UNIT 1 ECON Study Guide (chapter 2 and 8) PDF

Preview

Summary

Professor Prado Lopez Unit 1 Notes from SDSU...

Description

Chapter 2: Thinking Like an Economist 1. The Economist as a Scientist 1. The scientific method, models and assumptions

2. The Circular-Flow Diagram ■ Households sell the factors of production, such as land, labor, and capital to firms, in the market for factors of production. In exchange, the households receive wages, rent, and profit. Households use these dollars to buy goods and services from firms in the market for goods and services. The firms use this revenue to pay for the factors of production, and so on. This is a simplified model of the entire economy ■ Given an economic transaction, can you tell where it would be represented in the Circular Flow Diagram? 1. Mary buys a car from General Motors for $20,000: $20,000 of spending from households to market for goods and services. $20,000 of revenue from market for goods and services to firms. Car moves from

firm to market for goods and services. Car moves from market for goods and services to household. 2. General Motors pays Joe $5,000 per month for work on the assembly line: $5,000 of wages from firms to market for factors of production. $5,000 of income from market for factors of production to households. Labor from households to market for factors of production. Inputs from market for factors of production to firms. 3. Joe gets a $15 haircut.: $15 of spending from households to market for goods and services. $15 of revenue from market for goods and services to firms. Services from firms to market for goods and services. Services from market for goods and services to households. 4. Mary receives $10,000 of dividends on her General Motors stock.: $10,000 of profit from firms to market for factors of production. $10,000 income from market for factors of production to households. Capital services from households to market for factors of production. Inputs from market for factors of production to firms. 3. The PPF ■ If the economy is operating on the production possibilities frontier, it is operating efficiently because it is producing a mix of output that is the maximum possible from the resources available. ■ Points inside the curve are, therefore, inefficient. Points outside the curve are currently unattainable. ■ If the economy is operating on the production possibilities frontier, we can see the trade-offs society faces. To produce more of one good, it must produce less of the other. The amount of one good given up when producing more of another good is the opportunity cost of the additional production. ■ The production possibilities frontier is bowed outward because the opportunity cost of producing more of a good increases as we near maximum production of that good. This is because we use resources better suited toward production of the other good in order to continue to expand production of the first good. ■ A technological advance in production shifts the production possibilities frontier outward. This is a demonstration of economic growth. ■ Shifts of the PPF. ■ Bowed outward shape of the PPF. 4. Micro and macroeconomics 2. The Economist as Policy Adviser 1. Positive vs. normative analysis

2. Economists in Washington 3. Why economists disagree

Chapter 3: Interdependence and the Gains from Trade 1. Absolute advantage 1. What is the absolute advantage? 2. Given a scenario, who has the absolute advantage producing each good? i. The only where it takes less time to produce each product. 3. Can you determine specialization and trade, based on absolute advantage? 2. Comparative advantage 1. What is the comparative advantage? i. The ability to produce a good at lower opportunity cost than another producer. 2. Given a scenario, who has the comparative advantage producing each good? 3. Specialization and trade based on comparative advantage 3. Price of trade 1. At what price would trade work? 2. Who would benefit from trade at a given price? 4. Gains of trade 1. For each country 2. For each product Chapter 4: The Market Forces of Supply and Demand 1. Markets and competition 2. Demand 1. The demand curve: the relationship between price and quantity demanded ■ Demand schedule, demand curve, mathematical equation of demand curve 2. Market demand vs. individual demand 3. Shifts in the demand curve ■ Number of buyers ■ Income, normal good vs. inferior good. ■ Price of related goods, complements and substitutes ■ Tastes ■ Expectations 3. Supply 1. The supply curve: the relationship between price and quantity supplied ■ Supply schedule, supply curve, mathematical equation of supply curve 2. Market supply vs. individual supply 3. Shifts in the supply curve ■ Number of sellers ■ Price of inputs ■ Technology

■

Expectations

4. Equilibrium 1. Determine the equilibrium price and quantity using the supply and demand curves / schedules / mathematical equations. 2. Out of equilibrium markets: surplus and shortages 5. Changes in equilibrium: Determine the effect of an event on the equilibrium price and quantity. 6. Conclusion: How prices allocate resources Chapter 5: Measuring a Nation’s Income 1. What is the GDP? 1. The economy’s production, income and expenditure 2. Definition of the GDP ■ Given an economic transaction, determine if it is or not included in the GDP 2. The expenditure components of the GDP (Y=C+I+G+NX) 1. What is included in each of the expenditure components? 2. Given an economic transaction determine inside of which component it would be registered and how it would affect the GDP 3. Be able to determine the value of the GDP or one of its components applying the GDP equation. 3. Real vs. nominal GDP 1. What is the difference between real and nominal GDP? 2. Calculate both measures given quantities and prices from different years in an economy 3. The GDP deflator ■ How to compute it ■ How to transform nominal into real GDP using the GDP deflator ■ Use it to compute inflation in an economy 4. Is the GDP a good measure of economic well-being? Chapter 6: Measuring the Cost of Living 1. The CPI 1. How to calculate the CPI 2. What’s in the CPI basket? 3. Problems in measuring the CPI: substitution bias, introduction of new goods, unmeasured quality changes. 4. The GDP vs. the CPI ■ What are the differences between the two price indicators? ■ Given a change in the price of a good or service, determine if and how it affects the CPI and the GDP deflator 2. Correcting economic variables for the effects of inflation 1. How to compare dollar figures from different times using the CPI

2. Real and nominal interest rates Interest rate increases as time goes on. Financial Institutions ● Financial system ○ Group of institutions in the economy that help match the saving of one person with the investment of another ● Financial institutions ○ Institutions through which savers can directly provide funds to borrowers ■ Financial markets ■ Financial intermediaries Financial Markets ● Savers can directly provide funds to borrowers through the financial markets ○ The bond market: ■ A bond is a certificate of indebtedness / Debt finance ■ Term: Length of time until the bond matures. ■ Credit risk ■ Tax treatment ○ The stock market: ■ A stock is a claim to partial ownership in a firm / Equity finance ■ New York Stock Exchange and NASDAQ ■ Stock index, i.e.: Dow Jones, Standard & Poor’s 500 ■ Price, dividend, price-earnings ratio (P/E≈15) ■ Price of stock/ Earnings per stock ■ Financial Intermediaries ● Institutions through which savers can indirectly provide funds to borrowers ○ Banks ■ Pay depositors interest and charge borrowers a higher interest. ■ Checking deposits as a medium of exchange. ○ Mutual funds: institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds ■ Diversification ■ “Index funds” Accounting Identities ● Gross domestic product (GDP, Y) ○ Total income = Total expenditure Y = C + I + G + NX ○ Y = gross domestic product, GDP ○ C = consumption ○ I = investment ○ G = government purchases ○ NX = net exports Accounting Identities

●

Assume closed economy: NX = 0 ○ Y = C + I + G, so I = Y – C - G ● National saving (saving), S ○ Total income in the economy that remains after paying for consumption and government purchases ■ By definition: S = Y – C – G ● It follows: Saving (S) = Investment (I) for a closed economy Accounting Identities ○ For T = taxes minus transfer payments S = Y – C – G can be rewritten as: S = (Y – T – C) + (T – G) ● Private saving, Y – T – C ○ Income that households have left after paying for taxes and consumption ● Public saving, T – G ○ Tax revenue that the government has left after paying for its spending Accounting Identities ● Budget surplus: T – G > 0 ○ Excess of tax revenue over government spending = public saving (T-G) ● Budget deficit: T – G < 0 ○ Shortfall of tax revenue from government spending = – (public saving) = G – T...