BEC 5: Economic Concepts Flashcards
What is the difference between nominal and real GDP?
Nominal = "today's" prices Real = "base year" prices - adj. for changing levels/inflation
What is the GDP deflator and its formula?
Price index used to calculate GDP
Real GDP = (Nominal GDP/GDP deflator) * 100
What are the summary components of business cycles?
“Every Peak Contracts Through Recovery”
- Expansionary phase
- Peak
- Contractionary phase
- Trough
- Recovery phase
What are leading indicators? Name 8.
“Before the fact” - predict economic activity - subject to change
- Avg. new unemployment claims
- Building permits for residences
- Avg. length of the workweek
- Money supply
- Prices of selected stock
- Orders for goods
- Price changes of materials
- Index of consumer expectations
What are lagging indicators? Name 3
Follow economic activity - give signals after the fact
- Prime rate charged by banks
- Avg. duration of unemployment
- Bank loans outstanding
What are coincident indicators? Name 2
Occur coincident to economic activity - at the same time
- Industrial production
- Manufacture and trade sales
What is the multiplier effect and its formula?
“Ripple effect” - refers to fact that an increase in consumer, firm, or gov’t spending produces a multiplied increase in the level of economic activity - results from the marginal propensity to consume (MPC). (the change in consumption due to $1 increase in income.)
Multiplier = 1/(1 - MPC) = MPS
Change in real GDP = multiplier = change in spending
“1 - MPC” = marginal propensity to save
What are the factors (not change in price level) that shift aggregate demand? SRAS?
TWICE Government Taxes Wealth Interest rates Consumer confidence Exchange rates Government spending
Changes in input (resources) prices and supply shocks
What are the components of the expenditure and income approaches to measuring GDP?
GICE (“flow of products”)
- Gov’t purchases of goods and services
- gross private domestic Investment
- personal Consumption expenditures
- net Exports
IPIRATED (“flow of earnings and costs”)
- Income of proprietors
- Profits of corporations
- Interest (net)
- Rental income
- Adj. for net foreign income and misc. items
- Taxes (indirect business taxes)
- Employee compensation (wages)
- Depreciation (aka. capital consumption allowance)
What is the unemployment rate, labor force, and corresponding formula?
Ratio of number of people classified as unemployed (16 yrs. or older, available for work, sought employment in previous 4 weeks) to the total labor force - all non-institutionalized individuals 16 yrs. or older who are working or looking for work
Unemployment rate = (# of unemployed/total labor force) * 100
What are the four types of unemployment?
- Frictional - from routine changing of jobs or temporary lay-offs
- Structural - jobs not corresponding with skills and unemployed do not live where jobs are located
- Seasonal - seasonal changes in demand and supply of labor
(1-3 independent of economic performance “normal”) - Cyclical - results from declines in GDP or when the economy fails to operate at potential - no cyclical - full employment
Using the CPI, how is the inflation rate calculate?
[(CPI this period - CPI last period)/CPI last period] * 100
What is demand-pull inflation? Factors?
Caused by an increase in AD
a. Inc. in gov’t spending
b. Dec. in taxes (D up)
c. Inc. in wealth
d. Inc. in money supply (thus IR down and AD up)
What is cost-push inflation? Factors?
Caused by reductions in SRAS
a. Inc. in oil prices (profits and AS down)
b. Inc. in nominal wages (profits and AS down)
What are the three measures of money supply?
MI - used for purchases of goods and services - coins, currency, checkable deposits, and traveler’s checks
M2 - M1 + liquid assets that can’t be used as a medium of exchange, but can be easily converted into components of MI - M1, time certificates of deposits less than $100,000, money market deposit accounts at banks, mutual funds accounts, and savings accounts.
M3 - M2 + time certificates of deposit in excess of $100,000
What factors, other than price, shift demand curves?
WRITEN
a. changes in Wealth
b. changes in price of Related goods
c. changes in consumer Income
d. changes in consumer Tastes or preferences for a product
e. changes in consumer Expectations
f. changes in the Number of buyers served by the market
What factors shift supply curves, other than changes in price?
ECOST
a. changes in price Expectations of the supplying firm
b. changes in production Costs (p of inputs)
c. changes in price or demand for Other goods
d. changes in Subsidies or taxes
e. changes in production Technology
What are the two ways the price elasticity of demand can be measured?
Point method - at particular point on D curve
Ep = % change in QD/% change in price
% change in QD = (new D - old D)/old D
% change in P = (new P - old P)/old P
Midpoint method - b/w only 2 points on D curve
Ep = [(Q2 - Q1)/(Q2 + Q1)] / [(P2 - P1)/(P2 + P1)]
How do you measure the price elasticity of supply?
Ep = % change in QS / % change in P
How do you measure cross elasticity?
Ce = % change in QD or QS of one good caused by the price change of another good
Ce = (% change in # of units of x demanded or supplied) / (% change of price of y)
How do you measure income elasticity?
Ie = % change of QD for a product for a given % change in income
Ie = (% change in # of units of x demanded) / (% change in income)
What are the three main production concepts?
- Total Product (TP) - output - total amt. of output (Q) produced
- Marginal Product (MP) = change in TP resulting from a one-unit increase in the quantity of an input employed - ex.) labor - MP L = Change in TP/Change in L
- Average Product (AP) = the TP divided by the quantity of an input - ex.) Labor - AP L = TP/L
What are the four major cost functions?
- Avg. FC = FC/Q
- Avg. VC = VC/Q
- Avg. TC = TC/Q
- Marginal Cost (“Incremental Cost”) = Change in TC, resulting from a one-unit increase in Q -> MC = change in TC/change in Q -> depends solely on VC - FC do not influence - produce another as long as, MR > MC
What are four market structures in which firms may operate?
- Perfect (pure) competition - no individual firm can influence the market price of its product, nor shift the market supply sufficiently to make a good more scarce or abundant.
- Monopolistic competition - many sellers compete to sell “diff.” product in a mkt. into which entry of new sellers is possible.
- Oligopoly - “few sellers” dominate the sales of a product and entry of new sellers is difficult or impossible.
- Monopoly - represents concentration of supply in the hands of a single firm.
* Know chart on pages 41-42!
