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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:


    --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


  • 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


    Index = Current X 100


  • 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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