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National Income Accounting

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system that a national government uses to measure the level of the country's economic activity in a given time period.

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GDP

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the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

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Nominal GDP

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GDP evaluated at current market prices

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Real GDP

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macroeconomic measure of the value of economic output adjusted for price changes.

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GNP

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broad measure of a nation's total economic activity. GNP is the value of all finished goods and services produced in a country in one year by its nationals.

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Difference between GDP and GNP

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GDP refers to and measures the domestic levels of production, where as GNP measures the levels of production of any person or corporation of a country

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Depreciation

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the gradual decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question.

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Price Level

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the average of current prices across the entire spectrum of goods and services produced in the economy.

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Aggregate Demand

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total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels.

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Aggregate Supply

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total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing and able to sell at a given price level in an economy.

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Durable Goods

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good that does not quickly wear out, or more specifically, one that yields utility over time rather than being completely consumed in one use.

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Non-Durable Goods

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they may be defined either as goods that are immediately consumed in one use or ones that have a lifespan of less than 3 years

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Business Cycle

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the upward and downward movements of levels of GDP and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around a long-term growth trend

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Expansion

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phase of the business cycle when the economy moves from a trough to a peak. It is a period when the level of business activity surges and GDP expands until it reaches a peak

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Economic Growth

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increase in the inflation-adjusted market value of the goods and services produced by an economy over time

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Peak

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highest point between the end of an economic expansion and the start of a contraction in a business cycle.

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Contraction

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occurs after the business cycle peaks but before it becomes a trough. According to most economists, a contraction is said to occur when a country's real GDP has declined for two or more consecutive quarters

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Trough

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low turning point or local minimum of a business cycle

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Recession

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when the economy declines significantly for at least six months. That means there's a drop in the following five economic indicators: real GDP, income, employment, manufacturing, and retail sales

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Depression

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sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than an economic recession

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Stagflation

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situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high

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Leading Indicators

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measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but they are not always accurate

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Real GDP per capita

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measure of the total output of a country that takes GDP and divides it by the number of people in the country

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Capital Deepening

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situation where the capital per worker is increasing in the economy. This is also referred to as increase in the capital intensity. Capital deepening is often measured by the rate of change in capital stock per labour hour.

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Saving

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consists of the amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income he earns in a given period of time

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Savings Rate

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the amount of money, expressed as a percentage or ratio, that a person deducts from his disposable personal income to set aside as a nest egg or for retirement

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Frictional Unemployment

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time period between jobs when a worker is searching for or transitioning from one job to another

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Seasonal Unemployment

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occurs when people are unemployed at certain times of the year because they work in industries where they are not needed all year round

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Structural Unemployment

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form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers

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Cyclical Unemployment

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factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized.

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Census

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the U.S. federal government's official five-year measure of American business and the economy. It is conducted by the U.S.Census Bureau, and response is required by law.

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Unemployment Rate

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measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.

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Full Employment

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level of employment rates where there is no cyclical unemployment.

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Underemployed

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all jobless persons who are available to take a job and have actively sought work in the past four weeks.

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Discourage Worker

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person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment

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Inflation

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rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling

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Purchasing Power

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value of a currency expressed in terms of the amount of goods or services that one unit of money can buy

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Consumer Price Index (CPI)

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more direct measure than per capita GDP of the standard of living in a country. It is based on the overall cost of a fixed basket of goods and services bought by a typical consumer, relative to price of the same basket in some base year.

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Price Index

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measure of relative price changes, consisting of a series of numbers arranged so that a comparison between the values for any two periods or places will show the average change in prices between periods or the average difference in prices between places

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Inflation

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rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

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Hyperinflation

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occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency, and causing the population to minimize their holdings of local money

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Demand-Pull Theory

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theory that inflation occurs when demand for goods and services exceeds existing supplies

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Cost-Push Theory

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develops because the higher costs of production factors decreases in aggregate supply in the economy. Because there are fewer goods being produced and demand for these goods remains consistent, the prices of finished goods increase

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Fixed Income

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any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule

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Deflation

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decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%

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Poverty Threshold

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the minimum level of income deemed adequate in a particular country

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Income Distribution

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smoothness or equality with which income is dealt out among members of a society.

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Lorenz Curve

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graphical representation of the distribution of income or wealth

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Block Grants

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financial aid package that grants federal money to state and local governments for use in social welfare programs, such as law enforcement, community development, and health services. Block grants provide money for general areas of social welfare, rather than for specific programs.

