Inflow = credits
Outflow = debits
Balance of payment divided:
1. Current Account
2. Capital Account
3. Official Reserves Account
Current Account:
Balance of Trade of Net Exports
- Exports = credit to balance
-Imports = debit to balance
Net Foreign Income
Net Transfers (tend to be unilateral)
-Foreign Aid = debit to current account
Capital Account:
Balance of capital ownership
Includes the purchase of both real and financial assets
Direct investments in the US is a credit to the capital account
Direct investment by US firms/individuals in a foreign country are debits to the capital account
Purchase of foreign financial assets represents a debit to the capital account
Purchase of domestic financial assets by foreigners represents a credit to the capital account.
*Current Account and Capital account should zero each other out.*
Official Reserves
foreign currency holdings of the US Federal Reserve System
Balance of payments surplus = Fed accumulates foreign currency
BOP payments = Fed depletes its reserves of foreign currency
Monday, May 16, 2016
Foreign Exchange
Foreign exchange
- the buying and selling of currency
- Any transaction that occurs in the balance of payments necessitates foreign exchange
- The exchange rate (e) is determined in the foreign currency markets - [ex. the current exchange rate is approximately 8 yuan to 1 dollar]
Changes is exchange rates
- an increase in the supply of currency will decrease the exchange rate of a currency
- A decrease in supply of a currency will increase the exchange rate of a currency
- An increase in demand for a currency will increase the exchange rate of a currency
- A decrease in demand for a currency will decrease the exchange rate of a currency
Appreciation and depreciation
- appreciation of a currency occurs when the exchange rate of that currency increases (e⬆️)
- Depreciation of a currency occurs when the exchange rate of that currency decreases (e⬇️)
Exchange rate determinants
- Consumer tastes
- Relative income
- Relative price level
- Speculation
Exports and imports
- the exchange rate is a determinant of both exports and imports
- Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper this reducing exports and increasing imports
- Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
Unit 5 & 6 Notes
Short Run Effects
short run: price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant
long run: wages will adjust to the price level &previous output levels will adjust accordingly
Equilibrium in the extended model
the long as curve is represented with a vertical line @ full employment level of real GDP
Demand pull inflation in the AS model
Demand pull prices increase based on increase in aggregate demand
In the short run demand pull will drive up prices and increase production
In the long run, increases in aggregate demand will eventually return to previous levels
Dilemma for the government
In an effort to fight cost push the government can react in two different ways
Action such as spending by the gov. Could begin an inflationary spiral
No action however could lead to recession by keeping production and employment levels declining
Long run Phillips curve
- No trade off between inflation and unemployment at LRPC
- Always vertical at the natural rate of unemployment
- Only shift if LRAS shifts
The major LRPC assumption is that more worker benefits creat higher natural rates and fewer worker benefits creates lower natural rates
SRPC
- *see short run*
Supply shocks
- Rapid and significant increases in resource cost which causes the SRAS curve to shift
- SRAS is going to decrease
- SRPC is going to shift outward (increasing)
Misery index
- Combination of inflation and unemployment in any given year
- Single digit misery is good
Vocab to Know
Inflation: General rate in the price level.
Deflation:General decline in price level.
Disinflation:Reduction in the inflation rate from year to year.
Stagflation: unemployment and inflation increase at the same time.
Changes in AS but not AD
Determines the level of inflation, unemployment rates, and economic growth.
Supply Side economists support policies that promote GDP growth that arguing that high marginal tax rates along with the current system of transfer payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.
short run: price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant
long run: wages will adjust to the price level &previous output levels will adjust accordingly
Equilibrium in the extended model
the long as curve is represented with a vertical line @ full employment level of real GDP
Demand pull inflation in the AS model
Demand pull prices increase based on increase in aggregate demand
In the short run demand pull will drive up prices and increase production
In the long run, increases in aggregate demand will eventually return to previous levels
Dilemma for the government
In an effort to fight cost push the government can react in two different ways
Action such as spending by the gov. Could begin an inflationary spiral
No action however could lead to recession by keeping production and employment levels declining
Long run Phillips curve
- No trade off between inflation and unemployment at LRPC
- Always vertical at the natural rate of unemployment
- Only shift if LRAS shifts
The major LRPC assumption is that more worker benefits creat higher natural rates and fewer worker benefits creates lower natural rates
SRPC
- *see short run*
Supply shocks
- Rapid and significant increases in resource cost which causes the SRAS curve to shift
- SRAS is going to decrease
- SRPC is going to shift outward (increasing)
Misery index
- Combination of inflation and unemployment in any given year
- Single digit misery is good
Vocab to Know
Inflation: General rate in the price level.
