inal Exam Review

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Georgia
University of Georgia
Economics
Economics 2105
Mc White
Final Exam Review
Jessica W.
Created: 2015-05-03
Last Modified: 2015-05-04
Size: 132 Views: 2448
Comparative Advantage vs. Absolute Advantage (Definition)
Comparative advantage: differences in opportunity costs are the basis for specialized production and trade. [being the low cost producer of a good/
having the lowest opportunity costs to produce a good
]; "why doesn't Lebron James cut his own grass?"
Absolute advantage is the ability to produce more in total of something by comparison.
image comparative_advantage for term side of card
Ray has the CA for producing Fish and Ray has AA for Fish.
(1C = 2F); he can harvest 1C in the time it takes him to catch 2F); AA: can catch more fish than Bob in same time period
Bob has the CA for producing Coconuts.
His Opportunity Cost is lower than Ray's (1C = 1F), making him the low cost producer
image comparative_advantage for term side of card
Rick: (1Z = 4F), Daryl: (1Z = 5F)
Rick has CA for killing zombies
Daryl has AA for both food and zombies
kill 50 zombies with max. food
Daryl has AA for food, Rick kills 40 zombies, but collects 0 food
Daryl kills 10 zombies, and collects 240 food
Opportunity Cost
(Definition)
opportunity cost: the value of the next-highest-valued alternative of that resource, not the sum of all the alternatives
if you spend time hiking, when you could have spent it either
fishing OR reading
but you enjoy reading more, reading is your OC
Gains from Trade
Trade creates gains for everyone involved.
By fostering the exchange of goods, trade helps to create additional growth through specialization. Trade creates value because participants in markets are able to specialize in the production of goods and services that they have a comparative advantage in making.
Growing oranges in Alaska vs. in Florida
Demand and the Law of Demand
Demand measured in the Quantity Demanded: amount of good buyers are willing and able to purchase
Law of Demand: Ceteris paribus, the lower the price of the good, the great the Quantity Demanded is
↑Price ↓Quantity Demanded and vise versa
inverse relationship
image shift_in_d for term side of card
1. change in income
depending on whether it is a demand for a normal good or inferior good will determine how a change in income affects demand
2. price of related goods (price change in either substitutes or complements)
3. number of buyers (holiday seasons, celebrities)
4. change in tastes (demand for bootleg jeans in 2015)
5. expectations for future prices (upcoming sales)
image d-shifts-to-l for term side of card
depending on whether it is a normal good or inferior good will determine how a change in income affects demand
normal good: ↑ income ↑ demand
a shift to the right of a Demand Curve
inferior good: ↑ income ↓ demand
a shift to the left of a Demand Curve (inward); shift from D to D1
Consumer goods
consumer goods: products that are purchased for consumption by the average consumer.
Normal goods
normal goods: any goods for which demand increases when income increases, and falls when income decreases
↑income ↑quantity demand
as income increases, people buy nicer things rather than inferior goods, the cheaper substitutes
ex. Luxury cars, Chicago Bears tickets, steak
Inferior goods
inferior goods: a type of good whose demand declines when income rises
↑income ↓quantity demanded
inverse relationship between income and QD of inferior goods; as people get wealthier, they can afford the nicer/more expensive alternatives to inferior goods
ex. spam, smart car, local baseball game tickets
image normal_vs_inferior_goods for term side of card
image normal_vs_inferior_goods for definition side of card
image economics8 for term side of card
a movement along the demand curve: reflects a change in Quantity Demanded
only price can cause a movement along the curve
↓price ↑Quantity Demanded
a shift in the demand curve reflects a change in demand not Quantity Demanded
image grid5 for term side of card
prices of related goods affect one another; where the related good is X and we measure demand of Y
substitute (X): ↑ price of X ↑ demand of Y
increase of price for X would move D0 to D2
complement (X): ↑ price of X ↓ demand of Y
increase of price for X would move D0 to D1
Substitute Goods
substitute goods: when two goods could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise
as ↑ price of X ↑ demand for Y
ex. Coke/Pepsi, Starbucks/Jittery Joe's
Complement Goods
complementary good: a good whose use is related to the use of an associated or paired good. Thus as price of X increases, the price of Y increases as well
↑ price of X ↓ demand for Y
ex. Peanut Butter/Jelly, coffee filters/coffee beans
If a muffin is a complement to coffee, and muffin prices increase, what would happen to the demand for coffee?
Demand for coffee will decrease
Supply and the Law of Supply
Supply is measured in the Quantity Supplied: amount of good sellers are willing and able to sell
Law of Supply: Ceteris paribus, the higher the price of a good, the great the Quantity Supplied
↑Price ↑Quantity Supplied and vise versa
direct relationship
image shift_in_s for term side of card
1. costs of inputs
2. change in technology
better technology means you can produce more for less
3. number of sellers
4. future expectations
if price is expected to rise in the future: left
if price is expected to fall: right (outward)
image movement_along_supply for term side of card
a movement along the supply curve: reflects a change in Quantity Supplied
only price can cause a movement along the curve
↑price ↑Quantity Demanded
a shift in the demand curve reflects a change in supply not Quantity Supplied
How do we determine the equilibrium market price?
equilibrium market price: QD = QS
Market Clearing price is when the price consumers are willing to pay is equal to the price firms/suppliers will accept
image chart for term side of card
$5