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Workfare

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welfare program in which recipients are required to perform, usually public service work.

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Welfare

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level of prosperity and standard of living of either an individual or a group of persons. In the field of economics, it specifically refers to utility gained through the achievement of material goods and services

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Identify NIPA accounts

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This is a system to monitor the U.S. economy. Collects and organizes macroeconomics statistics on production, income, investment, and savings. Government uses NIPA to determine economic policies

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Explain how GDP is calculated

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GDP = C + I + G + (X - M) or GDP = private consumption + gross investment + government investment + government spending + (exports - imports)

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Difference Between Nominal and Real GDP

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real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP

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Limitations of GDP

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Goods and services produced but not exchanged for money, known as "nonmarket production", are not measured, even though they have value Economic "bads", such as pollution, are not included in GDP statistics. Cash transactions that take place outside of recorded marketplaces are referred to as the underground economy and are not included in GDP statisticsGDP does not take into account leisure time, nor is consideration given to how hard people work to produce output. Higher quality and/or new products often replace older products

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Why do we use GDP?

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Has a large impact on nearly everyone within that economy. GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms

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Four factors that influence GDP

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Consumption, Investment, Government, and Net-Exports

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Consumption

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spending by all households on goods and services. Includes spending on things such as cars, food, and trips to the dentist

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Investment

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spending by business on machinery tools or contraction of buildings

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Government

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spending by all levels of government on goods and services (military and schools)

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Net-Exports

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spending by people abroad on US goods and services minus spending by people in the US on foreign goods

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Phases of the business cycle

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expansion, peak, contraction, and trough

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4 Factors that keep the business cycle going

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Investment, interest rate and credit, consumer expectations, external shock

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Causes of poverty

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lack of education, location, shifts in family structure, economic shifts, racial/gender discrimination

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Saving and Investing Relation to Economic Growth

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They promote economic growth by adding money into the economy, which is then spent on goods and services. That leads to greater availability of funds to lend, which leads to lower interest rates, which leads to greater borrowing for business investment, which leads to business expansion, which leads to more employment, which leads to economic growth.

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Why isn't everyone employed during a period of "full employment"

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Because full employment is the level of employment reached when there is no cyclical unemployment, meaning the unemployment rate is constant and not rising and falling.

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Whats a normal unemployment rate

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4-6% means the economy is still running properly

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Effects of Rising Prices

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Inflation is a general increase in prices. Purchasing power, the ability to purchase goods and services, is decreased by rising prices. Price level is the relative cost of goods and services in the entire economy at a given point in time.

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How do they use price index to compare changes in price over time?

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The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics. The CPI is determined by measuring the price of a standard group of goods meant to represent the typical "market basket" of an urban consumer. Changes in the CPI from month to month help economists measure the economy's inflation rate. The inflation rate is the percentage change in price level over time.

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How do we measure economic growth?

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There are numerous ways to measure including, GDP, GNP, CPI, labor productivity, retail sales, etc.

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Causes of Inflation

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Cost-Push theory, Demand-pull theory, and quantity theory

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Effects of inflation

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Purchasing power, interest rates, and income

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Income Gap

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A 1999 study showed that the richest 2.7 million Americans receive as much income after taxes as the poorest 100 million Americans. Differences in skills, effort, and inheritances are key factors in understanding the income gap.

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Policies to combat poverty

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Employment Assistance: The minimum wage and federal and state job-training programs aim to provide people with more job options. Welfare Reform: Temporary Assistance for Needy Families is a program which gives block grants to the states, allowing them to implement their own assistance programs. Workfare programs require work in exchange for temporary assistance.

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Who is poor according to government?

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Anyone below the poverty threshold and poverty rate

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Calculation of inflation rate

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Annual rates of inflation are calculated using 12-month selections of the BLS's Consumer Price Index.

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Supply and Demand relation to Aggregate Supply and Demand

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Equilibrium is the price-quantity pair where the quantity demanded is equal to the quantity supplied. In the long-run, increases in aggregate demand cause the output and price of a good or service to increase. In the long-run, the aggregate supply is affected only by capital, labor, and technology.

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How do individual firms make up part of the economy?

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This is possible because of perfect competition, many buyers and sellers, similar products, informed people, and free market entry/exit

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