Basic Economic Concepts
Why do economists use market value when calculating GDP?
Using market value allows economists to combine different goods and services into a single measure by expressing them in common dollar terms.
Difference between Nominal GDP and real GDP
Real GDP adjusts for inflation, while Nominal GDP uses the current prices for that amount of output
What two things determine economic growth?
1. Input (land, labor, capital, entrepreneurship)
2. Productivity (how well those inputs get used)
A higher GDP Per capita means
A higher standard of living
In an open economy, why do domestic savings not have to equal domestic investment?
because of the possibility of international borrowing or lending.
Macroeconomics is mainly concerned on
Inflation
GDP
Unemployment
Why is there no such thing as zero unemployment
There are always people seeking to work
John is 20 and is a couch potato who does not concern himself with finding a job. Is he part of the labor force?
No: of the working age and not seeking a job -not unemployed
Which is not a financial intermediary
Mutual Funds
Banks
Stock Market
Insurance companies
Pension Funds
Stock Market- a financial market, not intermediary
Why is the short-run aggregate supply (SRAS) curve upward-sloping while the long-run aggregate supply (LRAS) curve is vertical?
Short-run AS (SRAS) is upward-sloping because in the short run, some input prices—especially wages—are sticky or slow to adjust.
When the overall price level rises but wages and other costs remain fixed temporarily, firms can make higher profits and increase production.
As a result, higher prices lead to higher real output in the short run.
The LRAS curve is vertical because in the long run, wages and other resource prices are fully flexible.
When a recession is particularly severe, it is called a
Depression
Three limitations of Simon Kuznets system of measuring GDP
1. It is difficult to constitute what counts as a "final" good/service. National defense as one example
2. GDP does not include non - market transactions. (Unpaid household work/chores, the underground economy, black market)
3. GDP does not account for natural disasters or crime
Frictional unemployment + Structural unemployment = ?
Natural Rate of Unemployment NRU, The minimum unemployment a healthy economy has
How do economists define the words "savings" and "investment"?
Investment - purchase of capital equipment. (factories, machinery, apartments)
What are the main determinants that cause the AD curve to shift to the right or left?
A change in the components of Consumption (the wealth effect), Investment (the interest rate effect), Government spending, and Net Exports (the exchange rate effect)
The three goals of macroeconomics
Maintaining economic growth, keeping unemployment low, and controlling inflation
Compare and contrast the expenditures method of calculating GDP, vs the income method
1. GDP = Consumption + Investments + Government spending + (Exports - Imports)
(Combines all components of spending to find an economy's total spending)
2. GDP = Production = Expenditure = Income.
(The total value of everything produced, the total amount spent on those things, and the total income earned from producing them are all equal to each other)
What role does the government play in the circular flow model?
Taxing households and firms to provide public services
Banks pay their depositors(people who put money they wish to save in banks) interest. Banks charge borrowers higher prices than the interest they pay to depositors.
Why did Keynes argue that wages are “sticky” in the short run, and what implication does this have for unemployment?
He argued that wages are "sticky" because of psychological factors like employee morale and the practical difficulty of coordinating wage cuts, leading to unemployment during economic downturns
The economy’s total output divided by the total number of workers employed is
Average Labor Productivity
How are CPI and GDP deflator different?
The CPI measures a fixed basket of goods purchased by ordinary consumers. Reflects impact of inflation on households.
The GDP Deflator measures price changes for all goods/services included in GDP. Measures prices in the overall economy and separates Nominal GDP from Real GDP.
A farmer doubles the amount of fertilizer used on a field, but crop yield only rises by 30%. This illustrates:
Diminishing returns
What are the two advantages of mutual funds?
Allows diversification which reduces the potential ups and downs of a single business
Provides access to knowledge on professional money managers so that individuals don't have to closely follow market devlpoments
When the economy is in a recession, how can the government use tax cuts to stimulate AD?
By creating tax cuts, the government increases disposable income, and increases business investment, (the C and I factors) therefore shifting the AD curve rightward.