where QD and QS will be equal (6=6)
Suppose there is a 10% rise in the price of gasoline.

According to the law of ________, we expect the quantity of gasoline ______ to ________.
According to the law of supply, we expect the quantity of gasoline supplied to increase.

⇑price ⇑Quantity Supplied
image demandsupplycurve for term side of card
image demandsupplycurve for definition side of card
Consider the market for tablet computers (like iPads and Android tablets). Suppose the average price of an iPad goes up by $20 when a major online retailer changes its sale policies. What is likely to occur to the price of Andriod tablets?
Demand for Andriod tablets will increase (substitutes)
Price for Andriod price will also increase
Competitive Markets
Individual buyers do not have an influence on the price.

Forces of supply and demand significantly affect consumer and producer behavior.

Individual sellers do not have an influence on the price.
image expectations_1 for term side of card
image expectations_2 for definition side of card
Gasoline: a new housing development goes up. Several new gas stations are built nearby.

A. Demand and Supply both increase
B. Demand and Supply both decrease
C. Demand decreases and Supply increases
D. Demand increases and Supply decreases
A. Demand and Supply both increase

more people ⇒ more demand
more gas stations ⇒ more supply
Corn: news media run stories about people with corn allergies. The corn crop is unusually large

A. Demand and Supply both increase
B. Demand and Supply both decrease
C. Demand decreases and Supply increases
D. Demand increases and Supply decreases
C. Demand decreases and Supply increases

expectations/fears of the future cause a decrease in demand for corn
larger crops mean an increase in supply
Pumpkins: an early frost destroyed much of the pumpkin crop. A newspaper reports zucchini is better for pie than pumpkin.

A. Demand and Supply both increase
B. Demand and Supply both decrease
C. Demand decreases and Supply increases
D. Demand increases and Supply decreases
B. Demand and Supply both decrease
zucchini is a substitute for pie, meaning as ⇑price of pie, ⇑demand for zucchini, thus ⇓demand for pie
frost destroys much of crop meaning ⇓supply of pie
Taxis: public transit workers at a popular tourist attraction go on strike as a holiday weekend approaches.

A. Demand and Supply both increase
B. Demand and Supply both decrease
C. Demand decreases and Supply increases
D. Demand increases and Supply decreases
D. Demand increases and Supply decreases

Taxis are a substitute for public transit, thus as ⇓supply for public transit, ⇑demand for taxis
As number of buyers increase, and no additional taxis are put into the market ⇓supply of taxis (relative to the number of people looking for taxis)
True of False:

Sellers set the demand for a product, while the buyers set the supply.
False

In fact the reverse is true: buyers create the demand; the sellers generate the supply
Fertilizer is an essential part of a successful garden. Given that, how would the following incidences affect the demand curve for fertilizer?

1. Daffodil seeds become cheaper
2. Fertilizer becomes more expensive
3. Fertilizer becomes cheaper
4. Chicken manure becomes more cheaper


1. Shift to the right (outward) for fertilizer; price of related goods: as ⇓price and ⇑demand of related good, ⇑demand of fertilizer
2. Upward movement along the demand curve; (⇑price, ⇓QD); only changes in price causes movement along curve
3. Downward movement along the demand curve; a change in QD not Demand
4. Shift to the left (inward) for fertilizer; substitutes
Suppose that the supply of automobiles is given by the equation

P = –5,000 + 2,000Q



where P is the price in dollars and Q is the quantity of cars. At a price of $23,000 each, how many cars will be supplied?

