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EXAM REVIEW.docx

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Department
Economics
Course
ECON 2HH3
Professor
Marc- Andre Letendre
Semester
Winter

Description
EXAM REVIEW: Chapter 2: Gross Domestic Product (GDP): Dollar value of final output produced during a given period of time within the borders of Canada. 3 approaches to measuring GDP: • Product Approach: sum of value added to goods and services in production across all productive units in the economy. o Total revenue – wages – interest – cost of intermediate inputs – taxes • Expenditure Approach: C + I + G + NX • Income Approach: Y = C + I + G + NX GNP: Measures the value of output produced by domestic factors of production, whether or not the production takes place inside Canadian borders. Components of Aggregate Expenditure: • Consumption: 55.5% of GDP 2007 o Durable goods, semi-durable goods, nondurable goods, and services. • Investment: 20.3% of GDP in 2007 o Fixed investments: production of Capital: Plant, equipment, and housing o inventory invesmtnet: Goods put in storage. • Net Exports: 1.9% • Government Expenditures: 22.7% Price Index: Weighted average of the prices of a set of the goods and services produced in the economy over a period of time. Price Level: average level of prices across all goods and services. Inflation: one change from a period to another. • Nominal change: Change in GDP occurring only because price level changed. • Real Change: increase in physical quantity of output. Real GDP: value of final goods and services produced in a given year when valued at constant prices. Implicit GDP Deflator: Nominal GDP/Real GDP x100 CPI: Fixed weight Price index Current Year CPI=Cost of base year quantities at current prices/cost of base year quantities at base year prices x100 Capital Stock: The quantity broad of plant, equipment, housing, and inventories in existence in an economy at a point in time. Labour market measurement: • Employed: 15 and older who worked part-time or full time during past week. • Unemployed: 15 and older who were not employed during the past week, but actively searched for work at some time during the last four weeks. • Labour Force=Employed + Unemployed • Not in labour force: 15 and older who are neither employed nor unemployed. • Unemployment Rate: Fraction of the labour force that is unemployed. o UR = Unemployed/Labour Force • Participation rate: Labour Force/Total working age population • Employment/population ratio: Employment/Total Working age population • Labour market tightness: reflects the degree of difficulty that firms face in hiring workers. Chapter 3 Business Cycles: fluctuations about trend in real gross domestic product. Amplitude: Maximum in trend. Frequency: Number of peaks that occur per year. Boom: Series of positive deviations from trend. Recession: Series of negative deviations from trend. Turning Points: Peaks: large positive deviation from trend Through: relatively large negative deviation from trend Comovement describes how aggregate economic variables move together over the business cycle: • Positive Correlation/procyclical • Negative Correlation/countercyclical • Leading/Lagging Variables • Coincident variable: neither lags nor leads. Nominal Variables: Philips Curve: negative relationship among change of money wages, and unemployment rate in the UK. If we take the unemployment rate to be a measure of aggregate economic activity then the Philips curve captures positive relationship between the rate of change in a money price and the level of aggregate economic activity. They tend to be unstable. Labour Market Variables: Real Wage: purchasing power of the wage earned per hour worked for the average worker. Measured as: average money wage for all workers/Price Level. Weight of empirical rule suggests that real wage is procyclical. Average Labour productivity: Y/N | Y=aggregate real output N=Total Labour Input • Average labour productivity as output per worker. Chapter 4 Static Decisions: Given that there is only one time period Dynamic: Planning over more than one period. The Representative Consumer: Consumers Preferences • Consumer’s preferences over leisure and consumption goods is described by a utility function, U(C,l) • 3 features: o More is always preferred to less o The consumer likes diversity in their consumption bundle o Consumption and leisure are normal goods. Indifference map: Graphical representation of the utility function. Family of indifference curves. Indifference curve: set of consumption bundles among which the consumer is indifferent. Marginal Rate of Substitution: • marginal rate of substitutionis the rate at which the consumer is willing to substitute leisure for consumption goods • It is the negative of the slope of the indifference curve---that is, o MRS = -[Slope of the indifference curve passing through (C,l)] l,c • Explains relationship between the marginal rate of substitution and the slope of the indifference curve. The Budget Constraint: • Condition that the total expenditure on consumption goods and leisure must not exceed the real disposable income. • If w is the real wage rate, h is the total number hours available for work, π is the dividend income, and T is the lump-sum tax amount then: o C + wl = wh +π - T • the figure is the graphical representation of the consumer’s budget constraint. • Negative of the slope of the budget line, w, is the trade-off between consumption and leisure. Consumption Optimization: • Optimal commodity bundle: Consumption-leisure pair that is feasible and lies on the highest possible indifference curve. • The optimal consumption leisure pair meets the condition: MRS = l,c Figure shows the optimal consumption-leisure pair, represented by point H The consumer finds such a pair by equating the marginal rate of substitution of leisure for consumption MRS I,Co the relative price of leisure w. Effects of change in Dividends or Taxes: • Given w, an increase in the net of tax dividend (π - T) produces a pure income effect on the consumer’s choices. • It expands the consumers feasibility set • Given that consumption & leisure are normal goods, increase in (π -T) increases both consumption & leisure. Income Effect: Figure shows the effects of an increase in (π – T) The optimal consumption-leisure pair moves from point H to K • At point K, both consumption & leisure are higher. • Increased leisure menas less work • The new optimal bundle lies on a higher indifference curve indicating an increase in consumer well-being. Effects of Changes in the Real Wage • Given (π-T), an increase in the real wage produces an income effect and a substitution effect. • Substitution effect increases consumption but reduces leisure. • The income effect raises both consumption and leisure. • Thus, while consumption increases in response to an increase in the real wage, leisure may or may not. Income & Substitution Effects: Figure shows the effects of an ncr
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