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Production possibility frontier (PPF)
illustrates the trade offs facing an economy that produces only two goods. IT shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.
Efficient
if there is no way to make anyone better off without making at least one person worse off - On the ppf curve = efficient
Opportunity cost
what you give up __________________ what you gain
feasible
Possible to do easily or conveniently
With in the PPF curve
Feasible but not efficient - shows that there are more output possible to produce
Outside of the PPF curve
Not feasible and not efficient - there are not enough resources to create the amount of output outside of the PPF curve
if an economy has to sacrifice only one unit of good x for each unit of good y produced throughout the relevant range, then its PPF has a:
Constant, negative slope
The production possibility frontier is bowed out from the origin because:
resources are not equally suited fro the production of both goods
an inward shift in the US economy's PPF could represent which of the following?
US workers moving to canda - the PPF is decreasing
If the PPF is a straight line, then
Opportunity costs are constant
This is not true:
Most opportunity costs are zero.
The phrase "gains from trade" refers to
increase in total output that is realized when individuals specialize in particular tasks and trade with each other
One parent picks up the kid from day care while the other parent goes to the grocery store and begins to make dinner, this is an example of which principle at work?
There are gains from trade
Abe starts exercising regularly, and after a few months discovers he can now do twice as much of everything, He can make 10 hamburgers or 8 milkshakes rather than 5 hamburgers and 4 milkshakes we now know that abe's PPF has
shifted right (increased) but the opportunity cost of making milkshakes are unchanged (10/8 = 5/4)
Khalil is offered a free ticket to the opera. His opportunity cost of going to the opera is:
whatever Khalil would have done had he not gone to the opera.
National accounts
keep track of the flows of money between different sectors of the economy
Household
a person or group of people who share income
firm
an organization that produces goods and services for sale
product markets
where goods and services are bought and sold
factor markets
where resources especially capital and labor are brought and sold
Consumer spending
household spending on goods and services
stock
a share in the ownership of a company held by a shareholder
bond
a loan in the form of an IOU that pays interest
Government transfers
payments that the government makes to individuals without expecting a good or service
Disposable income
equal to income plus government transfers minus taxes is the total amount of household income available to spend on consumption and to save
Private savings
equal to disposable income minus consumer spending, is disposable income that is not spend on consumption
Financial market
the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing and foreign borrowing
Government borrowing
the amount of funds borrowed by the government in the financial markets
Exports
goods and services SOLD to other countries
Imports
Goods and services PURCHASED from other countries
Inventories
stocks of good and raw material held to facilitate business operations
Investment spending
spending on new productive phsyical capital such as machinery and structures, and on changes in inventories
GDP (Gross Domestic Product)
The total value of all final goods and services prodcued in the economy during a GIVEN year
Aggregated spending
the total spending on domestically produced final goods in the economy. The sum of consumer spending (C) investment spending (I) , government purchases (G), and exports minus imports (X-IM)
Net exports
the difference between the value of exports and value of imports
Aggregate output
the total quantity of final goods and services produced within an economy
Real GDP
The total value of all final goods produced in the economy during a given year, calculated using the prices of a selected base year.
Nominal GDP
total value of all final goods produced in the economy during a given year, calculated with the prices current in the year in which the output is produced
GDP per capita
GDP divided by the size of the population, equivalent of the average GDP per person, - to see labor productivity
Which of economic agents engages in consumer spending?
Households
Total income households have after paying taxes and receiving government transfers is called
disposable income
private savings is
disposable income minus consumption
a stock in a company is
a share of owernship of a compnay held by a share holder
a bond is
an iou that pays interest
The market that channel excess savings of households into investment spending by firms are known as
the financial markets
an example of investment spending would be
purchase of a new productive machine
best definition of GDP
the total dollar value of all final goods and services produced in the economy during a given year
GDP equation
GDP=C+I+G+(X-IM)
An intermediate good would be
lumber used in building a house
Intermediate good
a good used in the production of another good
Inventory investment is counted as investment because
inventory is a source of future sales
GDP excludes
the value of leisure, damage done to the environment, the value of house work
Is japanese auto producer Honda builds a factory in Indiana considered GDP of the US?
Yes, in USA so in our economy
Is you buying a new pair of pants produced at a factory in honduras a GDP of the US?
