Economics Flashcards
Real GDP
(Nominal GDP / GDP deflator) * 100
Leading Indicators
Predict economic activity
Change before the economy follows a trend
Examples of leading indicators
Average new unemployment claims
M2
S&P Stock Index
Orders for goods
Lagging Indicators
Follow economic activity
Change after a given economic trend has already started
Examples of lagging indicators
CPI
Consumer debt to income ratio
Average duration of unemployment
Coincident Indicators
Change at approximately the same time as the whole economy
Provides information about the current state of the economy
Examples of coincident indicators
Industrial production
GDP
Personal income less transfer payments
Long run aggregate supply line
Vertical line
Illustrates that in the long run, if all resources are fully utilized, output is determined solely by the factors of production
Correspondences to the potential level of output in the economy
Factors that shift aggregate demand
TWICEG Taxes Wealth Interest rate Consumer confident Exchange rate increases Government spending
Multiplier Effect (definition)
Increase in consumer, company or government spending produces a multiplied increase in the level of economic activity
Multiplier equation
1 / (1-MPC)
Solve for change in GDP per multiplier effect
Multiplier * Change in Government Spending
Factors that shift aggregate supply
Input prices (wages, supplies) Supply shocks (plentiful vs curtailed)
GDP Measurement: Expenditure Approach
Government spending
Investment, gross private
Consumption, private
Exports (net), includes foreign
GDP Measurement: Income Approach
Income of proprietors Profit from corporations Interest (net) Rental income Adjustments from net foreign income Taxes Employee compensation Depreciation
Net Domestic Product
GDP - depreciation
Gross National Product
Includes GDP and goods/services produced abroad by US firms and excludes good/services produced domestically by foreign firms
Net National Product
GNP - economic depreciation
National Income
NNP - indirect business taxes
What type of employment rises during a recession and falls during an expansion?
Cyclical unemployment
What is included in the natural rate of unemployment?
Structural, frictional and seasonal unemployment
What is full unemployment?
When cyclical unemployment does not exist but there is still natural unemployment (structural, frictional and seasonal).
Consumer Price Index
Measure of overall cost of a fixed basket of goods and services already paid for
CPI Equation
(Current cost / Base Cost) * 100
Demand Pull Inflation
Shift in aggregate demand to the right
Due to TWICEG
Supply Push Inflation
Shift in aggregate supply to the left
Due to inputs and supply shocks
M1
Money used for purchasing goods, services
No type of savings accounts or CDs
M2
M1 plus liquid assets that are easily convertible to checkable deposits or M1
CDs LESS THAN $100k
Money market deposit accounts
Mutual funds
Savings Accounts
M3
M2 plus CDs of $100k or more
Expansionary monetary policy
Purchase of US Treasury bills, bonds (purchase pours money into economy)
Decrease in interest rate
Decrease in required reserve ratio
What happens as a result of expansionary monetary policy?
Aggregate demand shifts right
GDP rises
Unemployment falls
Price levels rise
Contractionary monetary policy
Sale of US Treasury bills
Increase in interest rate
Increase in required reserve ratio
What happens as a result of contractionary monetary policy?
Aggregate demands shifts left
GDP falls
Unemployment rises
Price levels fall
What is the result of a change in price relative to the quantity demanded?
Indirect relationship
When price increases, quantity demanded decreases
This is simply a change in QD along the demand curve
What is the result of the change other than price, relative to the quantity demanded?
The demand curve will shift right according to increases the following:
Wealth Related good prices Income of the consumer Tastes of the consumer Expectations of the consumer Number of buyers in the market
Fundamental law of supply
The higher the price one can sell, the more they will produce
Positive relationship
What is the result of a change in (selling) price relative to the quantity supplied?
When (selling) price increases, the quantity supplied will increase
This is simply a change in QS along the supply curve
What is the result of a change other than (selling) price, relative to the quantity supplied?
The supply curve will shift according to the following:
Expectations of future (selling) price Cost of inputs Other goods' demand Subsidies, taxes Technology in production
How will the expectation of future selling price effect the supply curve?
If future selling prices will decrease, company will sell more now > supply more now to make more profit
How will the cost of inputs effect the supply curve?
If costs are expected to decline, supply will increase (more workers for cheaper)
How will the demand of other goods effect the supply curve?
if the demand for other goods falls, a company will focus on producing more of another good to squeeze profit (butter v margarine).
How will subsidies effect the supply curve?
If subsidies increase, supply of a good will also increase since the company will receive more support from the government to produce.
How will taxes effect the supply curve?
If taxes increase, supply of a good will decrease since this will discourage production.
How will technology in production effect the supply curve?
If technology improves, supply will increase as production will be more efficiency (output).
Price ceiling
Maximum price set BELOW the equilibrium price
Cause prices to be artificially low, creating greater demand (rent control)
Price floor
Minimum price set ABOVE the equilibrium price
Established by law (minimum wage)
Price elasticity of demand (definition)
Sensitivity per the percentage change in quantity demanded as a result of the percentage change in the price
Ranges from >1, 1 to <1
What is meant by a negative price elasticity coefficient for a demand curve?
Since the relationship between demand and price is negative, this is represents a normal demand curve. However, this will always been shown as the absolute value.
Positive percentage change / Negative percentage change
When there are more substitutes available, what is assumed of demand?
Demand is elastic, consumers will respond to changes in price and will seek out other options as they have them.
When there are few to no substitutes available, what is assumed of demand?
Demand is inelastic, consumers will not respond to changes in price and will NOT seek out other options, since they don’t have any/have few.
Cross Elasticity (definition)
Percentage changes in QD or QS of one good caused by a change in price of another good
Ex. butter and margarine
Price elasticity of demand (equation)
% change in quantity demanded / % change in price
Cross elasticity (equation)
% change in number of units of X demanded or supplied / % change in the price of unit Y
What is meant by a positive coefficient as a result of cross elasticity?
Due to the change in price of product Y, the QD or QS has increased. Therefore, the goods are substitute goods.
What is meant by a negative coefficient as a result of cross elasticity?
Due to the change in price of product Y, the QD or QS has decreased. Therefore the change in price of product Y has steered away customers; therefore, the goods are complementary goods.
Income elasticity of demand (definition)
Percentage changes in QD or QS caused by a change in income
Income elasticity of demand (equation)
% change in QD or QS / % change in income
What is meant by a positive income elasticity as a result of income elasticity of demand?
As income of the consumer increases, the demand for the good increases. As a result, this is a normal good/luxury good.
What is meant by a negative income elasticity as a result of income elasticity of demand?
As income of the consumer increases, the demand of the good decreases. As a result, this is an inferior good.
Expansionary fiscal policy
Increased government spending
Decreased taxes
Contractionary fiscal policy
Decreased government spending
Increased taxes
PEST Analysis
Political, economic, social, technological
Essential to understanding the nature of the operating environment and making entity wide decisions
