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ECON1010 - Midterm 1 Study Notes

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ECON 1010
Ardeshir Noordeh

ECONOMICS The social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices MICROECONOMICS The study of choices that individuals and businesses make, the way those choices interact in markets, ad the influence of governments MACROECONOMICS The study of the performance of the national and global economies GOODS AND SERVICES are the objects that people value and produce to satisfy human wants G&S are produced by using productive resources that economists call FACTORS OF PRODUCTION Land (earns rent) Labour (earns wages) Capital (including human capital) (earns interest) Entrepreneurship (earns profit) Self-interest vs. social interest (efficiency/equity) EFFICIENCY is achieved when the available resources are used to produce G&S 1. At the lowest possible price 2. In quantities that give the greatest possible benefit EQUITY is fairness Four issues with self- and social interest are globalization, information-age economy, global warming, economic instability ECONOMIC WAY OF THINKING A CHOICE IS A TRADEOFF PEOPLE MAKE RATIONAL CHOICES BY COMPARING BENEFITS AND COSTS BENEFIT IS WHAT YOU GAIN FROM SOMETHING COST IS WHAT YOU MUST GIVE UP TO GET SOMETHING MOST CHOICES ARE “HOW-MUCH” CHOICES MADE AT THE MARGIN The benefit from pursuing an incremental increase in an activity is its marginal benefit The opportunity cost of pursuing an incremental increase in an activity is its marginal cost CHOICES RESPOND TO INCENTIVES Positive statement: what is Normative statement: what ought to be An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand Natural experiments Statistical investigations Economic experiments GDP gross domestic product The market value of all final g&s produced in a country in a given time period 1. Market value 2. Final goods and services A final good/service is an item bought by its final user during a specified time period Intermediate good is an item produced by one firm, bought by another firm, and used as a component of a final g/s 3. Produced within a country 4. In a given time period THE CIRCULAR FLOW OF EXPENDITURE AND INCOME demonstrates the equality of income and expenditure -households and firms buy the services of labour, capital and land in factor markets Firms pay income to Households (Y is total income paid by firms to households) Firms sell and households buy consumer g/s in the goods market (C consumer expenditure is total payment for consumer g/s) The purchase of new plant, equipment, and buildings and additions to inventories are investment (I) Governments buy g/s from firms (G government expenditure) The value of exports (X) minus the value of imports (M) is called net exports (X-M) If positive, the net flow of g/s is from Canadian firms to the rest of the world If negative, the net flow of g/s is from the rest of the world to Canadian firms .: GDP equals expenditure equals income GDP = C + I + G + X - M .: income equals expenditure Y = C + I + G + X – M Gross in GDP means before deducting the depreciation of capital Opposite of gross is net which means after deducting the depreciation of capital Depreciation is the decrease in the value of a firm’s capital that results from wear & tear & obsolescence Gross investment is total amount spent on purchases of new capital & on replacing depreciated capital Net investment is the increase in the value of the firm’s capital Net investment = gross investment – depreciation TWO APPROACHES TO MEASURE GDP EXPENDITURE APPROACH Measures GDP as the sum of the red flow (C, I, G, X-M) GDP = C + I + G + X – M INCOME APPROACH Measures GDP by summing the incomes that firms pay households for the factors of production they hire 1. Wages, salaries and other labour income 2. Other factor incomes Sum of net wages plus benefits such as pension contributions and is shown by the blue flow W Other factor incomes include a mixture of interest, rent, profit and some labour income from self- employment. Shown in the blue flow OFI The sum of all factor incomes is net domestic income at factor cost Two adjustments must be made to get GDP 1. Indirect taxes less subsidies are added to get from factor cost to market prices 2. Depreciation is added to get from net domestic income to gross domestic income GDP = W + OFI + indirect taxes less subsidies + depreciation Real GDP is the value of final g/s produced in a given year when valued at the prices of a reference base year *current base year is 2002 Nominal GDP is the value of g/s produced during a given year valued at the prices that prevailed in that same year Why real GDP? 1. To compare the standard of living over time Real GDP per person is real GDP divided by the population, by using it we remove any influence that rising prices and a rising cost of living might have had on our comparison 2. To compare the standard of living across countries -the growth of potential GDP per person -fluctuations of real GDP around potential GDP (the value of real GDP when all the economy’s labour, capital, land and entrepreneurial ability are fully employed) Lucas wedge the dollar value of the accumulated gap bw what real GDP per person would have been if growth rate had persisted and what real GDP per person turned out to be BUSINESS CYCLE is a periodic but irregular up-and-down movement of total production and other measures of economic activity Two phases: expansion (from a trough to a peak) and recession (growth rate is negative for at least two successive quarters) (from a peak to a trough) Two turning points: peak and trough TWO ISSUES IN USING REAL GDP TO COMPARE LIVING STANDARDS ACROSS COUNTRIES 1. Real GDP of one country must be converted into the same currency units as the real GDP of the other country 2. The g/s in both countries must be valued at the same prices LIMITATIONS OF REAL GDP Factors that influence the standard of living and not part of GDP are >household production >underground economic activity >health and life expectancy >leisure time >environmental quality >political freedom and social justice WHY UNEMPLOYMENT IS A PROBLEM >lost production >lost human capital >human misery Labour Force Survey conducted every month by Statistics Canada that asks 54,000 households Population divided into two groups: 1. Working-age population : number of people aged 15 years and older who arenot in institutional care 2. People too young to work (under 15 years of age) or in institutional care Labour Force Participation Rate is the percentage of working-age population who are members of the labour force (labour force / working-age population) x 100 This is an imperfect measure because it excludes marginally attached workers and part-time workers who want full-time jobs Involuntary part-time rate is the percentage of the labour force who work part time but want full-time jobs (number of involuntary part-time workers / labour force) x 100 Marginally attached worker is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past Discouraged worker is a marginally attached worker who has stopped looking for a job because of repeated failure to find one FRICTIONAL UNEMPLOYMENT >normal labour market turnover (creation/destruction of jobs, increases in number of people entering and re-entering the labour force, increases in unemployment benefits) STRUCTURAL UNEMPLOYMENT >created by changes in technology and foreign competition that change the skills needed to perform jobs or the location of jobs CYCLICAL UNEMPLOYMENT >higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak (i.e. laid off bc of recession, rehired in expansion) Natural unemployment is *frictional and *structural but no *cyclical Natural unemployment rate is natural unemployment as a percentage of labour force Full employment when unemployment rate = natural unemployment rate **potential GDP There is no *cyclical, just *frictional and *structural Natural unemployment rate influenced by key factors… >age distribution of the population >scale of structural change >real wage rate >unemployment benefits Output gap: real GDP minus potential GDP Low, steady and anticipated inflation/deflation is not a problem Unpredictable in/deflation is a problem bc >redistributes income and wealth >lowers real GDP and employment >diverts resources from production Hyperinflation – inflation rate so rapid workers are pai
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