Final Prep Flashcards
GDP per capita
Gross domestic product of a country divided by its population
Leaves out non traded goods and services that affect well being
Conflates taxes and income of multinationals
Disposable income
All incomes of a typical person after accounting positive and negative transfers
Leaves out non traded goods and services that affect well being as well as government supplied services
Nominal gdp
The market value of all goods and services produced in an economy within a given time period
Calculated by multiplying each good or service’s price by its quantity and then summing up these values
Real gdp
Similar to nominal gdp but adjusts for price changes
Calculated by multiplying each good or service’s baseline price by its quantity and then summing up these values
Need to choose a baseline period
What are the three ways of measuring gdp
Output method = total sum of what’s produced
Income method = sum of gross profits of companies the self employed and employees wages
Expenditure method = total spending on goods and services C+I+G+(X-M)
GNP
GDP but based on citizenship rather than population
Ndp
Gdp but accounts for depreciation of capital goods
Law of demand
The tendency for quantity demanded to be higher when price is lower
Giffen goods
Essential gods with upward sloping demand because it’s higher prices one cannot afford better alternatives
Veblen goods
Goods with upward sloping demand due to increased perceived exclusivity at higher prices
Market
A setting bringing together potential buyers and sellers
Price elasticity of demand
A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a percent price change
Cross price elasticity of demand
A measure of how responsive the demand of one good is to price changes of another good. It measures the present change in quantity demanded that follows from a percent change in the price of another good
Substitute goods and complement goods
Substitutes good = goods that can replace each other in consumption
Complement goods = goods that are consumed together
Income elasticity of demand
A measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a percent change in income
Normal and inferior goods
Normal goods = goods for which higher income leads to a higher demand
Inferior goods = goods for which higher income leads to lower demand
Price elasticity of supply
A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a percent change
2 reasons for taxes
Pay government bills
Influenced market outcomes
Subsidy
Subsidy is a payment made by the government to those who make a specific choice
Statutory burden
Economic burden
Tax incidence
Statutory burden = being assigned by the government to send a tax payment
Economic burden = created by the change in after tax prices faced by buyers and sellers
Tax incidence = the division of the economic burden between buyers and sellers
Quantity regulation
A min of max quantity that can be sold
Mandate requires to buy or sell a min
Quota limits the max quantity that can be sold
Tax expenditure
Special deductions exemptions or credits that lower your tax obligations to encourage you to engage in certain kinds of activities
Discretionary fiscal policy
Automatic stabilizers
Deliberate changes in government spending or taxes to boost or slow economy temporarily
Spending or tax programs that automatically adjust as the economy expands or contracts without deliberate action
Gross government debt
Net government debt
Gross= the total accumulated amount of money the government owes
Net= the debt that the government owes to external parties
Positive vs normative analysis
Positive = describes what is happening, explaining why or predicting what will happen
Normative= describes what should happened which involves value judgements
Production efficiency
When it’s not possible to increase producer surplus by imposing production plans that are different to the market equilibrium plans
allocative efficiency
When it’s not possible to increase consumer surplus by imposing allocations of goods that are different to the market equilibrium allocations
Common types of market failures
Market power
Externalities
Private information
Incomplete contracts
Irrationality
Government regulation
Externality
A side effect of an activity that affects bystanders whose interests aren’t taken into account
Deadweight loss
The difference between the actual level of economic surplus and the largest possible economic surplus
Msc Msb
Msc the extra cost paid by the seller and bystanders from one extra unit
Msb the extra benefit enjoyed by the buyer and bystanders from one extra unit
Public good
Non rivalrous and non excludable
Common goods
Rivalrous but non excludable
Private goods
Rivalrous and excludable
Club goods
Non rivalrous but excludable
Nash equilibrium
An equilibrium in which the choice that each player makes us a best response to the choices other players are making
Pareto dominance
When one equilibria gives a higher payoff to at least one player without hurting any individual player’s payoff
This equilibrium could occur more often
Perfect competition
A market in which
All forms in an industry seek an identical good
There are many buyers and sellers, each of whom is small relative to the size of the market
Seller’s market power
The extent to which a seller can charge higher prices without losing many sales to competing businesses
Monopolistic competition
A market with many small businesses competing, each selling differentiated products
Marginal revenue
The addition to total revenue you get from selling one more unit
Killer acquisitions
Where incumbent firms may acquire innovating startups to terminate their potentially competing innovations
Cournot competition
Firms set quantity and the price is determined by the total quantity in the market
Rival companies offering an identical product compete on the amount of output they produce independently and simultaneously
Fixed numbers of firms in a market
Produces an equilibrium higher than the competitive price and lower than the monopoly price
Bertrand competition
Firms set the price, and the one with the lowest price wins the whole market
In eq p=mc
Is more likely when production and storage are more flexible
Oligopoly model where two or more firms pride a homogenous good and compete in prices.
