ECO 3200 Midterm Study Sheet.docx - ECO 3200 Midterm Review...

ECO 3200 Midterm Review Sheet
Chapter 1:
I. Macroeconomics: study of the behavior the economy as a whole
A. What determines fluctuations in output and employment; what causes the business
cycle?
B. What causes inflation?
C. What is the relationship between unemployment and inflation?
D. What economic policy should be used to solve these problems?
Chapter 2: Measurement of Macro Variables
I. Measurement of Economy’s Performance
A. Market Value: the amount at which something can be sold for on the market
B. GDP:
1. Excludes goods and services produced by Americans abroad and include those
produced within the U.S. by foreigners.
2. Counts only final goods and services
3. Financial transactions (the sale of stocks and bonds, etc.) are not counted
4. Components of GDP
a) Consumption (C): the total spending of households on durable and non-
durable goods and services
(1) Makes up about 70% of GDP
b) Investment (I): spending by businesses on plant and equipment
(1) Fixed investment expenditures for newly produced capital goods
(2) Changes in business inventories
(3) Residential housing construction
c) Government Spending and Gross Investment (G): the value of goods and
services the government purchases
(1) Transfer payments such as SS benefits are not included
d) Net Exports (X-M):
(1) Exports (M): total expenditure of foreigners on domestically
produced goods and services
(2) Imports (X): total revenue of foreign goods purchased by

domestic residents
e) In a closed economy, GDP = C+!+G
f) In an open economy, GDP = C+I+G+X-M
5. Shortcomings:
a) Only captures market activity; excludes unpaid work
b) Ignores the distribution of income
c) Ignores the kid and quality of products
d) Quantitative and not qualitative
e) Neglects leisure time
f) Doesn’t include the underground economy
g) Doesn’t capture negative externalities such as pollution
6. Nominal vs. Real GDP
a) Nominal GDP is based on current market prices. An increase in nominal
GDP is due to:
(1) Output increase and/or
(2) Price increase
b) Real GDP is the value of goods and services produced in the current
period, valued at the base year’s prices
c) Nominal GDP = P (given year) * Q (given year)
d) Real GDP = P (base year) * Q (given year)
e) GDP Deflator = Nominal GDP / Real GDP
C. CPI : the most widely used measure of inflation
1. Only includes consumer goods and services (consumption)
a) CPI = cost of market basket of products in current year/cost of market
basket products at base year
b)