Economic 1B

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GDP (Gross Domestic Products)
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measure of all the FINAL goods and services (to prevent double counting) produced and for the measure of the health of the economy *Demand Based (expenditure approach to measure a country’s GDP) -GDP=C+I+G+(X-M) C=consumption (everything demanded) I=investment (purchase of physical goods that you’re be able to produce other goods with) G=Governments X= exports (produce here, bought by other countries) M=Imports *Supply Based -change in inventories: where goods are sold in the next year instead of this year *+/- growth * (-) growth means recession
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Real
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adjusted for inflation
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unemployment
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*want jobs but can’t find jobs *willing to be productive, but there’s none for them *high during inflation *needs GDP to grow to get out of recession and perhaps unemployment
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Housing Bubble
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*2008/2009 recession *situation where price of asset becomes overvalued *excessive expectations of future price increases, which causes current prices to elevate *In 2002-07, low interest rates made it easy for ppl to spend more than what they had. Mortgage market innovations (banks were thinking of more way to loan money to home buyers). Rising house prices.
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mortgage
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loan for home buyers *typically 20-30 year payback
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Innovative in Mortgage Markets
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when interest rates are low, buying houses were more appealing to people
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subprime loans
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loans determining by their credit scores *people with lower credit scores take these loans *they were charged at a higher interest rate because they were less able to put in a higher amount of down payment
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ARMS
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initially charged with lower interest rates for the loans, but it becomes adjusted to a higher interest rate after 5 years (teaser rate)
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Equity
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the difference between what you own in the house and what you owe *\”I can’t pay the mortgage, so the bank takes my house\”
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CDOs (Collateralized Mortgage Debt Obligations)
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Banks assets are the stream of the loan repayment then they sell these assets to other firms
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Budget Constraint
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shows all possible choices *Consumer choice will be on budget constraints *Changes in environment (Variables=goods, labor/leisure, consume today vs tmrw) changes budget constraint
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Compound Interest
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Future $ amt = ($ amt today) (1+interest rate) ^#years
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Goals of Macroeconomic Policy
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1. Economic growth/standard of living 2. Price Stability 3. Low Unemployment 4. Sustainable balance of trade between countries
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Circular Flow: Model #1
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Model of Macroeconomy *two sectors 1. households (people, consumers) -demanders in market for goods and services -suppliers in labor and financial capital market 2. firms *two makers 1. market for goods and services (output markets): stuff the markets produce for people 2. market for factors of production (input markets): labor, capital(tools not money, equipment, buildings, actual physical man made capitals), natural resources (land)
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Production Possibility Frontier (PPF)
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show combo of goos that are possible to give available resources and technologies *if society wants one thing, they must give up something else *efficient combo of 2 goods [image http://upload.wikimedia.org/wikipedia/commons/thumb/d/d7/NewPpf_small.png/350px-NewPpf_small.png]
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Positive statements
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statements of facts that can be proven true/false as long as you can prove true/false
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normative statements
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statements that involves a value judgement usually includes within statement words like: \”should\” \”ought to\” \”very little\” \”not many\”
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closed economy
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no trade with other countries
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open economy
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specialize production in goods that country can produce efficiency and at lower cost, then trade with other countries *we’re better off when we trade*
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absolute advantage (of trade)
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a country has absolute advantage when it can produce more of a good with the same resources *productivity*
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comparative advantage (of trade)
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a country has comparative advantage when it can produce one additional count of a good at lower cost *trade is driven by this* EX: even if US can produce a lot of tshirts, but Canada can also produce, but with lower cost, Canada should produce it instead
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Determinants (reasons) of interest rates
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1. Riskiness (uncertainty of future) 2. Inflation (money today is worth less in the future) 3.Time value of money (can use/invest the money now)
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Economic Concepts from Budget Constraints
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1. Opportunity Cost 2. Diminishing Marginal Utility 3. Sunk Costs
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Opportunity Cost
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whatever have to be given up to obtain something desire *time investment *next best alternative *not just money cost, but time, forgone earnings, and resource used *resources devoted to one thing and not the other
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Diminishing Marginal Utility
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As more of a good is consumed, additional satisfaction diminishes *the additional utility a consumer from an additional unit of a good or service decreases as consumption of it increases *utility= satisfaction of obtaining/consuming something *marginal utility= additional satisfaction from consuming one more unit of a good
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Sunk Costs
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costs incurred in the past that cannot be recovered *shouldn’t affect current decisions
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consumption
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what would generate consumers today
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investment
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what can be done for future years
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Substitution Effect
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as the price of a good goes up, people will substitute towards cheaper/different goods and demand less of the good *increase P so less people buying *decrease P so more people buying
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Income Effect
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as the price of a good goes up, your income will be worth less in real terms (real value of income will decline; purchasing power), demand less of the goods and everyting else *cahnge of income is coming along the price
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ceteris paribus
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demand curve assumes all else is equal or held constant *things that are being held constant when we draw Demand curve 1. income (average and distribution) 2. prices of other goods 3. tastes/preference 4. population 5. expectations
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substitute
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if the increase of the price of good B, leads to an increase of the demand of good A, A and B are substitutes *you need something, but it’s too expensive, so you substitute it with something similar for a lower price (increasing D) *shift in D curve?
