Economics Flashcards
Real Gross Domestic Product (GDP)
Real Gross domestic product (GDP) measures the value of all goods and services produced within the nations borders in constant dollars. Real GDP is adjusted to account for changes in price levels and removes the effects of inflation by using a price index. Real GDP can be used to compare economic performance over time; nominal GDP cannot be used for this purpose because nominal GDP doesn’t adjust for inflation.
Economic Activity (Characterized)
Economic activity is characterized by situations, which vary in severity and duration. Severity refers to how deep a recession is or how widespread a recovery may be. Duration refers to time – how many quarters a recession lasts or how many years of growth until inflation..
Trough
A trough is a low point of economic activity. Firms profits are at their lowest levels, so cost-cutting is essential for survival. Since jobs have been cut, creation of products is low and excess capacity would be expected.
Recession
During a recession, potential output will exceed actual output. Prices are falling, employment is low, and real Gross domestic product is falling.
Government Purchases (government spending)
Increasing government purchases (government spending) cause an increase in demand. An increase in demand causes real Gross Domestic Product (GDP) to rise and unemployment to fall.
Shifts in the Demand Curve
An increase in wealth and an increase in general level of confidence shifts the aggregate demand curve to the right. Shifts in aggregate demand curve occur due to factors other than price. Prices would cause a change in the quantity demanded along the same aggregate demand curve, but price would not be enough to cause a shift in the demand curve. A shift to the right (good news) would occur as a result of reasons other than price, including factors such as increases in wealth (stock market gains), reduction in interest rates, and increases in consumer confidence.
The Aggregate Demand Curve
The aggregate demand curve is downward sloping because quantity demanded (QD)is inversely related to the price level. For example, as prices rise, QD falls. Slope is a measure of sensitivity – in this case, sensitivity of the dependent variable (quantity demanded) to the change in the independent variable, price level. The short run aggregate supply curve is upward sloping because quantity supplied is directly related to the price level. In the short run, if prices rise, sellers will want to sell more (a positive slope). In this case, slope is measuring the sensitivity of the dependent variable (quantity supplied) to the change in the independent variable, price. Note that in the long run, the aggregate supply curve is not about price but about resources available such as labor, material and capital.
Aggregate Supply
A nation’s long-term aggregate supply curve represents the potential output of a nation, and long run output is dependent on infrastructure, including available technology, capital, labor, and raw materials. A decrease in aggregate supply causes output to fall and the price level to rise. Decrease in aggregate supply will lead to fewer products being created, which could lead to shortages. If products are scarce, prices will rise. Alternatively, an increasingly negative supply would cause output to rise in price levels to fall, since more goods are being produced. More products created could lead to a surplus, which leads to lower prices.
Decrease in Input Cost (direct materials direct labor)
If a company’s input costs go down, a company can make more money by increasing production. When supply goes up, output goes up and gross domestic product (GDP) goes up. When supply goes up price per unit will go down. Therefore a decrease in input costs like direct materials and direct labor will shift the aggregate supply curve to the right, resulting in an increase in real GDP and a decrease in the overall price level.
Inflation (affects)
Inflation erodes purchasing power. Inflation actually helps anyone that has to make a fixed payment. Inflation hurts those who are receiving fixed payment.
Gross Domestic Product (formula) – Income Approach (PRIDE)
Gross Domestic Product Profits to Proprietors \+ Profits to corporations \+ Rental income \+ Interest income Depreciation \+ Employee wages GDP – Income approach
The Consumer Price Index
The Consumer Price Index is measured monthly and represents prices paid for a representative basket of goods and services.
Monopolistic Competition
In Monopolistic Competition, there are many firms, each with a slightly different product (product differentiation.)
There are relatively small or no barriers to entry.
Perfect Competition
In a perfectly competitive marketplace, customers are indifferent about which firm they buy from and will by from the cheapest firm.
Oligopoly
Oligopoly markets conditions are characterized to the following:
– few firms in the market
– significant barriers to entry
– Little or no variability in price
The international oil industry is an example of an oligopoly. In an oligopoly, the other firms in the market will match any price reduction so they do not lose market share, but they will not automatically match a price increase of an individual firm. Therefore, the demand curve is said to be “kinked” for a firm competing in an oligopoly.