Deflation:General decline in price level.
Disinflation:Reduction in the inflation rate from year to year.
Stagflation: unemployment and inflation increase at the same time.
Changes in AS but not AD
Determines the level of inflation, unemployment rates, and economic growth.
Supply Side economists support policies that promote GDP growth that arguing that high marginal tax rates along with the current system of transfer payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.
Monday, April 4, 2016
Unit 4 Monetary Policy Video (Problem #1)
Here was the problem I worked out in the video:
I. Assume that the reserve requirement is 5 percent and banks hold no excess reserves.
A. Assume that Ally Sheedy deposits $400 of cash into her checking account at Wells Fargo. Calculate each of the following.
1. The maximum dollar amount that Wells Fargo can initially lend.
2. The maximum total change in demand deposits in the banking system.
3. The maximum change in the money supply
A. Assume that Ally Sheedy deposits $400 of cash into her checking account at Wells Fargo. Calculate each of the following.
1. The maximum dollar amount that Wells Fargo can initially lend.
2. The maximum total change in demand deposits in the banking system.
3. The maximum change in the money supply
B. Assume that the Federal Reserve buys $5 million in government bonds on the open market. As a result of the open market purchase, calculate the maximum increase in the money supply in the banking system.
Thursday, March 3, 2016
Fiscal Policy & More
Fiscal policy
changes in the expenditures or tax revenues of the federal government
2 tools of fiscal policy
taxes: government can increase or decrease taxes
spending: government can increase or decrease spending
Deficits, Surpluses, and Debt
balanced budget: revenue = expenditures
budget deficit: revenues < expenditures
budget surplus: revenues > expenditures
government debt: (sum of all debts) - (sum of all surpluses)
government must borrow money when it runs a budget deficit
individuals
corporations
financial institutions
foreign entities or foreign governments
Fiscal policy
Discretionary Fiscal Policy (action)
expansionary fiscal policy (easy) : think deficit; combat a recession, increase government spending, decrease taxes
contractionary fiscal policy (tight) : think surplus; combat inflation, decrease government spending, increase taxes
Non-Discretionary Fiscal Policy (no action)
Discretionary
Increasing or decreasing government spending and/or taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem.
Automatic
Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.
Automatic or Built-In Stabilizers
Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers
Economic importance
Taxes reduce spending and aggregate demand
Reductions in spending are desirable when the economy is moving toward inflation
Increases in spending are desirable when the economy is heading toward recession
Transfer Payments
medicare, medicaid, social security, unemployment, food stamps, welfare
Taxes
Progressive tax system
average tax rate (tax revenue/GDP) rises with GDP
Proportional tax system
average tax rate remains constant as GDP changes
Regressive tax system
average tax rate falls with GDP
changes in the expenditures or tax revenues of the federal government
2 tools of fiscal policy
taxes: government can increase or decrease taxes
spending: government can increase or decrease spending
Deficits, Surpluses, and Debt
balanced budget: revenue = expenditures
budget deficit: revenues < expenditures
budget surplus: revenues > expenditures
government debt: (sum of all debts) - (sum of all surpluses)
government must borrow money when it runs a budget deficit
individuals
corporations
financial institutions
foreign entities or foreign governments
Fiscal policy
Discretionary Fiscal Policy (action)
expansionary fiscal policy (easy) : think deficit; combat a recession, increase government spending, decrease taxes
contractionary fiscal policy (tight) : think surplus; combat inflation, decrease government spending, increase taxes
Non-Discretionary Fiscal Policy (no action)
Discretionary
Increasing or decreasing government spending and/or taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem.
Automatic
Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.