P = –5,000 + 2,000Q

P= $23,000

$23,000= –5,000 + 2,000Q

$28,000=$2,000Q



Q=14; 14 cars

True of False:

The law of supply applies to normal goods, but not inferior goods.
False

With any good, whether inferior or normal, if ⇑price, ⇑Qs
Consider the market for gasoline. Suppose that a new oil-pump technology is developed, making gasoline production less costly. At the same time, war breaks out and several oil fields are destroyed. What will be the effect on supply?
technological advances will increase supply
destruction of oil fields will cause a decrease in supply

without more information when two factors affect supply in different directions, overall effect on supply is unknown
Inventory depletion results in a:
shortage
Inventory buildup results in a:
surplus
True of False:

If Zoe believes that the price of apples is going to increase by 50% in four weeks, then her current demand for apples should increase.
True

expectations of future prices increasing will lead to an increase in current demand
One autumn, the weather is perfect for growing pumpkins, and the pumpkin crop is much larger than usual. Meanwhile, when Halloween approaches, jack-o'-lanterns turn out to be less popular than in prior years. Instead, consumers spend more on costumes.
What will happen to the price of pumpkins around Halloween compared to last year?
image sr_dr for definition side of card
What is the most likely effect on the price of apples if the price of pears increases?
The demand for apples will increase (causing an outward shift in the Demand Curve) since pears and apples are substitute goods
the price of apples will most likely increase
supply will not change, Ceteris paribus, causing the new equilibrium point to be at a higher price point
Suppose there are seven coffee shops located on the same busy street. If two of the coffee shops close, what will happen to the market for coffee, Ceteribus paribus?
⇑price of coffee
supply curve will shift inward (to the left) meaning a higher price point at market equilibrium (though there is no shift in the demand curve)
⇓Supply
less sellers in the market, supply will decrease
Define: scarcity
having seemingly unlimited wants in a world of limited resources
Define: shortage
a disparity between the quantity demanded and quantity supplied where there is an excess of demand; QD > QS
Define: surplus
the amount of a good that exceeds the portion needed; when there is an excess supply;
QS > QD
Difference between a shortage and a surplus?
a shortage occurs when there is an excess of demand with too little supply
a surplus occurs when there is an excess of supply with too little demand
The market-clearing price for cantaloupes is the price at which ____________. If the market price is too high, then there is a _________. If the market price is too low, then there is a ___________.
Quantity Demanded = Quantity Supplied
surplus
QS > QD
shortage
QD > QS
image demandsupplycurve for term side of card
image demandsupplycurve1 for definition side of card
What does a decrease in the Demand curve look like? What does an increase look like?
image shifts for definition side of card
Define a competitive market
a market with many buyers and sellers, so that each has a negligible impact on the market price; ideally has no barriers for entry and perfectly homogeneous goods
Define an imperfect market
a market with generally few sellers who dictate the market price
Define a monopoly
a market structure characterized by a single seller, selling a unique product in the market; the seller faces no competition, dictates market price for the good/service
Why is a monopoly an example of an imperfect market?
a perfect competition implies a market in which no single supplier can influence prices and there are a large number of suppliers/sellers, a monopoly is the opposite
characterized by a single seller, seller faces no competition (often due to barriers for entry); seller dictates market price
Rural Internet access, with one dominant provider that faces very little competition, is a good example of an _________. It functions as a ______. By contrast, a flea market or swap meet, where many buyers and sellers get together to conduct transactions, is an example of a ________. No single buyer or seller exerts significant control over prices.
imperfect market, monopoly, competitive market
True of False:

a scenario where we expect a shift in both supply and demand, if the demand for a product increases, the price will always increase.
False

The price could decrease if an increase in supply outweighed the increase in demand

Provide an example of the stages of a market experiencing a shortage and then regaining equilibrium
popular celebrity endorses a product ⇒ demand for product increases ⇒ items purchased > items being manufactured ⇒ sellers raise price (causing ⇓demand) ⇒ sellers used increase revenue to increase production ⇒ supply = demand
supply = demand at new (higher) price point
Explain Adam Smith and the invisible hand

