E&S Test 2!!!!!!!!!!!

GDP

100

Expenditure approach

C+I+G+NX

200

What does GDP and GDP/capita measure

General welfare of a nation and per person respectively

300

RDGP vs NGDP

NGDP- nominal GDP includes output and price, counted in todays dollars.

RGDP- adjusted for inflation, only changes if output changes, counted in constant dollars

400

Business cycle

Boom- big increase in RDGP

Recession- 2 consecutive quarters of declining RGDP

Depression- unusually severe recession

500

What does each component of the expenditure approach mean? and give an example of each

C- Consumption- consumption (spending) of g/s from households

-Durable goods, non-durable goods, services

I- Investment of the private sector from firms

- Plant equipment and software purchases, New home construction, Inventory changes: Increase in inventory--> increase in I (same for the inverse)

G- government purchases (final user is gov)

-Gov investment, Gov g/s, Does NOT include transfer payments

NX- net exports: Exports-Imports

Market Failures

100

Imperfect Information & 3 types

One party has relevant information that is unknown by another party.

• Adverse selection- one party takes advantage of info the other lacks when (other is) trying to buy or sell ex: lemon cars
• Moral hazard- one takes more risks because they’re insured against the consequences ex: insurance
• Principle- agent- problem- one party hires another when who in turn can pursue goals that conflict with the principals goals ex: darn mechanics.

200

Imperfect competition and ex

monopoly

300

Public goods vs Private goods

Public- non-rivalrous and non-excludable

Private- Rival and Excludable

400

Free Rider problem

You don’t pay for it, but you still use it and enjoy the benefits. Under provided and overused

500

Government provisions

Can lead to efficient distribution

Elasticity of S&D

100

Elasticity definition for S&D and types

Price Elasticity of Demand (PED)- Measures how sensitive Qd is to changes in Price.

PES (Price Elasticity of Supply)- How sensitive Qs is to ∆ in P.

• Elastic demand means it is heavily sensitive to price
• Inelastic demand means that it is insensitive to price change

200

Determinants of demand 

 

• Availability of subs
• More subs, more elastic demand
• More specific classification of a good, the more elastic demand will be (greater the coefficient).
• Share of budget devoted to the g/s
• The bigger the share of your budget devoted to that specific g/s, the more elastic your demand is.
• Necessity or luxury
• Demand for Luxury goods tends to be more elastic.
• Demand for necessity goods tend to be more inelastic.
• Time
• Demand becomes more elastic with the passage of time.
• Short run- short time after price change
• Long run- at least a year or more.

300

Determinants of supply

• Time
• Short run vs long run
• Short run- supply is more inelastic
• Long run- supply is more elastic
• Substitutes in Production
• More subs, more elasticity
• Flexibility
• How easy is it to change productive capacity
• Flexibility- Inelastic
• Inflexibility- Elastic
• Ability to store
• Easy vs Hard-Easy, less elastic; hard more, elastic.

400

Coefficients that define elasticity

Elastic is >1

Unit elastic =1

Inelastic <1

500

How does elasticity affect taxes?

More elastic, less tax burden

More inelastic, less tax burden

Elasticity of I&CP

100

Cross price elasticity

Measuring how sensitive Qd of 1 good is to ∆s in D of another good.

200

Compliments, subs, not related

Ec>0

Ec<0

E=0

300

Normal good and 2 types

Ei>0

0<Ei<1-necessity

Ei>1- luxury

400

Inferior good

Ei<0

500

Example of Inferior and Normal (necessity and luxury) goods

Ramen, spam

milk, bread

Gucci belt

Macro (pain)

100

Unemployment & LF

Unemployment includes working age population, people actively looking for work, and non-institutionalized. 

LF= # of Unemp+# of Emp

200

Inflation, Deflation, Hyperinflation

Increase in average price level

Decrease in average price level

Abnormal increase in average price level

300

CPI

Consumer Price Index- a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

400

What is not included in Unemployment

Discouraged workers

Involuntary part-time workers (Underemployed) 

Those who don’t report employment (tax reasons, criminal activity etc)

500

Types of unemployment

Frictional – job search; finding job that best suits skills and tastes

Structural – mismatch between workers’ skills and skills required for job; mismatch in location (changes in structure of economy) 

Cyclical – related to changes in production over business cycle

Seasonal – related to seasonal factor