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# Econ 1010 Review Chapter 20-24,26.doc

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School
Department
Economics
Course
ECON 1010
Professor
Semester
Winter

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Econ 1010 Review (Ch. 20-24,26) Chapter 20 Gross Domestic Product (GDP) 1. Market Value (Price x Quantity = \$\$) 2. Final goods and services 3. Produced within a country (domestically) 4. Produced in a given Reference Period (eg; produced in 2012 and bought 2013, still part of 2012 GDP because it was produced in 2012) Y = C (Consumption) + I (investment) + G (Government) + {X (exports) – M (imports)} - Consumption – Households (Cars, furniture) - Investment – Expenses on equipment, buildings, tools - Government – Government expenses on goods and services - Exports (X) – excluded - Imports (M) – included Net Investment = Gross Investment – Depreciation Eg: \$20 million on capital is Growth investment, but deceases \$2 million, therefore, that is depreciation ^\$20 - \$2 = \$18 million Nominal GDP The GDP that measures sum of market of all goods (Formula – Current Price x Current Quantity ) Eg; Price Price (Base) Quantity Quantity(Bas Market Value (Current) (Cur.) e) Bread 2.10 1.00 75,000 70,000 57,500 Computer 1.80 1.00 18,000 25,000 32,400 Nominal GDP = Current Price x Current Quantity For Bread = 2.10 x 75,000 = 157,500 For Computer = 1.80 x 18,000 = 32,400 Nominal GDP = 157,500 + 32,400 = 189,900 * Real GDP Value of Final Goods and Services (Formula – Base Price x Current Quantity ) Real GDP = Base Price x Current Quantity For Bread = 1.00 x 75,000 = 75,000 (the Market Value) For Computer = 1.00 x 18,000 = 18,000 Real GDP = 75,000 + 18,000 = 93,000 Chapter 21 (Unemployment) - Unemployment results from lost production and income as well as lost human capital * - Labour Force divided into 2 groups, working-age population (# of people aged 15+) and people too young (# of people under 15)  to be employed – must have a part time or full time employment  to be unemployed – must be either = a. Without work but specific efforts to find job within 4 weeks b. Waiting to be called back to a job c. Waiting to start new job within 30 days  Note: anyone who has no job and is NOT looking for one is NOT part of labour force* 4 Labour Market indicators: Unemployment rate = (Number of people unemployed/labour force) x 100 Eg: labour force was 17.95 million and 1.08 was unemployed Unemployment rate = (1.08/17.95) x 100 = 6% Involuntary Part-Time rate = (Number of involuntary part-time workers/labour force) x 100 Eg; 679,000 involuntary part time workers and 17.95 million in labour force Involuntary Part-Time rate = (679,000/17.96 million) x 100 = 3.8% Labour Force Participation Rate = (Labour force/Working-age population) x 100 Eg 17.95 million in labour force, 26.55 million in working-age population Labour Force Participation Rate = (17.95 million/26.55 million) x 100 = 67.6% Employment-to-Population Ratio = (Employment/Working age population) x 100 Eg; 16.87 million in employment, 26.55 million in working-age population Employment-to-Population Ratio = (16.87million/26.55million) x 100 = 63.5% o Marginally attached workers are NOT actively working and NOT looking for work ** o Discouraged worker is NOT applying for jobs because no one hires them, therefore, discouraged to apply for another job ** Frictions, Structural Change and Cycles - Unemployment can be classified in 3 types:  Frictional – arises from normal labour and market turnover (people entering labour force or transitions of various jobs OR changes in demand in labour across firms)  Structural – unemployment created by changes in technology and foreign competition (Structural lasts longer than frictional, for example, employees need to update skills)  NOTE: both Frictional and Structural MUST happen  Cyclical – fluctuating unemployment over business cycles (Cyclical is the WORST out of the three) Chapter 21 (inflation) - Price Level – average level of prices and value of money - Inflation rate – annual percentage change in the price level - Note: Inflation rate affect the growth of Price Level *  Inflation is a problem since it reduces the purchasing power of money and our income  When inflation is UNPREDICTABLE it is also another problem because of redistribution of income and wealth (some gain \$\$, some lost \$\$) and diverts resources from production - Hyperinflation – inflation rate that is EXTREMELY high and out of control (\$\$ loses value very quickly) - Consumer Price Index (CPI) – measures price paid by urban consumers for “fixed” basket of consumer goods and services  CPI is defined to be equal to 100 for the “reference base period”  For example, reference base period is 2002; average CPI over 12 months in 2002 is equal