No, they were imported in
If you mow your uncle's yard and he gives you $10 for a job well done, is that considered GDP in the US?
no, because you weren't hired. it was more like a gift
A woman once had a gardener and then got married so her husband does it now. What happened to the GDP in the economy?
The GDP decrease because the service went to is not used anymore
Why do economist bother to compute Real GDP? Instead of comparing nominal GDP from one year to the next?
Real GDP can be used to find per capita of the population crate a more accurate representation of our economy. Real GDP accounts for the price changes from one year to the next
Nominal GDP equation
Nominal GDP = quantity produced x Price of current year
Real GDP equation
Real GDP = Quantity produced x Price of base year
GDP per capita equation
Real GDP __________ Population
when a gpd per capita goes from 200 to 183 then standard of living has
decreased
If nominal GDP decrease from one year ot the next, we can conlude that
prices fell from one year to the next, real GDP fell from one year to the next or that prices and real GDP fell from one year to the next
Employed
people are currently holding a job in the economy, either full tie or part time
Unemployed
People are actively looking for work but aren't currently employed
Labor force
equal the sum of employed and the unemployed
Labor force participation rate
the percentage of the population aged 16 or older int he labor force
unemployment rate
the percentage of the total number of people in the labor force who are unemployed
discouraged worker
non working people who are capable of working but have given up looking for a job due to the sate of the job market
marginally attached workers
would like to be employed and have looked for a job in the recent past but are not currently looking for work
Underemployed
are people who work part time because they can not find full time jobs
Employment is
the total number of people actively working
the unemployment rate is
the percent of the labor force that is unemployed
to be counted as unemployed, one must
be out of work and actively looking for a job
If a country has a working age population of 200 million, 135 million people with jobs and 15 million people unemployed and seeking, then the unemployment rate is:
10% (15/ (135+15)) = .1
The labor demand curve is negatively sloped because
employers are willing to hire more people at lower wages
The labor supply curve is positively sloped because
more people are willing to work at higher wages than at lower wages
If the economy invest in education such that the average level rises by 2 the new aggregate production function will
increase GDP per worker with education because it is human capital - B shifts up
Economist say that long run economic growth is almost entirely due to
rising productivity
Factor that contributes to a nation's rapid long run economic growth
Faster technological progress
The term "Human capital" describes
improvement in the worker made possible by education, training, and knowledge
Over the course of the 20th century, the real GDP per capital in the US rose mostly as a result of
rising productivity
Technological progress allows workers to produce more
even when the amount of physical capital and human capital do not change
if technology advances then
more output can be obtained from the same inputs
Physical capital would include
the tools a worker has to work with
When tracking economic growth, why do economist prefer real GDP per capita?
Real GDp is preferred because it controls the price change from one year to the next, but setting a base year price. And with per capita real GDP accounts for population size which better determines how productive an economy is
Diminishing returns to physical capital means that, when the amount of human capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to
a smaller increase in productivity (not efficient anymore)
What describes what is happening along a typical aggregated production function?