Automatic or Built-In Stabilizers
Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers
Economic importance
Taxes reduce spending and aggregate demand
Reductions in spending are desirable when the economy is moving toward inflation
Increases in spending are desirable when the economy is heading toward recession
Transfer Payments
medicare, medicaid, social security, unemployment, food stamps, welfare
Taxes
Progressive tax system
average tax rate (tax revenue/GDP) rises with GDP
Proportional tax system
average tax rate remains constant as GDP changes
Regressive tax system
average tax rate falls with GDP
Interest Rates & Investment Demand/ Real (r%) v. Nominal (i%)
a. What is investment? Money spent or expenditures on:
1. New plants (factories)
2. Capital punishment (machinery)
3. Technology (hardware & software)
4. New Homes
5. Inventories (goods sold by producers)
b. Expected Rates of Return
How does business make investment decisions? Cost/ benefit analysis
How does business determine the benefits? Expected rates of return
How does business count the cost? Interest costs
How does business determine the amount of interest they undertake?
-compare expected rate of return to interest cost
* if expected return > interest cost, then invest
* if expected return < interest cost, don't invest
Real (r%) v. Nominal (i%)
What's the difference? Nominal is the observable rate of interest. Real subtracts out inflation and is known as an ex post facto.
1. New plants (factories)
2. Capital punishment (machinery)
3. Technology (hardware & software)
4. New Homes
5. Inventories (goods sold by producers)
b. Expected Rates of Return
How does business make investment decisions? Cost/ benefit analysis
How does business determine the benefits? Expected rates of return
How does business count the cost? Interest costs
How does business determine the amount of interest they undertake?
-compare expected rate of return to interest cost
* if expected return > interest cost, then invest
* if expected return < interest cost, don't invest
Real (r%) v. Nominal (i%)
What's the difference? Nominal is the observable rate of interest. Real subtracts out inflation and is known as an ex post facto.
SRAS (Short Run Aggregate Supply)
Nominal wages vs. Real and Sticky Wages:
Nominal wages: amount of money they work or receive per unit of time
Ex: ( tips waitress makes)
Real Wages: amount of goods and services a worker can purchase with their nominal wage
( real wages purchasing power of nominal wages) Determines what you can and can't buy
Sticky Wages- Nominal wage level is set according to an initial price level and doesn't vary due to labor contracts or other restrictions ( Keynesian)
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Price
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Wages
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Employment Level
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Implications
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Keynesian Range
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Recession
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Fixed
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Fixed
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Flexible
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Output depends upon changes in employment levels
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Intermediate
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Flexible
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Fixed
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Flexible
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Output depends upon changes in price and the employment level.
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Classical Range
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Inflation
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Flexible
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Flexible
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Fixed
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Output independent of changes in the price level
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Recessionary & Inflationary Gap
Recessionary Gap
A recessionary gap exists when equilibrium occurs below full employment output
Inflationary Gap
When equilibrium occurs beyond full employment output
A recessionary gap exists when equilibrium occurs below full employment output
Inflationary Gap
When equilibrium occurs beyond full employment output
Aggregate Supply
The level of Real GDP (GDPr) that firms produce at each Price Level (PL)
Long Run v. Short Run
Long Run v. Short Run
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Long Run
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Short Run
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Period of time where input prices are flexible and adjust to prices
in the change level
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Period of time where input prices are sticky and don’t adjust to
changes in the price level
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In the long run, the level of Real GDP supplied is independent of the
price level
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In the short run, the level of Real GDP supplied is directly related
to the price level
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Long Run Aggregate Supply (LRAs)
-Marks level of full employment on economy (analogous to PPC)
-Because input prices are completely flexible in the long run, changes in price level don't change a firm's real profits therefore it doesn't change a firm's level of output. This means the LRAS is vertical at the economy's level of full employment.
Changes in SRAS
Increase in SRAS is seen as shift rightward
Decreases in SRAS is seen as shift leftward
*SRAS shifts is per unit cost of production* (per unit cost of prod.= total input costs/ total input)
Determinants of SRAS
(all affect unit prod. cost)
1. Input Prices- Domestic Resource Prices (wages = 75%, capital, raw materials); Foreign Resource Prices; Market Power; Increase in Resource Prices= SRAS left while a decrease sends SRAS right
2. Productivity- total output/total input; More productivity = lower unit prod and send SRAS shifting to the right. Lower productivity = higher unit prod. cost sending SRAs left
3. Subsidies- money from governments to businesses to reduce unit prod. cost and sending SRAS to the right
Full Employment
Exists where AD intersects SRAS and LRAS at the same point
Aggregate Demand
Change in price level doesn't shift the curve, it causes a move along the curve
Why is AD downward slopping?