Bertrand paradox
Under Bertrand competition just two sellers can produce an outcome same as perfect competition
Monopsony power
A business using its market power as a major buyer of labour to pay lower prices including lower wages
Utility
Is a measure of the value that one places on an outcome
Indifference curve
A curve of the points which indicate the combinations of goods and services that provide the same level of utility to the individual
Nominal vs real wages
Nominal are measured in money
Real are measured by adjusting for inflation
Income effect
The effect that the additional income would have if there were no changes in price
Substitution effect
The effect that is only due to changes in the prices holding utility level constant
Induces workers to work more as working becomes more valuable (leisure becomes relatively more expensive)
Think about substitute goods and how preferences change
Labour force participation
It captures the share of population that is interested in or king - which can be affected by various socio-economic and cultural factors
Frictional unemployment
Occurs due to the time it takes for employers to search for workers and for workers to search for jobs
Structural unemployment
Occurs when wages don’t fall to bring labour demand and supply into equilibrium
Policies primarily affecting frictional unemployment
Job search assistance
Retraining programs
Transportation subsidies
Policies primarily affecting structural unemployment
Reducing union power
Inflation
Payroll tax cuts
Displacement effect
Automation directly replaces labour
Productivity effect
As automation increases productivity economy expands and increases demand for labour in non-automated tasks
Reinstatement effect
Creation of new tasks in which labour has a comparative advantage
Malthusian assumptions
- Decreasing the average product of labour: population growth leads to less than proportional growth in production
- Wealthier households have more offspring
Marginal product of labour
The additional output produced with one more unit of labour
Average product of labour
Total output divided by a labour input
Exogenous technology
Technological innovation is treated as exogenous and independent
Smoothing
Economic agents tend to prefer to smooth out consumption instead of consuming everythingkater and nothing now
Principal agent relationship
The lender would like to ensure that the borrower repays a loan but cannot enforce this directly through a contract
Credit rationing
Borrowers with less wealth face unfavourable lending terms or are denied loans as they cannot provide enough collateral or equity
Deregulation
The glass-steal all act which separated commercial and investment banking was repealed in 1999. This a,lowed banks to engage in riskier financial activities.
Market conditions
The booming housing market provided an incentive for banks to expand lending to high risk individuals
Base money
Is the legal tender including
Case held by households firms and banks
Balances held by commercial banks at the central banks
Broad money
Includes both bank money and base money representing the total money supply circulating in the economy
A bond
A financial instrument where the issuer borrows funds from the bond holder and promises to repay over a specific duration
Bank run
May occur when depositors fear insolvency and withdraw funds rapidly
What is inflation and inflation rate
A generalized rise in the overall levels of prices
Also can be seen as a decline in the purchasing power of money
The annual percentage increase in the average price level
CPI
Consumer price index
Is an index that tracks the average price consumers pay over time for a representative basket of goods and services
Personal consumption expenditure deflator
Is used for monetary policy like the federal reserves target inflation rate of 2%
Ppi
Measures the price of inputs into production process - it measures the inflation experienced by the businesses
GDP deflator
Is a measure of inflation based on the basket of all goods and services produced domestically
Money illusion
Refers to the mistaken tendency to focus on nominal dollar amounts instead of real amounts
Could :
Distort decision making
Lead to mis-pricing
Create nominal wage rigidity
Money
An asset regularly used in transactions
3 functions
Medium of exchange
Unit account
Store of value
Causes of hyperinflation
Governments can generate revenue by printing money at virtually zero cost using it to purchase goods
The ease f printing money tempts governments to do so in the face of serious fiscal problems like wars, reparations, and external debts
Challenges of ending hyperinflation
Hyperinflation creates expectations of future inflation leading to immediate consumer spending which in turn hikes up prices
So the government is forced to print even more money to cover expenses
With the expectations of future inflation, escaping becomes difficult
Often ending hyperinflation requires major monetary / fiscal reforms that convince the public that the inflation will will stabilize
Firms demand curve
Not an individual or market demand, it reflects the demand faced by the firm based on its market power.
Summarizes the quantity that buyers demand from an individual firms as it changes its price
The line becomes steeper as the firms gains more market power
Explain 2 reasons why working hours have gone down over time
- Production in some industries has become less labour intensive and more capital intensive
- As people escaped poverty and became richer their demand for leisure time increased
What is the budget constraint
Defines the most expensive combinations of goods and services that a person can afford
Skill biased technological change
Skill biased technological change
The hypothesis that new technologies increase the productivity of skilled workers more than those of less skilled workers
Why does computerization lead to job polarization
They cannot substitute non routine tasks
Manual and abstract tasks are at opposite skill spectrum ends and thus there exists a growing gap
When did the Industrial Revolution hit the 4 major areas discussed
Britain - late 18th century , textiles, iron coal
Germany - mid 19th century, electricity, chemicals, automobiles
Japan - late 19th century, textiles, steel, shipbuilding
Russia - early 20th century, steel, coal, large scale machinery
How are wages and population related under the Malthusian model?
In the initial eq, wages are at the subsistence level
Innovation raises the average product of labour and wages
As the result of higher wages, the population grows
With a higher population, wages fall due to decreasing average product of labour
As wages fall, population growth slows and eventually stabilizes
How does mokyr view growth
Attributes technological change to europes scientific Revolution and enlightenment arguing that they brought about new ways to transforms elite scientific knowledge to practical tools for engineers and artisans
Views wages and energy prices as guiding facts not primary drivers of technological progress
How does Clark view the Industrial Revolution
Attributes britains take off to the middle class cultural values such as patience and diligence
Argues that europes high mortality rate combined with the Rich’s higher offspring survival lead to their descendants moving down socially, “biologically” dispersing middle class values throughout society
Downplays the role institutions
What is pomeranz’s theory?
Focuses on the divergence debt when Europe and china
Attributes superior European growth after 1800 to the abundance of coal in britains which the technologies of the time required
Argues that Britain’s access to agricultural production in its new world colonies fed the expanding class of industrial workers thus helping them escape to the Malthusian trap
Downplays the role of culture and institutions
What is galor’s theory
Unified growth theory
A framework that aims to explain both the epoch of Malthusian stagnation and the subsequent transition to sustained growth
Initial period of Malthusian stagnation
Increasing important of human capital over time
Demographic transition
Shifts to sustained economic growth
Menu costs
The marginal cost for sellers of adjusting prices
Shoe leather costs
The costs incurred by buyers trying to avoid holding cash
Quantitative easing
Is a novel monetary policy that aims to increase aggregate demand by buying assets even when the policy interest rate is zero