Due to diminishing returns, at some point increasing the amount of physical capital per worker will bring small increases in productivity
With improvement of technology then the point on the productivity curve
moves up, B to C
10 million people who did not have jobs were actively looking and 85 million had full time or part time jobs. The unemployment rate in 2007 was:
10/ (85+10) = .105
If the population of the US is 260 and the labor force is 130 and 120 are employed, the rate of the unemployment is:
130-120=10 10/130=.0769 = 7.7%
Frictional unemployment
unemployment due to the time workers spend in job search
Structural unemployment
Unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate - D > S
Efficiency wages
wages that employers set above the equilibrium wage rate as an incentive for better employee performance
Natural rate of unemployment
The unemployment rate that arises from the effects of frictional plus structural unemployment
Cyclical unemployment
the deviation of the actual rate of unemployment from the natural rate
Employment is
the total number of people actively working
The unemployment rate is the ratio of anyone
unemployed to those in the labor force
120 with jobs and 30 looking, then the unemployment rate is
30/(120+3) = .2
135 with jobs, 10 looking but have given up, 5 seeking, then the number of discouraged workers is:
10 million
the labor force is equal to the
sum of employment and unemployment
amount people counted as unemployed by the government are
people without a job who are actively seeking a job
to classified as unemployed, a person must be
not working and actively looking for a job in the last four weeks
Discouraged workers are those individuals
who have given up looking for a job
Debbie works 20 hours a week at an accounting for and would like to work full time, she is considered
a underemployed worker
In calculating the unemployment rate, discouraged workers are
no included in the labor force
the presence of discouraged workers in the economy tends to
lower the official unemployment rate
an example of frictional unemployment is
real estate agent who leaves a job in Texas and searches for a similar, higher paying job in California
an example of structural unemployment is
geologist who is permanently laid off from an oil company due to an increase in wages won by labor unions
If the actual unemployment rate is 7% and the cyclical unemployment rate is 2% then the natural rate of unemployment is
5%
Deviation from the natural rate of unemployment is known as
cyclical unemployment
Natural unemployment rate equation
Natural unemployment = frictional unemployment + Structural unemployment
Inflation rate
Price level in year 2 - Price level in year 1 _____________________________ X 100 Price level in price 1
Circular-flow diagram
a visual model of the economy, shows howdollars flow through markets among households and firms Two types of “actors”: households firms Two markets: the market for goods and services the market for “factors of production”
Income equation
I = W - tw + T W(wages) tw(tax rate) T(govt transfer)
Saving equation
S = I - C I (disposable income) C (consumption)
GDP equation
Y = C + I + G + (X-IM) Y (GDP) C (Consumption) I (Investment) G (Government spending) X (Exports) IM (Imports) > not produced here
Labor force does not include
retired people, Disabled workers, Discouraged workers
Why is the unemployment rate underestimated then the true level?
Doesn't include discourage workers
Labor
a factor in production, in other words, input
What causes the supply of labor to increase?
Population growth, Unions (place less restrictions on union members) - Minimum wage above the equilibrium point
What causes the labor supply to decrease?
Population decline, Unions (Can restrict number of labor entrance into the union labor market)
What causes the demand of labor to increase?
- the price of the firms output increases - The price of the substitute labor rises (machines) - the price of a complement of labor falls - a new technology or new capital increases the marginal product of labor - increases in government spending - increase in the number of firms i…
What causes the demand of labor to decrease?
- price of firms output decreases - the price of substitute for labor falls - The price of a complement of labor rises - a new technology or new capital decreases to the marginal product for labor (the per unit output a laborer produces) - Decrease in government spending
Why can the unemployment never be zero?
people still transition in between jobs (at one point or another you will be unemployed to find a new job)
Why is real gdp preferred over nominal GDP?
Real gdp controls for price changes from one year to the next by setting a base year price
Why is Real GDP per capita preferred?
It accounts for population size to see how productive an economy is
Aggregate
entire economy
Per worker
the average of a worker produces in the economy
GDP per worker equation
GDPerworker = T x K^.04 x H ^.6 T= technology K = physical capital H = Human capital
Why does the production function exhibit diminishing returns?
as each human capital increases, the amount of physical capital leads to a smaller increase in productivity
What is the most important element to economic growth?
Technology, can shift the GDPerworker curve out and increases all productivity
Total factor productivity
the amount of output that can be achieved with a given amount of inputs
One reason why frictional unemployment exisit
Constant process of job creation and Job destruction
Two reason why frictional unemployment exist
New workers are constantly entering the labor market ex. recent college/Highschool graduates
Low levels of frictional unemployment is
good for the economy
what would cause wage to be above the equilibrum wage?
1. minimum wage laws 2. Labor unions 3. Efficiency wages 4. Externalities from the government policies ex. welfare
Natural rate of employment
= Frictional + Structural
Cyclical unemployment
the deviation of the actual unemployment from the natural rate
Actual unemployment rate
= cyclical rate + Natural rate
Is the natural rate constant?
no it fluctuates
Factors that can change natural rate
1. changes in the characteristic of the labor force 2. Changes in labor market institution 3. Changes in govt policies
Does inflation always make someone worse off?
no
Real wage =
wage rate __________ Price level
Inflation rate
the percentage change per year in a price index
Inflation equation
W = CPI2- CPI1 ______________ x100 CPI1
index of a basket in year t
= cost of market basket in time t _________________________________ Cost of market basket in base year

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