1. Real- Balance- Effect
Higher price levels reduce the purchasing power of money
This decreases the quantity of expenditures
Lower price levels increases purchasing power and expenditures
Ex: The balance in your bank was $50,000 but inflation erode you're purchasing power which will cause you to then reduce your spending
2. Interest Rate Effect:
What price level increases lenders need to charge higher interest rates to get a real return on their loans
Higher interest rates discourage consumer spending and businesses investments
3. Foreign Trade Effect
When US price level rises foreign buyers purchase fewer US goods and Americans buy more foreign goods
Exports fall imports rise causing real GDP demanded to fall ( XN decreases)
Shifters of Aggregate Demand
GDP=C + I+G+XN
Two parts to shift and AD:
Change in C,IG, G and/ or XN
Multiplier fact that produces a greater change than the original change in the 4 components
Increase in AD= AD shift to the right
Decrease in AD= AD shift to the left
Consumption:
Household spending is affected by-
-Consumer wealth: more wealth= more spending ( AD shifts to the right)
Less wealth= less spending (AD shifts to the left)
- Consumer expectations:
Positive- more spending ( AD shifts to the right)
Negative- less spending (AD shifts to the left)
- Household indebtedness
Less debt = more spending ( AD shifts to the right)
Gross private investment:
Investment spending is sensitive to:
-Real interest-rate
Lower real interest rates = More Investment (AD shifts to the right)
Higher real interest rates = Less investment ( AD shifts to the left)
- Expected Returns
Higher expected returns = More Investment ( AD shifts to the right)
Lower expected returns= Less investment ( AD shifts to the left)
Expected returns are influenced bye...
- expectations of future profitability
- Technology
- degree of excess capacity (existing stock of capital)
- Business Taxes
More government spending (AD shift to the right) Increase
Less government spending ( AD shifts to the left ) decreases Decrease
Net exports:
Net exports are sensitive to
- Exchange rates ( International value of $)
Strong $= more imports and fewer exports= (AD shifts to the left )
Weak $ = fewer imports and more exports = (AD shifts to the right )
- Relative Income
Strong foreign economies = more exports = (AD shift to the right )
Week foreign economies = les exports = (AD shifts to the left )
Why is AD downward slopping?
1. Real- Balance- Effect
Higher price levels reduce the purchasing power of money
This decreases the quantity of expenditures
Lower price levels increases purchasing power and expenditures
Ex: The balance in your bank was $50,000 but inflation erode you're purchasing power which will cause you to then reduce your spending
2. Interest Rate Effect:
What price level increases lenders need to charge higher interest rates to get a real return on their loans
Higher interest rates discourage consumer spending and businesses investments
3. Foreign Trade Effect
When US price level rises foreign buyers purchase fewer US goods and Americans buy more foreign goods
Exports fall imports rise causing real GDP demanded to fall ( XN decreases)
Shifters of Aggregate Demand
GDP=C + I+G+XN
Two parts to shift and AD:
Change in C,IG, G and/ or XN
Multiplier fact that produces a greater change than the original change in the 4 components
Increase in AD= AD shift to the right
Decrease in AD= AD shift to the left
Consumption:
Household spending is affected by-
-Consumer wealth: more wealth= more spending ( AD shifts to the right)
Less wealth= less spending (AD shifts to the left)
- Consumer expectations:
Positive- more spending ( AD shifts to the right)
Negative- less spending (AD shifts to the left)
- Household indebtedness
Less debt = more spending ( AD shifts to the right)
Gross private investment:
Investment spending is sensitive to:
-Real interest-rate
Lower real interest rates = More Investment (AD shifts to the right)
Higher real interest rates = Less investment ( AD shifts to the left)
- Expected Returns
Higher expected returns = More Investment ( AD shifts to the right)
Lower expected returns= Less investment ( AD shifts to the left)
Expected returns are influenced bye...
- expectations of future profitability
- Technology
- degree of excess capacity (existing stock of capital)
- Business Taxes
More government spending (AD shift to the right) Increase
Less government spending ( AD shifts to the left ) decreases Decrease
Net exports:
Net exports are sensitive to
- Exchange rates ( International value of $)
Strong $= more imports and fewer exports= (AD shifts to the left )
Weak $ = fewer imports and more exports = (AD shifts to the right )
- Relative Income
Strong foreign economies = more exports = (AD shift to the right )
Week foreign economies = les exports = (AD shifts to the left )
Tuesday, February 9, 2016
Who's Hurt By Inflation & The 4 Types of Unemployment
A. Who's Hurt?
Savers, lenders, creditors, those on a fixed income.