Adam Smith is considered the "father of modern economics" and wrote the famous economic novel The Wealth of Nations
the invisible hand was a concept created by Smith to describe the way individuals' efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society; considered the guiding force of an economy
According to Adam Smith, people are motivated to be as productive as possible based on _______. In a market economy, prices respond to _________ and ________. Goods and services are then exchanged, and resources are allocated to their highest-valued use as if guided by __________.
their own self interest
both supply and demand
an invisible hand
According to the factors that cause a shift in the demand curve:

Give an example for each factor that would cause a shift in the demand curve for men’s jeans, assuming jeans are a normal good?
change in income: a pay raise, shift ⇒ in Demand for jeans
price of related goods: increase in the price for khakis; shift ⇒ for Demand of jeans
number of buyers: popular celebrity in jean ads
change in tastes: rise in popularity of khakis; shift ⇐
expectations for future prices: rumor of increase in jean prices; shift ⇒ (people want to buy it before it gets more expensive, no matter current price point)
Why would an increase in the minimum wage for baristas affect the supply curve of coffee? How would it affect it (a shift vs. along the curve and in which direction)?
would cause an inward shift (to the left) in the supply curve
an increase in the cost of inputs shifts the supply curve inwards
If there is currently a shortage of coffee in the economy, then the ________ is greater than the _______. According to the law of supply and demand, in order for the market to reach equilibrium, the price must _______.
Quantity Demanded is greater than Quantity Supplied
price must increase
why? because Quantity Demanded and price have an inverse relationship (⇑price ⇓QD); to reach equilibrium, market must lower QD to balance with QS
sellers can also used increased revenue to increase production ⇒ increasing QS
True of False:

If the holiday season is coming up in a couple of weeks, an electronics manufacturer is likely to hire more workers to help increase the supply today.
True

Demand from stores can change due to the number of buyers (i.e. during holiday seasons)
since Demand will surely increase, production must increase now to match that demand
Why does the demand for inferior goods decrease as income increases?
demand for inferior goods decreases as income increases in favor of spending on normal goods due to the principle of substitutes
as income increases, consumers can afford higher priced substitutes to the inferior goods
Since used cars are ______ goods compared with new cars, we should expect that as income increases, the demand for used cars should _____. On the other hand, new cars are ______ goods. We should expect an increase in income to _____ the demand for new cars.
inferior (goods)
decrease
⇑income, ⇓demand for inferior goods
normal (goods)
increase
⇑income, ⇑demand for normal goods
image lobsters for term side of card
equilibrium: where QD = QS
equilibrium = $15
where QD = 600, QS = 600
A change in ______ represents a movement along the current demand curve, while a change in _____ represents a shift in the entire demand curve. By understanding this difference, a producer can better respond to market changes.
Quantity Demanded
Demand
remember!: Quantity Demanded is not the same as Demand
Quantity Demanded is the real amount demanded by consumers. Demand is the relationship between QD and price.
image f03-112r for term side of card
image f03-112r for definition side of card
Define: Price Control

Where do they generally come from?
price control: a regulation establishing either a minimum or maximum price for a good or service
usually mandated by the government
Define: price ceiling
a limit to the highest price
if above the equilibrium, it is non-binding (has no effect)
if below the equilibrium (binding), it creates a shortage (due to QD > QS)
ex. rent control (if binding, more people can afford houses⇒not enough houses in market⇒leads to shortage)
Define: price floor
a limit to the lowest price
if price floor is below the equilibrium, it has no effect (non-binding)
if price floor is above the equilibrium, it creates a surplus (due to there now being a larger quantity supplied than quantity demanded); a binding price floor
ex. minimum wage
Why would raising the minimum wage above the equilibrium cause a surplus?
minimum wage is an example of a price floor
a price floor above the equilibrium is considered a binding price floor which causes a surplus (unemployment)
suppliers (labor) willing to supply a higher quantity than original (⇑price ⇑QS) and consumers (firms) are going to demand a lower quantity than originally demanded (⇑price ⇓QD)
Does a binding price ceiling cause a change in supply?
image pc for definition side of card
Why are black markets common in countries that use price controls?
sellers profit from providing goods under the table for elevated prices to make up for the surplus/shortage
people are more willing to pay for black market goods when there is a shortage
What kind of price control creates a surplus?
image binding_price_floor for definition side of card
What kind of price control creates a shortage?
image image006 for definition side of card
image f03-112r for term side of card
Graph B is an example of a binding price ceiling which creates a shortage due to QD being greater than QS
binding price ceilings restrict how high a price can be; if lower than equilibrium price, a shortage is created
image f03-112r for term side of card
Graph A is an example of a binding price floor which creates a surplus due to QS being greater than QD
binding price floors restrict how low a price can be; when higher than equilibrium price, a surplus is created
If the equilibrium price for an apartment in Athens is $700, but a price ceiling is set at $300, what happens to the demand and supply for apartments?
it causes some people to benefit and some people to not. The demand for apartments would go up. The supply would stay the same, though. This causes a shortage in the supply of apartments, since the demand will quickly become greater than the supply.
Does an increase in minimum wage (price floor) really benefit the poor?
If the equilibrium price is $5 for labor, but the gov’t sets a price floor at $7.25:
The demand for workers decreases. The number of people who want to work increases (supply increases).
They might be getting paid more for their jobs but they are less likely to be hired over an experienced worker.
True of False:

