Chap 5-8 study guide - Chapter 5 An Introduction to...

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Chapter 5: An Introduction to Macroeconomics 1. Microeconomics: how individual decision making units behave, decisions of individual units 2. Macroeconomics: concentrates on the behavior of entire economies; study overall price level, unemployment rate, and other things we call economic aggregates 3. Economic Aggregate: abstraction that people use to describe some salient feature of economic life a. Concept of domestic product (represents the total production of a nation’s economy b. Aggregation: combining many individual markets into one overall market 4. Aggregation a. During economic fluctuations markets tend to move up or down together b. Markets normally move together 1. Aggregate demand curve shows the quantity of domestic product that is demanded at each possible value of the price level a. Law of demand - when prices go up quantity demanded goes up 2. Aggregate supply curve shows the quantity of domestic product that is supplied at each possible value of the price level a. Law of supply: if price increases, quantity supplied will increase 5. Inflation a. Outward shift of aggregate demand curve b. Price level up c. If keeps pushing up there will be inflation 6. Recession and unemployment a. Leftward shift of the demand curve b. Recession: A period of time during which production falls and people lose jobs 7. Economic Growth a. Both curves shift to the right over time 8. GDP: measure an entire economy’s total output a. Most comprehensive measure of the output of all the factories, offices, shops in the US b. Specifically is the sum of the money values of all final goods and services produced in the domestic economy within the year.
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c. GDP=C+I+G+(X-M) d. Not included in GDP i. Sale and purchase of goods produced in other years ii. Financial transactions iii. Government transfers of money or services iv. Illegal transactions v. Non-market transactions a. sum of factor payments: wages+ net interest+ rents+ profits i. income should equal output b. NI+ statistical discrepancy=NNP (Net National Product) c. NNP+ depreciation=GNP i. Depreciation: looking at a piece of capital that loses value 1. Real GDP v. Nominal GDP a. Convert every good and service into money terms b. Add all the money up c. The market price of each good or service is used as an indicator of its value to society-someone is willing to pay that much for it d. Nominal GDP- calculated by valuing all outputs at current prices. Up when P up e. Real GDP - calculates changes in the value of total production that aren’t caused by changes in prices. Calculated using base year prices that are unchanging. Therefore, RGDP is a far better measure than nominal GDP of changes in total production 2. When GDP gets counted a. GDP per a particular year includes only g&s produced within the year b. Only final g&s count in GDP c. Domestic in GDP denotes production within the geographic boundaries of the US d. Only organized sales i. i.e. even if it is a US business in Europe-not counted e. intermediate good in a good purchased for resale of for use in producing another good 3 . Limitations of the GDP
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a.
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