Econ -Unit 2- Study Guide

Study Guide for Unit 2

Concepts & Terms

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  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
  

  
  

  
  



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  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
  

  
  

  
  



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  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
  

  
  

  
  



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  Government in the circular flow diagram
  
  
  

  
  



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  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.
  

  
  

  
  



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  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
  

  
  

  
  



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  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
  

  
  

  
  



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  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
  

  
  

  
  



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  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
  

  
  

  
  



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  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
  

  
  

  
  



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  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
  



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  Calculating GDP
  
  
  

  
  

  
  

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

  
  

  
  



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  Calculating Real GDP
  
  
  

  
  

  
  

  Real GDP = Nominal GDP X 100
  

  
  

  Price Index
  

  
  

  
  



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  Price Index
  
  
  

  
  

  
  

  Price Index = Nominal GDP X 100
  

  
  

  Real GDP
  

  
  

  
  

  
  

  Or
  

  
  

  
  

  
  

  Index = Current X 100
  

  
  

  Base
  

  
  

  
  



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  Calculating the unemployment rate
  
  
  

  
  

  
  

  Unemployment rate = (unemployed) X 100
  

  
  

  (Labor Force)
  



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  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)
  

  
  

  
  



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  Real Income
  
  
  

  
  

  
  

  Real Income = nominal income_____
  

  
  

  price index (in hundredths)
  

  
  

  
  

  
  

  Percentage Change in Real Income  Percentage Change in Nominal Inco
  

  
  

  
  

  
  

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