to 100. In September 2008, CPO was 115.7 (therefore, (115.7 – 100 = 15.7%) tells us that the prices urban consumers paid increased by 15.7% in 2008 than in 2002)  CPI Formula = (Cost of Current-period prices/Cost of Base-period prices) x 100  Eg; CPI in 2008 (current-period price) is \$70, and CPI in 2007 (base-period price) is \$50  ^ CPI = (\$70/\$50) x 100  = 140 (therefore, 40% {140 – 100} of the prices paid by urban consumers increased) - Inflation Rate – percentage change in price level from one year to the next  Inflation Rate Formula = [ (CPI this year – CPI last year) / CPI last year] x 100 The Biased CPI (4 reasons) 1. New good bias – CPI is fixed 2. Quality change bias – Quality improvements , CPI counts all price rises as inflation * 3. Commodity substitution bias – overstates actual increase of cost of living (however, people seek substitutions therefore CPI exceeds actual inflation) 4. Outlet substitution bias – fixed basket of CPI that people purchases in the same outlet even if prices increase (however, people find other chapter outlets therefore maintaining standard of living)  Consequences – Distorts private contracts, increases government outlays (closest to a third of federal government outlays are linked to CPI) and biases estimates of real earnings GDP Deflator GDP deflator equals (Nominal GDP/Real GDP) x 100 * - GDP deflator = [Nominal GDP (Price in Current year) / Real GDP (Price in Base year)] x 100 Note: One can use GDP Deflator to find Real Wage Rate - ^for example, Real Wage Rate = (Nominal Wage Rate / GDP Deflator) x 100 - ^As well, Real Wage Rate is Money Wage Rate divided by price level Chained Price Index for Consumption (CPIC) CPIC equals (Nominal consumption expenditure/ Real consumption expenditure) x 100 Chapter 22 Growth Rate of Real GDP Growth Rate of Real GDP = [ (Real GDP Current Year – Real GDP Base Year) / Real GDP Base Year] x 100 Growth Rate of Real GDP per Person = [ (X7/N7) – (X6/N6) / (X6/N6) ] x 100 ^ Real GDP in 2 years is X6 (2006) and X7 (2007), the Estimated Population N6 (2006 population) and N7(2007 population) Rule of 70 - Number of years it takes for level of a variable to double is approx. 70 divided by annual percentage growth rate  Annual % growth rate = [ (population of current year - population of base year) / population of base year] x 100  ^ therefore you get current year Annual % growth rate, afterwards you must add growth rate return % a year How Potential GDP grows - Determined by Aggregated production function and Aggregated labour market  To determine Aggregated production function -- Average Productivity of labour = GDP/Labour  ^increase in labour increases real GDP  To determine Aggregated labour market – Real wage rate (money wage rate/price level), demand for labour shows quantity of labour demanded and real wage rate, supply of labour shows quantity of labour supplied and real wage rate, and labour market equilibrium at real wage rate at which quantity of labour demanded equals quantity of labour supplied - Begin dividing Real GDP Growth into forces that increase à Growth in supply of labour and Growth in labour productivity • Growth in supply of labour (Average hours per worker, employment-to- population ratio, and working-age population growth) à all increase supply of labour • Growth in labour productivity (quantity of Real GDP produced by an hour of labour(firm demands more labour) Why Labour Productivity grows - Quantity of real GDP produced (Y), depends on quantity of labour (L), quantity of capital (K) and state of technology (T) Growth Theories and Policies 3 Growth theories: àClassical = GDP growth is temporary since GDP increases (people are healthier, have more babies because of the idea that more \$\$ results to more babes) – positive relationship between income and population, but it is ONLY temporary  NOTE: it has a pessimistic view of economic growth ** • Key idea – human population increases fast than food on earth, the increase in technology would not be as big as population • Limitation – not supported by empirical evidence because increase in money can reduce fertility rate àNeoclassical = sole determinant of economic growth is technological growth, it rejects positive relationship between population and income (rather, increase money, savings, investment and capital stock)  NOTE: emphasize on technology * -- what determines economic growth • Key idea – growth depends upon technological improvement/change, and depends on changes on capital stock (subject to diminishing returns) • Limitation – doesn’t tell us where technological change comes from (idea of convergence [when low \$\$ economy rapidly grows and catches up to first world countries] like Japan) àNew Growth = product of knowledge capital (eg
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