A binding price floor for minimum wage would cause a surplus
True

supply (labor) would be greater than the demand causing a surplus of labor (unemployment)
True or False:

All consumers are affected by a binding price ceiling in a negative way.

Assume that a binding price ceiling (Rent Control) of $300 is put in place when the equilibrium price point is $700.
False
Group 1: those who could already afford rent are better off (i.e. went from paying $700 to only $300)
Group 2: those who couldn't afford rent before, but can now are worse off (not enough apartments to go around)
Group 3: still can't afford nicer apartments; worse off due to deteriorating conditions in cheaper apartments (suppliers can't make profit with PC; some willing to live in squalor)
Define:
unemployed
unemployed: someone able and willing to work that is not working (but actively searching for a job)
What are the three types of unemployment? Which are the two types that are part of natural unemployment?
structural: unemployment typically due to technological change
cyclical: unemployment relating to cyclical nature of a business cycle
frictional: unemployment due to people being between jobs
Structural and frictional are part of natural unemployment
Define:
structural unemployment
structural unemployment: unemployment resulting from industrial reorganization.
typically due to technological change, rather than fluctuations in supply or demand.
ex. type writer repairman
Define:
Cyclical Unemployment
cyclical unemployment: unemployment that results when overall demand for goods/services cannot support full employment
changes in economy affect the number of workers hired; relates to cyclical trends in growth within a business cycle
Define:
Frictional Unemployment
Frictional Unemployment: unemployment due to people being in the process of moving from one job to another
quit old job/fired ⇒ takes time to find another job
Structural vs. Cyclical Unemployment
Structural unemployment is not associated with changes in supply and demand
usually caused by technological changes and industrial reorganization
Cyclical unemployment results from changes in supply and demand
caused when demand for goods/services cannot support full employment
What is the current unemployment rate of the United States? of Georgia?
U.S.: 5.5%
GA: 6.9%
fourth highest in nation

Define:
Natural Unemployment
natural unemployment: The lowest rate of unemployment that an economy can sustain over the long run.
if nation is willing to accept higher inflation rates, natural unemployment will decrease
the equilibrium rate of unemployment; where wages are at equilibrium
True of False:

Structural unemployment exists because tastes and technologies change over times and thus certain skill sets are sometimes no longer required.
True

structural unemployment occurs due to industrial reorganizations that meaning certain skill sets no longer match an economy's demands
Demand for certain skills may disappear
Learning new skills make take a long time
ex. type writer technicians
Can a natural disaster cause structural unemployment?
Yes