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complements
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increase in P of good B, leads to decrease of D for good A, then A and B are complements *goods being consumed together
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in graph, the increase/decrease in \”demand\”…
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shifts the D curve/function
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in graph, the increase/decrease in \”quantity demanded\”…
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moves the point along the curve
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what shifts supply curve
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changes in costs of production *prices of inputs (all the raw materials to make goods) *technological changes (including nature) *taxes/regulation changes in price of other goods changes in expectations EX: decrease in cost of production cause an increase shift in supply
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Equilibrium
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Quantity-demanded = Quantity-supplied *in a free market
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efficiency
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to use all the resources *the point on PPF line
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Demand Market
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Demand Market = Quantity of Demand Curve 1 + Quantity of Demand Curve 2 D^m = Qd1 + Qd2
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Demand Shifts
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1. Income shifts 2. Price of other goods 3. Preference 4. Expectations *Normal good = increase of income, Demand shifts right (increase) *Inferior good = increase of income, Demand shifts left (decrease) *Substitute = increase of price, increase in demand for substitute good *Complements = increase of price, decrease in demand for complement good
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Increase in Demand (demand shifts right)
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increase in P, Increase in Q
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Decrease in Supply (Supply shifts left)
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increase in P, decrease in Q
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consumer surplus (CS)
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difference between what consumers are willing to pay and what they actually have to pay *benefit to consumers from buying a good *from P* to Demand curve
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Producer Surplus (PS)
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Difference between what producers get for producing (selling) good minus what they would have been (just) willing to sell for *benefit to producers from selling a good *from Supply curve to P*
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Dead Weight Loss (DWL)
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reduction in total surplus from Price-here (Price at a point on Demand curve) *measure of the reduction in social welfare associated with an inefficient outcome
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Total Surplus
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Consumer Surplus + Producer Surplus
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Price Ceiling
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Price cannot be higher than a certain price (price max) *government making it illegal to charge a price above a certain threshold *only matters when it’s under the equilibrium
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Price Floor
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Government says the price must not be able to go below a certain amount *when the price of a good is forced above the equilibrium price *classic example is the minimum wage EX: price=woker hours quantity=demands by firms in need for workers price=wage quantity=# of workers employed (labor)
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Excess Demand
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Quantity demanded – Quantity supplied
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US GDP
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growth is just reflecting inflation, but didn’t adjust for inflation
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US Real GDP
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adjusted for inflation *economy grows overtime because here’s more people overtime, even without any technology/stuff changed *Real GDP = (current year GDP/GDP Deflator) x 100
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Real GDP per Capita
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adjusted for inflation and population
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Limitations of GDP
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1. ignores distribution of income 2. difficult to adjust for changes in quality of products 3. ignores non-market (ex. health, environment) transactions and non-material sources of welfare 4. doesn’t tell you who obtains the earnings 5. underground economy (crime, self-employed unreported income, barter transactions/ services)
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GDP Deflator (Price Index)
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measures price changes *weighted average price of all goods and services produced in a year that’s generated relative to base year (year against which price change are measured) *GDP Deflator = (current year [email protected] prices/current year [email protected] year prices) x 100
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Currencies in GDP
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CountryA GDP x Exchange Rate = CountryA GDP in CountryB
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Exchange Rate
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ER = CountryB Currency / CountryA Currency
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Economic growth
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rate of economic growth is the rate of GDP growth *maters a lot over the long run 1. % change in output (of real GDP overtime) 2. % change in real GDP per capita 3. % change in real GDP per worker/per worker hour
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GDP Growth Rate
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(Year2 GDP – Year1 GDP) / Year1
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GDP per Capita growth rate
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[(Year2 GDP / Population) / (Year1 GDP / Population)] – 1
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Productivity Growth Rate
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[(Year2 GDP / workers) / (Year1 GDP / workers)] – 1
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Calculate Future GDP
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Future GDP = (Current GDP) x (1+g)^(# years) *future GDP (per capita) *g (% demand GDP per capita)
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Resources that determines economic growth rate
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1. natural resources: mineral, oil, water, geography, land 2. physical capital 3. labor and human capital: productive skills (market) your worker has (work experience, quality of education, training); capital deepening
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Diminishing Marginal Returns
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more and more input means smaller ans smaller increment needed *labor, human capital, natural resources are held constant
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Crowding Out
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soak up all the possible investments by companies from high interest rates by government
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Market
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An institution that brings together buyers and sellers of goods and service.
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Market examples
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*the New York Stock Exhange *a local former’s market * the free-agent signing period in the NFL where players hoping to sign with a team interact with teams looking for additional players *Trader Joe’s: a grocery store frequented by \”foodie\” types
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Rank from Market-oriented (Laissez-faire) to Command-oriented (centrally planned)
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*Market-oriented activities 1. buyers and sellers make all production/consumption decisions 2. government attempts to induce certain production/consumption decisions using monetary incentives 3. government regulates some production decisions 4. government makes all production/consumption decisions *command-oriented activities
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market-oriented economy
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individuals’ economic lives are said to be interrelated with many other individuals and firms
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**SAPLING LEARNING**
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*Through the goods and service market people can consume what they want without needing the knowledge and skills necessary to produce all the products they wish to consume. *The economy is a social mechanism that helps coordinate distribution of goods, resources for production, and division of labor.
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Primary Macroeconomic Goal
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1. Low unemployment 2. A sustainable trade balance 3. Growth in the standard of living 4. Low level of inflation
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Price Elasticity
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Price Elasticity of Demand PE = (% change in quality demanded) / (% change in price)
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potential output of economy
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human capital physical capital technology

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