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[COMPLETE] ECO 304L Textbook Notes 4.0 GPA Student

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Economics
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ECO 304L
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Chapter 2 – Think Like an Economist 01/21/2013 High inflation arises when the government prints too much money Ex: when war in the Middle East interrupts the flow of crude oil, oil prices skyrocket Economists make assumptions to simplify the complex world Circular Flow Diagram Two decision makers Firms Produce goods and services using inputs (labor, land, capital) Inputs are the factors of production Households Own the factors of production and consume all the goods and services firms produce Two types of markets Markets for goods and services Households are buyers and firms are sellers Markets for factors of production Households are sellers and firms are buyers Production Possibilities Frontier Shows the various combinations of output that the economy can produce ***Resources are scarce Cannot produce at point C ***Must have efficient outcome Efficiency: getting all it can from the scarce resources available Point D represents inefficient outcome PPF shows trade-off (opp cost) Trade-off can change due to technological advancements PPF highlights scarcity, efficiency, trade-offs, opp costs, and economic growth Micro vs. Macro Micro: study of how households and firms make decisions and how they interact in a specific market Ex: effects of rent control on housing in NYC, impact of foreign comp on US auto industry, effects of compulsory school attendance on workers’earnings Macro: study of economy-wide phenomena Ex: effects of borrowing bed fed gov, changes over time in econ’s rate of unemp, alt policies to promote growth in natl living standards Statement about the world comes in two types Positive statements Descriptive Make claim about how the world is Normative statements Prescriptive Make claim about out the world ought to be Why economists disagree Differences in scientific judgment Different hunches about the validity of alternative theories or about the size of important parameters that measure how economic variables are related Ex: disagree abt whether gov should tax household income or consumption Those that want to tax consumption and not income Change would encourage households to save more because income that is saved would not be taxed Leading to more free resources for capital accumulation and growth in productivity Advocates of current income tax Household saving would not respond much to change in tax laws Differences in opinion due to different + views about responsiveness of saving to tax incentives Differences in value Ex: Peter and Paula Both take same amount of water from town Peter = $100k/year (taxed 10%, $10k), Paula = $20k/year (taxed 20%, $4k) Is this fair? Don’t know specific details about the problem Perception vs. Reality Chapter 5 – Nation’s Income 01/21/2013 GDP: market value of all FINAL goods and services produced within a country in a given period of time Measures two things at once: total income of everyone in the economy and total expenditure on the economy’s output of goods and services These two things are really the same Measures the flow of money Does not include non-final goods and services Ex: a tire would not be counted in the GDP, but a car would For an economy as a whole, income must equal expenditure This is true because every transaction has two parties: buyer and seller Circular flow diagram of expenditure and income equality Caveats Households do not spend all of their income Some of it is paid in taxes Some are saved Chapter 5 – Nation’s Income 01/21/2013 Households do not buy all goods and services produced in the economy Some goods are bought by governments Some are bought by firms that plan to use them in the future to produce their own output GPD uses market price to measure the amount people are willing to pay for different goods It reflects the value of those goods GDP tries to be comprehensive and includes all items produced in the economy and sold legally in markets GDP also includes the market value of the housing services provided by the economy’s stock of housing Chapter 5 – Nation’s Income 01/21/2013 For rental housing, the value is calculated by the rent, which is equal to both the tenant’s expenditure and the landlord’s income Owner-occupied housing is calculated by estimating its rental value Based on the assumption that the owner is renting the house to himself GPD excludes: Items sold illicitly Items produced and consumed in the home (veggies you grow) **this can lead to paradoxical results… Intermediate goods Ex: when International Paper makes paper, which Hallmark then uses to make a greeting card, the paper is called an intermediate good. The card would be a final good. ***GDP only includes the value of final goods Exception: if the good is produced and, rather than being used, is added toa firm’s inventory of goods for use or sale at a later date The intermediate good is then taken to be a “final” for the moment, and its value as inventory is included as part of GDP GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits) Also includes goods and services currently produced, but does not include transactions involving items produced in the past. Ex: when Ford produces and sells a new car, the value of the car is in GDP, but when someone sells a used car to another person, the value of the car is not again included in GDP GDP measures the value of production within the geographic confines of a country Ex: when a Canadian citizen works temporarily in the US, her production is part of the US GDP, but when anAmerican citizen owns a factory in Haiti, the factory’s production is not part of the US GDP Items are included in a nation’s GDP if they are produced domestically, regardless of the nationality of the producer GDP measures the value of production that takes place within a specific interval of time (usually a year or a quarter) Seasonal adjustment: procedure that adjusts data of GDP after they have been modified by a statistical procedure When monitoring the condition of the economy, we often want to look beyond the regular seasonal changes and the statisticians adjust the quarterly data to take out the seasonal cycle Chapter 5 – Nation’s Income 01/21/2013 Components of GDP Consumption (C) Investment (I) Y = C + I + G + NX Government purchases (G) Net exports (NX) *GDP is denoted as (Y) The equation is an identity, an equation that must be true because of how the variables in the equation are defined. Consumption: spending by households on goods and services (with the exception of purchases of new housing) Tangible and intangible Investment: purchase of goods that will be used in the future to produce more goods and services Sum of purchases of capital equipment, inventories, and structures Investment in structures includes expenditure on new housing Government purchases: include spending on goods and services by local, state, and federal governments Includes salaries of gov workers and expenditures on public works Payment to teacher or army general is party of gov purchases, but payment of social security is not because there was no exchange of goods or services and thus does not reflect the economy’s production Net exports: equal exports minus imports If total spending rises from one year to the next, at least one of two things must be true: 1. The economy is producing a larger output of goods and services 2. Goods and services are being sold at higher prices Chapter 5 – Nation’s Income 01/21/2013 Real vs. Nominal GDP Real GDP Answers a hypothetical question: What would be the value of the goods and services produced this year if we valued these goods and services at the prices that prevailed in some specific year in the past? Evaluating current production using prices that are fixed at past levels Shows how the economy’s overall production of goods and services change over time Measuring the amount produced that is not affected by changes in prices Reflects only the quantities produced because it holds the prices constant at base-year levels Nominal GDP is the amount of the production of goods and services valued at current prices Reflects both the quantities of goods and services the economy is producing and the prices of those goods and services GDP deflator: measures the current level of prices relative to the level of prices in the base year Nominal and real GDP must be the same in the base year, so the deflator for the base year always equals 100 Deflator for subsequent years measure the change in nominal GDP from the base year that cannot be attributable to a change in real GDP Inflation describes the rising of the economy’s overall price level Inflation rate is the percentage change in some measure of the price level from one period to the next Chapter 6 – Cost of Living 01/21/2013 Measuring the Price of Living Consumer Price Index (CPI): measure of the overall cost of the goods and services bought by a typical consumer Goal: measure changes in cost of living Tries to gauge how much incomes must rise to maintain a constant standard of living Each month, Bureau of Labor Statistics (part of Dpt of Labor), computes and reports the CPI Uses data on the prices of thousands of goods
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