Macroeconomics Concepts Flashcards
When does cost-plus pricing happen?
When firms don’t know the demand curve
What is odd pricing?
Pricing that often ends in 5 or 9 rather than 0
What is convenient pricing?
Prices that simplify and expedite transactions, reducing the time costs from physically making a transaction (vending machines, parking meter, food trucks)
Arbitrage
Buy a good in one market at a low price and resell it in another market at a higher price
Transaction costs
Costs involved in carrying out an exchange of goods
Price Discrimination
Charging different prices to different consumers for the same product when the price differences are not due to differences in cost. (cannot happen in the case of perfect competition)
Requirements to engage in price discrimination
1) firm has marketpower
2) identifiable differences in willingness to pay among consumers
3) arbitrage cannot be possible
Perfect Price Discrimination
Each consumer pays a price equal to their willingness to pay
Transfer Payments
Like social security where a person isn’t getting anything directly in return.
GDP
The market value of all final goods and services produced in a country in a period of time, typically one year.
Production and Income
Total Production is the same as total income.
Four components of GDP
1) Personal Consumption expenditures (spending on services, durable goods, nondurable goods)
2) Gross Private Domestic Investment (business fixed investment, residential investment, changes in business inventories)
3) Government Consumption & Gross Investment (spending by governments on new goods and services)
4) Net exports of goods and services (exports - imports)
GDP Formula (Y)
Y=C+I+G+NX
What production is not included in GDP?
- Household Production: responsibilities of a homemaker
- Underground economy - drug trade, illegal activities, etc
GNP
Value of final goods and services produced by US residents.
National Income
GDP minus depreciation of machinery, equipment and buildings
Personal Income
national income minus earnings that corporations retain rather than pay to shareholders
Disposable personal income
personal income minus tax payments
Change in prices
1) price level - measure of average price of goods and services in the economy
2) inflation - increase in prices over time
3) nominal GDP - GDP using current year prices
4) Real GDP - GDP using base year prices.
Inflation rate
percentage change in the price level from one year to the next.
Consumer price index (CPI)
A measure of the average change over time in the prices that a typical urban family of four pays for the goods and services they purchase
Problems w CPI (4)
1 - substitution bias
2 - increase in quality bias
3 - new product bias
4 - outlet bias
Producer Price Index
Average of the prices received by all producers of goods and services at all stages of the production process.
Interest Rate
The price of borrowing money - The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.
Nominal Interest Rate
The stated interest rate
Real interest rate
nominal interest rate minus the inflation rate
Expansion
Total employment & total production are increasing
Recession
Total employment & total production are decreasing
GDP per capita
GDP divided by the total population
Potential GDP
Real GDP when all firms are producing at capacity .
The Financial System
A system of financial markets and dinancial intermediaries through which firms acquire funds from households.
or
Institutions through which firms acquire funds from households.
What is a bond
It is a loan you give to the government
Aggregate demand curve
the relationship between price level and quantity of real GDP demanded by household, firms and govt.
3 factors that change quantity demanded
1) wealth effect - rise and fall of prices moves along demand curve
2) interest effect - some savings go in bank, get interest, lower price of loanable funds, more investment spending - all from lower price.
3) international trade effect - lower relative price in US meant more US goods purchased thatn foreign goods
3 factors that change demand
1) expectations - optimism about future shifts demand to right. pessimism about future shifts demand to left.
2) govt policy - fed can change interest rates
3) foreign factors - economic situation in other countries can increase or decrease foreign demand for US goods.
Aggregate supply curve
the relationship between price level and quantity of real GDP supplied by firms
Factors that determine potential GDP
workers in the economy, capital stock, technology
factors that change supply
workers, capital stock, technology, expectations for future prices, errors in past expectations, supply shock (unexpected change in price of important natural resources)
Roles of the Federal Reserve
1) lenders of last resort
2) manages the US money supply
The discount rate:
the interest rate that the Fed charges to banks
Money
any asset that people are generally willing to accept in exchange for goods and services or for payment of debts
commodity money
a good that is used as money but also has value independent of its use as money
fiat money
money that is authorized by a government body and does not have to be exchanged for commodity money
Functions of money (4)
1) Medium of exchange - If you want to buy goods you use money to do so
2) unit of account - giving a single way of measuring the value of many things
3) store of value - keeps its value through time
4) standard of deferred payment - paying over time in smaller payments. Works in low inflation
M1 money supply
Sum of currency in circulation, checking account deposits in banks, holdings of traveler’s checks.
M2 money supply
sum of M1 money supply, savings account deposits, small-denomination time deposits, money market mutual fund shares
Reserves
Deposits that banks keep on hand as cash in deposits with the federal reserve
Required reserve ratio (RR)
minimum fraction of deposits that a bank is required by law to keep as reserves
Velocity of Money
Average number of times that each dollar is used to purchase goods and services included in GDP
(MxV=PxY)
Nominal exchange rate
the vlaue of one country’s currency in terms of another country’s currency
Implied exchange rate
also called the “purchasing power parity” exchange rate, used in big mac example where product is the same anywhere in the world.
Floating currency
demand and supply determine a country’s exchange rate
Managed Float
Floating currency with occasional government intervention
Fixed
countries agree to keep exchange rates fixed for long periods of time.
Pegged exchange rate
A policy by which a country keeps fixed the exchange rate between its currency and another country’s currency
Why peg an exchange rate?
1) Business planning - they can’t set a maximizing price if the exchange rate changes every single day
2) encourage exports -
