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Friday, October 12, 2007

Econ -Unit 2- Study Guide


Study Guide for Unit 2




Concepts & Terms




  • Important aspects of the market system: competition, private property, and property rights

    ~Competition: the market system depends on competition to among economic units


    -Freedom of choice exercised in pursuit of a monetary return


    -Freedom of sellers and buyers to enter or leave markets, on the basis of their economic self-interest


    -The diffusion of economic power inherent in competition limit's the potential abuse of that power


    ~Private Property: ex: owning a house, land, etc…


    ~Property Rights: the right of private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, use and dispose of property resources as they see fit


    -Encourages investment, innovation, exchange, and economic growth





  • Distribution of Income in the US

    ~Transfer Payments: (ex: welfare checks and food stamps) provide relief to the destitute, and the dependant, the disabled, and older citizens; unemployment compensation payments provide aid to the unemployed


    ~Market Intervention: the government cats to modify the prices that are or would be established by market forces.


    -Provides farmers with above-market prices for their output and requiring that firms pay minimum wages are illustration of government interventions designed to raise the income of specific groups


    ~Taxation: the government uses the personal income tax to take a large proportion of the income of the rich than of the poor, thus narrowing the after-tax income difference between high-income and low-income earners





  • Types of businesses and comparing the amounts of each and the output of each type of business

    ~3 Types:


    -Sole proprietorship: there's one owner


    -Partnership: there's two or more owners


    -Corporation: separate legal entity





  • Government in the circular flow diagram




  • GDP: what is it? What is counted and what isn't? How do you find it? Intermediate and final goods. What counts as investment?

    ~GDP: the total market value of all final goods and services produced in a given year


    ~What's counted as GDP: includes all the goods and services produced by either citizen-supplied or foreign-supplied resources employed within the country


    ~What's NOT counted as GDP: purely financial transactions (ex: public transfer payments, private transfer payments, stock market transaction) and secondhand sales


    ~How you find GDP:


    GDP = Consumption + Government Expenditures + Investment + Imports - Exports


    ~Intermediate Goods: goods and services that are purchased for resale or for further processing or manufacturing


    ~Final Goods: goods and services that are purchased for final use by the consumer, not for resale or for further processing or manufacturing


    ~What counts as Investment:


    -Ex:


    --A family pays a contractor $100,000 for a house he built for them this year


    --At the end of a year, a flour-milling firm finds that its inventories of grain and flour are $10,000 more than its inventories at the beginning of the year


    --Ford Motor Co. buys new auto-making robots


    --Apple Computer Co. builds a new factory in the U.S.





  • What is national Income?

    ~National Income: total income earned by resource suppliers for their contributions to gross domestic product; equal to the gross domestic product minus non-income charges, minus net foreign factor income





  • What is Real GDP?

    ~Real GDP:
    Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year





  • What is a price index?

    ~Price Index: an index number that shows how the weighted average price of a "market basket" of goods changes over time





  • Business Cycles: What firms are affected most by business cycles? How does each phase of the business cycle affect output?

    ~Firms affected most by business cycles: firms and industries producing capital goods (ex: housing, commercial buildings, heavy equipment and farm implements) and consumer durables (ex: automobiles, personal computers, refrigerators) are affected most by the business cycle


    ~The 4 Phases of the Business Cycle~


    -Peak: business activity has reached a temporary maximum


    --The economy is near or at full employment


    --The level of real output is at or very close to the economy's capacity


    -Recession: a period of decline in total output, income, employment, and trade


    --Lasts 6 months or more


    --Widespread contraction of business activity in many sectors of the economy


    -Trough: in the trough of the recession or depression, output and employment "bottom out" at their lowest levels


    --Can be either short-lived or quite long


    -Recovery: output and employment rise toward full employment


    --Price level may begin to rise before full employment and full-capacity production return





  • Unemployment: The 3 types. The labor force.

    ~3 types of unemployment~


    -Frictional: consists of search unemployment
    and wait unemployment-- for workers who are either searching for jobs or waiting to take jobs in the near future


    --Have salable skills and either live in areas where jobs exist, or are able to move


    -Structural: structurally unemployed workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating


    --Workers whose skills and experience have become obsolete


    -Cyclical (a.k.a. deficient-demand unemployment): caused by a decline in total spending and is likely to occur in the recession phase of the business cycle


    ~The Labor Force~


    -Labor Force: consists of people who are willing and able to work


    --Those who are unemployed but actively seeking work are counted as being in the labor force


    -Not in the Labor Force: people less than 16 years of age, people who are institutionalized, homemakers, full-time students, retirees





  • The GDP gap

    ~When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost


    -Society is operating at some point inside it's production possibilities curve; this sacrifice of output is called a GDP gap


    -In the case of unemployment above the natural rate, the GDJP gap is negative because actual DGP falls short of potential GDP




    Calculations



  • Calculating GDP



    GDP = Consumption + Government Expenditures + Investment + Imports - Exports





  • Calculating Real GDP



    Real GDP = Nominal GDP X 100


    Price Index





  • Price Index



    Price Index = Nominal GDP X 100


    Real GDP




    Or




    Index = Current X 100


    Base





  • Calculating the unemployment rate



    Unemployment rate = (unemployed) X 100


    (Labor Force)



  • Rate of Inflation

    ~Consumer Price Index (CPI): the main measure of inflation in the U.S.




    CPI = (price of the most recent market basket in the particular year) X 100


    (Price of the same market basket in 1982-1984)




    ~The rate of inflation is found by comparing, in percentage terms, that year's index with the index in the previous year




    Rate of Inflation = (that year's Index - Index of the previous year) X 100


    (Index of the previous year)





  • Real Income



    Real Income = nominal income_____


    price index (in hundredths)




    Percentage Change in Real Income Percentage Change in Nominal Inco




    Pasted from <file:///C:\Users\Joyce\Desktop\Study%20Guide%20for%20Unit%202.doc>



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