ex. Fishing industry in Louisiana after Hurricane Katrina
many left unemployed due to destruction of facilities, resources, etc.
Causes of frictional unemployment
after quitting/being fired, it takes time to find a new job; can take longer depending upon
information: it takes time to know that firms/businesses are hiring
Government: unemployment insurance programs and other "job security" programs available
Cyclical unemployment is caused mostly by what factor?
changes in the economy
demand for goods/services must be able to support the number of employees
Government mainly focuses on lowering cyclical unemployment rate
When is a nation said to produce at "full employment" output and what does that mean?
"full employment" output (Y*) occurs when the cyclical rate of unemployment is zero (0).
when it is zero, unemployment rate = the natural rate of unemployment
Calculate:
Labor Force
LF = E + U
Labor Force = Employed + Unemployed
where unemployed only accounts for those able to work that are actively searching for employment
Define:
Labor Force
Labor Force: the number of people available for work; includes the employed and unemployed
where unemployed only accounts for structural, frictional, and cyclical unemployment
not discouraged workers
LF = E + U
All formulas related to Unemployment
LF = E + U
Labor Force = Employed + Unemployed
LFPR = LF/pop x100
Labor Force Participation Rate = Labor Force/population
Un. Rate = U/LF x100
Unemployment Rate = Unemployed/Labor Force
Calculate:
Unemployment Rate

U-Rate = U/LF x100
Unemployment Rate = Unemployed/Labor Force
where unemployed only accounts for structural, frictional, and cyclical unemployment
Define:
Unemployment Rate

Unemployment Rate: the percentage of the total labor force that are unemployed but actively seeking employment
U-Rate = U/LF x100
Define:
Labor Force Participation Rate (LFPR)
Labor Force Participation Rate (LFPR): the ratio between labor force and the overall population
a measure of the active portion of the economy's population
LFPR = LF/pop x100
The total population is 6. Everyone but Bob is working/looking for a job.

Calculate LF.
Calculate LFPR.
Calculate U-Rate.
LF = E + U
everyone but Bob (6-1); LF = 5
LFPR = LF/pop x100
(5/6)(100) = 83.3% = LFPR
U-Rate
cannot calculate without knowing U; we only know the number of discouraged workers
Could the real unemployment higher than the unemployment used to calculate labor force?
Yes

unemployment only accounts for those who are unemployed and actively searching for work
it does not account for discouraged or underemployed workers
Define:
Discouraged worker
Discouraged worker: an individual who is unemployed and not actively seeking employment
possibly because the individual has given up looking/has had no success
Define:
underemployed worker

underemployed worker: a worker that is employed and is highly skilled, but works in a low paying job
part-time employees that want full-time work
Explain the difference between the discouraged worker and the underemployed worker?

What is unique about these types of unemployment in context of the unemployment rate?
a discouraged worker is someone that is unemployed and not seeking employment, while an underemployed worker is employed, but is either overqualified for their position or wishes to work full-time when they only work part-time
discouraged workers and underemployed workers are not accounted for when calculating U-rate and unemployment
Which of the following would be included as a member of the labor force?

a.  A full time college student.
b.  A recent high school graduate looking for a first job.
c.  A homemaker contributing 15 hours per week as a volunteer worker in a hospital.
d.  A retired school teacher collecting social security benefits.
B. A recent high school graduate looking for a first job
Labor Force only accounts for those that are employed and unemployed that are actively looking for a job
Which of the following people would be considered unemployed?

a. A full-time college student.
b. A recent high school graduate looking for a first job.
c. A retired school teaching collecting social security benefits.
d. A homemaker contributing 15 hours per week as a volunteer worker in a hospital.
B. A recent high school graduate looking for a first job.
Unemployment caused by a recession is called:

a.  Frictional unemployment.
b.  Cyclical unemployment.
c.  Natural unemployment
d.  Structural unemployment.
B. Cyclical unemployment.
Cyclical unemployment is unemployment caused by changes in demand/changes in the economy
The total population of Utopia is 100. Of that 100, 70 are currently employed, 10 are in full-time students, and 5 enjoy Utopia's luxurious Social Security benefits.

