BEC-5 Flashcards
Nominal GDP
Measured in “today’s” prices
Real GDP
- Measured in “Base Year” prices
- Most commonly used measure of economic activity and national output
Formula:
Nominal GDP / GDP Deflator x 100 = Real GDP
GDP
-The total market value of all final goods and services produced within the borders of a nation
Price Index
- the “GDP Deflator”
Real GDP “per capita”
- used to compare standards of living across countries or across time
- must use Real GDP and not Nominal
Every Peak Contracts Through Recovery
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Recession
- Below long term average growth
- defined as two consecutive quarters of falling national output.
Depression
- Very Severe recession
- relatively long period of stagnation in the economy
Reasons for Fluctuations
- ∆ in price causes a ∆ in Quantity demanded Quantity Supplied
- ∆ in Aggregate Demand or Aggregate Supply it causes a ∆ in price level
- business cycles result from shifts in aggregate demand and/or aggregate supply
Aggregate Demand(AD) curve
- downward sloping
- as price goes up the quantity demanded goes down
Aggregate Supply(AS) curve
- upward sloping, positively sloped
- as price goes up the quantity supplied goes up
Short run Aggregate Supply(AS) curve
-Upward sloping
Long run Aggregate Supply(AS) curve
- independent of price level
- resources available to produce
- VERTICAL slope
- all about the capacity of the country to produce
- Is the potential of the level of output of the economy
- The level of Real GDP(national output) that the economy would produce if its resources(capital and labor) were FULLY employed
Increase in Real Interest rates
- willingness to buy on credit
- thus demand is down, and GDP and employment will go down as well, and then prices
Decrease in interest rates
GOOD
- more willing to buy on credit
- thus demand is up, and then GDP and employment will go up, then prices will go up
Changes in exchange rates
-an appreciating currency: if the dollar is more expensive, then foreign demand will go down and exports will go down which is bad news as real GDP will go down
a depreciating currency: GOOD news, the dollar is cheaper, foreign demand and exports and GDP will go up
Government spending
More spending: Good, demand is up, GDP is up
Less spending: Bad news, demand is down, GDP is down
-Government is a consumer just like businesses and individuals
Slow down an overheated economy
-the government to slow down inflation, when current output is above LONG-RUN Aggregate supply(good in short term, but long term can cause inflation), the government may implement restrictive government policy by spending less and taxing more
Factors that shift Aggregate demand( not from a change in price level)
Taxes Wealth Interest Rates Consumer confidence Exchange rates Government spending
Multiplier Effect
- Ripple effect through the economy
- increase in consumer, firm, or government spending produces a multiplies increase in the level of activity. $1 increase in gov’t spending causes a greater that $1 increase in Real GDP
- results from the marginal propensity to consume(MPC)
Multiplier = 1 / (1 - MPC),
also the Marginal Propensity to Save(MPS) = (1 - MPC)
MEMORIZE DIAGRAM ON PG 7 BEC-5
MUST KNOW!!!!
Expenditure Approach to measuring GDP(memorize)
- GDP= GDI
- Expenditure Approach:
G - Government purchases of goods and services
I - Investment spending by business’s
C- Consumer households spending
E- net Exports( exports minus imports)
Income Approach to measuring GDP(memorize)
- GDP= GDI
I-Income of people who own businesses P-Profits of Corporations I- Interest for people who lend $ R- Rental Income A- adjustments for miscellaneous items T - Taxes E- employee income D- Depreciation
Net Domestic Product
GDP - depreciation
Gross National Product(GNP)
- the market value of final goods and residents produced by residents of a country
- whether the residents work in the country or out of the country
Disposable Income(DI)
Personal income less personal taxes
- Directly affects Aggregate Demand
The Unemployment Rate
- When GDP is down unemployment is up
Unemployment Rate = Number of Unemployed* / Total Labor force** x 100
- must be above 16 years old and actively SEEKING work
- seeking + those employed
Types of Unemployment(4 types)
- First 3 are Independent of economic performance, will always be there to a certain extent
1. Frictional Unemployment - resulting from workers frequently changing jobs or from workers being temporarily laid off
2. Structural Unemployment - jobs available in the market do not correspond to those in the workforce, due to change in technology
3. Seasonal Unemployment - result of seasonal changes in demand - Cyclical Unemployment - is based on economic performance, “controllable” in theory,
- amount of unemployment resulting from declines in real GDP during periods of contraction or recession
Full Employment
not 100% employment
- occurs when we are at the *natural rate
- no cyclical unemployment
*natural rate - certain unemployment is unavoidable: frictional, structural, seasonal
Inflation
- inflation is the sustained increase in the general prices of goods and services
- can be caused by either the aggregate demand going up or the aggregate supply going down
Consumer Price Index(CPI)
- Change in price levels over time
- a measure of the overall cost of a basket of goods that would normally be purchased by the average household
Producer Price Index( PPI)
- a measure of the overall cost of a basket of goods that would normally be purchased by firms and businesses
Inflation Rate (memorize)
Inflation Rate = CPI this period - CPI last period / CPI last period x 100
Demand- Pull Infaltion
- inflation caused by increases in the aggregate demand
Cost- Push Inflation
- caused by reduction in the aggregate supply
The Phillips curve
- says that in the short-term when inflation is high unemployment will be low
- inverse relationship between unemployment and inflation
Real interest rate
Real interest rate = Nominal interest rate - inflation rate
Nominal interest rate
Nominal interest rate = Real interest rate + inflation
Nominal Interest rate = Risk Free(pure time value of money*) + expected inflation
*pure time value of money = supply/demand for loanable funds “money supply”
Money Supply
- If money supply is up then interest rates are down
- If money supply is down then interest rates will go up
M1
coins, currency and things in checking accounts
EXCLUDES : savings accounts, cd’s, and money market funds
M2
“M1 + CD’s(less than $100,000), money market accounts, mutual funds and savings accounts
M3
“M2” + CD’s in excess of $100,000
“Monetary Policy” and the money supply
Primary job of the federal reserve to stabilize thte economy:
- Open market - the fed buys gov’t securities to increase the money supply to expand the economy, the fed sells gov’t securities to lower the money money supply and cool off an overheated economy
- Discount Rate - the rate the Fed charges member banks for short-term loans
- Required Reserves - the ratio of total deposits a bank must hold, if the fed raises the required reserve it lowers the money supply, and conversely by lowering the required reserve it increases the money supply
Microeconomics Shift - Change in Demand(also for supply)*important
- Change in Quantity demanded - caused by change in price
- Change in Demand - caused by something other than change in price
Price Elasticity of Demand Formula(memorize!)
