is looking for a job
-begin as unemployed reentrant: previously had a job, has then quit and left labor force, now decided to look for job again
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frictional unemployment
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Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another.
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structural unemployment
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Structural unemployment is a form of unemployment resulting from a mismatch between the sufficiently skilled workers seeking employment and demand in the labor market.
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seasonal unemployment
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arises because of seasonal patterns
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cyclical unemployment
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fluctuating unemployment over business cycle that increases during recession and decreases during expansion
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full employment
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no cyclical unemployment
unemployment rate = natural unemployment rate potential GDP = real GDP
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natural unemployment rate
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unemployment rate with economy is at full employment
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CPI
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consumer price index: measure of the average of the prices paid by urban consumers for a fixed market basket of consumption G&S
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CPI Formula
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CPI = cost of CPI basket at current period rates / cost at base period prices x 100
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inflation rate
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percentage change in the price level from one year to the next
(current CPI - previous year CPI) / previous year CPI x 100
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deflation
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negative inflation rate
-price level falling when price level rises rapidly, inflation rate high when price level rises slowly, inflation rate low when price level falls, deflation
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nominal wage rate
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average hourly wage rate measured in current dollars
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real wage rate
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average hourly wage rate measured in the dollars of a given reference base year
real wage rate 2008 = nominal wage rate in 2008 / CPI in 2008 x 100
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nominal interest rate
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dollar amount of interest expressed as a percentage of amount loaned
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real interest rate
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G&S forgone in interest expressed as percentage of amount loaned
nominal interest rate - inflation rate = real interest rate
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classical economics
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market economy works well, aggregate fluctuations are a natural consequence of an expanding econ. and gov. intervention cannot improve the efficiency of the market econ.
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Keynesian macroeconomics
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market econ. is inherently unstable and requires active gov. intervention to achieve full employment and sustained econ. growth.
- too little private spending is the cause of depression and recession. to counter this problem, government spending must increase
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diminishing returns
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each additional hour of labor employed produces a successively smaller additional amount of real GDP
-arise because quantity of capital and other FOP is fixed
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production function
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shows maximum quantity of real GDP that can be produced as the quantity of labor employed changes
-labor on x-axis, real GDP on y-axis -boundary between attainable and unattainable
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quantity of labor demanded
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total labor hours that all the firms in the econ. plan to hire during a given time period at a given real wage rate
-greater when real wage rate is lower
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demand for labor
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relationship between quantity of labor demanded and the real wage rate
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supply of labor
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relationship between quantity of labor supplied and real wage rate
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quantity of labor supplied
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# of labor hours that all the households in the econ. plan to work during a given time period at a given real wage rate
-increases because a) hours per person increase or b) labor force participation increases
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efficiency wage
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real wage rate that is set above full employment equilibrium wage rate to induce greater work effort
-firm can attract most productive workers, workers less likely to quit, lower rate of labor turnover and lower training costs
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minimum wage
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makes hiring labor for less that a specified wage illegal
-set below equilibrium--> minimum wage has no effects -set above equilibrium--> in conflict with market forces, unemployment rises
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econ. growth rate
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annual percentage change of real GDP
(current real GDP - previous yr. real GDP) / previous yr. real GDP x 100
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rule of 70
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# of years it takes for the level of any variable to double
70 / annual percentage growth rate
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labor productivity
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quantity of real GDP produced by 1 hr. of labor
labor productivity = real GDP / aggregate hrs.
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human capital
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accumulated skill and knowledge of people. comes from 2 sources:
1. education and training 2. job experience
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saving and investment in physical capital
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increase amount of capital per worker and increase labor productivity
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gross investment
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total amount spent on new capital
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net investment
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change in quantity of capital
net investment = gross investment - depreciation
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3 markets for financial capital
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1. loan
2. bond 3. stock
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interest rate and loanable funds
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quantity demanded smaller when real interest rate high
quantity demanded larger when real interest rate low
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reserves
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consists of bank's currency in its vaults plus balance on its reserve account at a federal reserve bank
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required reserve ratio
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The Reserve Requirements (or Cash Reserve Ratio) is a Central bank regulation that sets the minimum reserves each Commercial bank must hold to customer deposits and notes i.e the amount that the bank surrenders with the central bank.
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federal funds rate
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interest rate on interbank loans
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discount rate
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interest rate at which the Fed stands ready to lend reserves to commercial banks
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money multiplier
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number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money
-depends on desired reserve ratio and currency drain ratio
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desired reserves
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R x Deposits and Currency = C x Deposits
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monetary base
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MB = (R + C) x Deposits
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quantity of money
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M = Deposits + Currency = (1 + C) x Deposits
M = (1 + C) / (R + C) x MB
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EC 111: Exam 3