o If PD>PW country does not have comparative advantage, under free trade and country imports the good. Domestic demand curve: shows how the quantity of a good demanded by domestic consumers depends on the price of that good. Domestic supply curve: shows how the quantity of a good supplied by domestic producers depends on the price of that good. World Price: the price at which that good can be bought or sold aboard. Chapter 7: GDP= consumption purchases+ investment purchases + government purchases + exports – imports. (Net exports = exports – imports) GDP= wages+ interest + rent + profit GDP is a measure of the total value of final goods produced within the boundaries of the country in a given year. Nominal GDP: is output valued at current prices o (Real amount) X (price index) /100 Real GDP: is output valued at base-year prices o (Nominal amount) / (price index) /100 Price index = (Nominal amount) / (real amount) X 100 Chapter 8: Cyclical unemployment: o Caused by recessions o When demand for output falls, firms lay off workers causing the unemployment rate to rise. o When there is general downturn in business activity, cyclical unemployment increases. Frictional Unemployment: o Even if the number of job vacancies equals the number of job seekers and those job seekers are fully qualified for the jobs available, there will still be some unemployment. o Takes time to match up those workers with the appropriate jobs due to imperfect information. Structural unemployment: o Any non-frictional unemployment that remains when the economy has fully recovered from a recession. o Caused by skills mismatch, rigid wages and reticence to hire due to uncertainty about future economic conditions. The natural rate of unemployment is the unemployment rate that remains when cyclical unemployment is zero OR the unemployment that remains when the economy has fully recovered from recession. o Natural rate = sum of frictional + structural unemployment rates. Chapter 11:
Marginal propensity to consume (MPC) = change in consumer spending / change in disposable income. Accelerator principle: a higher growth rate of real GDP leads to higher planned investment spending, but a lower growth rate of real GDP leads to lower planned investment spending. Actual Investment = new construction + purchases of machinery and equipment + planned change in inventory o Actual investment spending: is the sum of planned investment spending and unplanned inventory investment. o I = I unplanned + I planned Chapter 12:
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