Midterm Summarypptx

Midterm Summarypptx - Econ101 MidtermSummary...

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Click to edit Master subtitle style Econ 101 Midterm Summary
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Growth rates n If  gt   is small,
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How do we study macro?   n We cannot run  experiments  in  macroeconomics, so we need to construct  models   to be used as  laboratories
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Model n Simplified, abstract, representation of  reality n Excludes many details , represents only  essential features needed to answer a  specific question n helpful to make predictions n should be  simple , but they need  not be  realistic.
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Structure of a typical model Households Choose  consumption, saving, labor  supply Firms Choose  production, investment, labor  demand Markets Prices such  that Supply =  demand
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The basic structure of a  macroeconomic model 1. Consumers and firms 2. The set of goods that consumers  consume 3. Consumers’ preferences 4. The production technology 5. Resources available
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Prediction of a Model n Individual behavior n people behave rationally (optimize) n firms maximize profits n Equilibrium behavior  n competitive equilibrium
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Microeconomic Foundations n The Approach 1. Start with consumers and firms making  decisions at  individual  level 2. Aggregate them up n Representative Consumer Assumption n Example: Benefits of this Approach 1. Monetary Policy
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Gross Domestic Product  (GDP) n Measure of aggregate economic activity Nominal GDP = dollar value of goods and services produced in an economy during a year Real GDP = measure of the quantity of goods and services produced in an economy during a year
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Method 1:  Base Year Method n Fix a  base year n Calculate real GDP growth using base  year prices n Main Problem: the growth rate depends  on the choice of base year
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Base year method - problems n If people substitute away from the good  that becomes  relatively  expensive. . n Using year 1 as a base year  over states real  GDP growth n Using year 2 as a base year  under states  real GDP growth
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Method 2:  Chain-weighting  method n Take a geometric average of the growth  rates calculated using two consecutive  base years:
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Gross Domestic Product vs Net Domestic Product n GDP  is not adjusted for depreciation of  capital n NDP  substracts capital that depreciates  during the year
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Gross Domestic Product vs. Gross National Product n GDP  counts the production in a given  geographic area (USA) n GNP  counts the production of country  nationals (US citizens)
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Shortcomings of GDP n As a measure of production n black market sector not included n household production not included n government expenditures valued at its cost n quality of products not taken care of n As a measure of welfare n Value of leisure not included n Part of GDP is invested and does not affect  current living standards
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How is GDP actually measured? 1. Expenditures
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Midterm Summarypptx - Econ101 MidtermSummary...

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