Calculate Unemployment.
Calculate LF.
Calculate LFPR.
Calculate U-Rate.
Unemployment: 100(pop.) -- 70(employed) -- 15 (students+retirees); U = 15
Labor Force
LF = E + U; LF = 70 + 15 ⇒ LF = 85
Labor Force Participation Rate
LFPR = LF/pop x100; 85/100 x100 ⇒ LFPR = 85%
U-Rate: U/LF x100; 15/85 x100 ⇒ U-Rate = ˜17.647%
Define:
Gross Domestic Product (GDP)
Gross Domestic Product (GDP): a measurement of all income and domestic production of a country and a measure of its economic standing.
The market value of all final goods and services produced in a country during a given period
measures a nations production and income at the same time
What information about the economy does GDP provide?
1. measures production and income
2. measures state of economy
3. allows one country to compare economy to another's
Define:
Business cycle
Business cycle: short run changes around the long run trend; a series of contractions and expansions
Economic expansions vs. Economic contractions during a business cycle
image c5 for definition side of card
Define:
Real GDP
Real GDP: GDP with prices adjusted for inflation
accounts for changes in price levels
Real GDP = (Nominal GDP/GDP Deflator) x100
GDP vs. Real GDP vs. Nominal GDP vs. Per Capita GDP
GDP: the market value of all goods and services produced in a country during a given period
Real GDP: GDP with prices adjusted for inflation
Nominal GDP: GDP calculated for the prices in the given year/period
Per Capita GDP: the GDP divided by the number of people in the cuontry (Per capita GDP = GDP/pop.)
Real vs. Nominal GDP
Nominal GDP is simply the GDP calculated for the price levels in the given years while Real GDP is the Nominal GDP adjusted for inflation via using a "base year" for comparison; "how much stuff can I buy with those dollars"
This is done by using the GDP Deflator
GDP Deflator = (Nominal GDP/Real GDP) x100
True of False:

GDP is used to measure improvement/decline in the economy from year to year.
True

GDP measures a nation's production and income at the same time, and is thus used as a measure of the economy
a recession occurs when GDP falls in 2 consecutive quarters
Why does Per Capita GDP work better than GDP for comparing countries' standard of living?
GDP is a good measure to compare economies, however Per Capita GDP works better for comparing economic standing of the people in those countries
Per Capita GDP = GDP/pop.
"How much stuff" (GDP) vs. "How much stuff per person in the country?"
4 Types of Expenditures for Calculating GDP
1. Consumption (C):
spending by household
2. Investment (I)
spending by businesses
3. Government Purchases (G)
purchases of goods/services by government
4. Net Exports (NX)
NX = (exports - imports)
True of False:

A house is calculated as household spending of consumers (consumption) when calculating GDP, as it is a durable good.
False

a house is not a consumption good, it is an investment
Types of Expenditures for Calculating GDP

Consumption (C)
- Durable Goods: things expected to last more than a year (furniture, cars, larger purchases)

- Nondurable Goods: Things that will be consumed immediately/quickly (Happy meal)
- Services: When you pay people to do something
All formulas relating to GDP
GDP = C + I + G + NX
GDP = Consumption + Investment + Government Spending + Net Exports (Exports - Imports)
Nominal GDP = sum of all (price x quantity)
Real GDP = (Nominal GDP/GDP Deflator) x 100
GDP Deflator = (Nominal GDP/Real GDP) x 100
All formulas relating to Growth Rates in GDP and Price Level
Growth rate (in Nom. GDP) = Growth in Real GDP + Growth in Price Level
(GDP2014 - GDP2013)/GDP2013 x 100 (base level = GDP 2013)
difference b/n current + prev. year
Price Level Changes = (GDP Deflator2014 - GDP Deflator)/(GDP Deflator2013) x 100
Issues with GDP
1. Non-market goods and services
2. Underground and illegal markets
3. No value/no way to account for Standard of
    Living
environmental quality
leisure time
Would you use Nominal GDP or Real GDP to compare inflation rates over the years?
Real GDP is a better measure for inflation, as it is Nominal GDP adjusted for inflation.
Real GDP = (Nominal GDP)/(GDP Deflator) x 100
Define:
price level
price level: an index value of prices in the economy
GDP Deflator is a measure of the price level
GDP Deflator = (Nominal GDP)/(Real GDP) x 100
Define:
inflation
inflation: an increase in prices and fall in the purchasing value of money
measured using Cost Price Index (CPI)
Define:
inflation rate
image a for definition side of card
Define: Consumer Price Index (CPI)
Consumer Price Index (CPI): measure of the cost of living; "what it costs to live now vs. in the past"
focuses on prices relevant to consumers called basket goods, goods that consumers buy on a regular basis (gas, tuition, phone)
Calculate:
Consumer Price Index (CPI)
image a for definition side of card
Define:
Chained CPI
Chained CPI: an alternative measurement for CPI that considers product substitutions made by consumers and other changes in spending habits
more accurate gauge of inflation
If inflation is increasing, what happens to the value of money?
The cost of holding money is the principle that physical money decreases in value due to inflation
this is why you earn interest on money in checking/saving accounts
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