Point Method
Price Elasticity of Demand = % change in quantity demanded* / % change in price
*% change in quantity demanded = new demand - old demand / old demand
**% change in price = new price - old price / old price
Price Elasticity(demand & supply)
if the absolute price elasticity of demand or supply is greater than 1, then the greater the value the more elastic the item is. Less than 1 and the item is inelastic. The item is considered UNIT Elastic if its value is equal to exactly 1.
Income Elasticity of Demand(formula memorize!)
Income elasticity of demand = % change in number of units of x demanded / % change in income
- positive income elasticity: as income goes up demand goes up( luxury goods)
- negative income elasticity: as income goes up demand goes down(inferior goods)
Positive vs. negative Coefficients
Positive coefficients = substitutes
-as price of one goes up. demand for the other goes up(beef and chicken)
Negative coefficients = compliments
- as price of one goes up, demand for the other goes down( ketchup and hamburgers)
Marginal Cost
- same as incremental cost
- only affected by variable costs
- cost due to a change in output resulting from production of 1 more item
Optimal Quantity
amount in production when we have minimized our average total cost
- at some point marginal costs begin to go from being less or the same to becoming increasingly more expensive as you reach a certain high level of production( U shaped curve)
Long Run Average Total cost
Like average total cost, initially costs go down and then go back up and therefore follows a U shaped curve
Market structures and pricing
Pure competition(perfect) : No individual firm can influence the price, too many substances - price is set by the market. Zero barriers to entry and most products are the same i.e Gas is Gas, price is perfectly elastic.
Monopolistic competition: many sellers, but “differentiated” products. Few barriers to entry, some influence over price. Since the products are similar, if price is raised to high buyers can buy alternatives, so best to spend money on marketing and show why product is best. i.e iPhone and Galaxy
Oligopoly: Relatively few sellers that are large but with differentiated products. Relatively strong barriers to entry. i.e American car companies ford, chevy. “Kinked demand curve”: if competitors lower their price may have to lower yours as well, however if competitor’s raise their price do not need to necessarily change price.
Monopoly: Only 1 supplier. Insurmountable barriers to entry. No competitors or substitutes. Demand is highly inelastic.
- (memorize!) Regardless of the model that represents the industry, the firm will operate best when marginal revenue = marginal cost MC = MR
- keep producing units until the MC = MR, this is how you maximize profit for all industries
How to Maximize profits
Keep producing until MC = MR
Monopsony
Only one employer in the market, instead of Big 4 there is the Big 1
-results in lower wages and lower levels of employment, no bargaining power for employees
Consequences of a Union
If there is a union:
1. Employees who are part of it - union can use its power to bargain for higher wages, and therefore unionized employees wages increase.
- Employees who are not part of union: although wages will rise for the unionized workers, those who are not part of the union will see lower wages but greater employment opportunities since they will work for less and there is a higher demand for them.
SWOT analysis
Strengths and Weaknesses = Internal - core competencies( what do we do well, what are we good at) - Opportunities and Threats = External - less controllable
Porter’s 5 forces
- Barriers to market entry
- Market Competitiveness
- Existence of substitute products
- Bargaining power of the customers
- Bargaining power of the suppliers
Cost Leadership Strategy
- strategy is to sell item on the market for the lowest price
- works well for inferior goods where customers do not care about quality but want the lowest price
- fails when you overlook technological advances because you are too focused on selling for lowest price
Best Cost Provider
Combination of Cost Leadership and Differentiation strategies
- works well when customers want differentiated products and are not satisfied with the generic but are still sensitive to cost
Differentiation strategies
- strategy is to actually make a better product or convince consumers why your product is better
- works when the product is actually superior
- good when consumers want “luxury” goods\
- Fails when the value of the firm’s differentiation premium does not exceed its cost.
Value Chain Analysis
a “strategic tool” that assists a firm in determining how important its value(as perceived by buyers) is with respect to the market with which it operates