B. Who Gains?
Debtors.
*COLA (Cost of Living Adjustment) automatically increases with inflation.
1. Unemployment- failure to use available resources particularly labor to produce goods and services
1a. Who's In the Labor Force? anyone above 16 years of age who's willing to work
1b. Who's Not In the Work Force? People in the military, homemakers, retired/ disabled people, people in mental institutions, and those not looking for work.
1c. Unemployment Rate- 4-5% = full employment of natural rate of unemployment (NRU)
2. How to Calculate Unemployment
(# of unemployed/ # of employed + # of unemployed x 100)
2a. Four Types of Unemployment
Frictional- people who are "in between jobs" they have transferable skills
Structural- changes in work force makes some skills obsolete. They don't have transferable skills
Seasonal- due to time of year, nature of season
Cyclical- unemployment that occurs because of recession
*Frictional & Structural are unavoidable types of unemployment.
Savers, lenders, creditors, those on a fixed income.
B. Who Gains?
Debtors.
*COLA (Cost of Living Adjustment) automatically increases with inflation.
1. Unemployment- failure to use available resources particularly labor to produce goods and services
1a. Who's In the Labor Force? anyone above 16 years of age who's willing to work
1b. Who's Not In the Work Force? People in the military, homemakers, retired/ disabled people, people in mental institutions, and those not looking for work.
1c. Unemployment Rate- 4-5% = full employment of natural rate of unemployment (NRU)
2. How to Calculate Unemployment
(# of unemployed/ # of employed + # of unemployed x 100)
2a. Four Types of Unemployment
Frictional- people who are "in between jobs" they have transferable skills
Structural- changes in work force makes some skills obsolete. They don't have transferable skills
Seasonal- due to time of year, nature of season
Cyclical- unemployment that occurs because of recession
*Frictional & Structural are unavoidable types of unemployment.
Calculating GDP
1a. Income Approach- adding all the income that resulted from selling FINAL goods and services produced in a year.
( wages + rent + interest + profit +statistical adjustment)
1b. Expenditure Approach- adding all the spending on final goods and services produced in a given year.
(GDP = C (Personal Consumption) + Ig (Investments) + G (Government Spending) + Xn (Net Exports)
2a.
Compensation of Employees- wage + salaries or wage salary supplements such as welfare
Rent-income received by the households and businesses that supply resources
Interest- money paid to suppliers of loans
Proprietor's Income- comes from sole proprietorship and partnerships
Corporate Profits- could include dividends, corporate income taxes and undistributed corporate profits.
Statistical Adjustment- indirect business tax, consumption of fixed capital (depreciation) and net factor foreign payment.
3.Nominal v Real
Nominal GDP- quantity x current year price
Real GDP- quantity x base year price
-In the base year Nominal GDP = Real GDP, in years after the base year Nominal GDP > Real GDP. In years before base year Nominal GDP < Real GDP.
4. GDP Deflator
)Nominal GDP/Real GDP x100) - In years before the base year, deflator less than 100, in base year it equals 100 and in years after it's greater than 100.
5. Consumer Price Index
(cost of market basket of goods in a given year/ cost of market basket of goods in base year x 100)
6. Inflation
(Price Index In Current Year- Price Index In Year 1/ Price Index In Year 1 x 100)
( wages + rent + interest + profit +statistical adjustment)
1b. Expenditure Approach- adding all the spending on final goods and services produced in a given year.
(GDP = C (Personal Consumption) + Ig (Investments) + G (Government Spending) + Xn (Net Exports)
2a.
Compensation of Employees- wage + salaries or wage salary supplements such as welfare
Rent-income received by the households and businesses that supply resources
Interest- money paid to suppliers of loans
Proprietor's Income- comes from sole proprietorship and partnerships
Corporate Profits- could include dividends, corporate income taxes and undistributed corporate profits.
Statistical Adjustment- indirect business tax, consumption of fixed capital (depreciation) and net factor foreign payment.
3.Nominal v Real
Nominal GDP- quantity x current year price
Real GDP- quantity x base year price
-In the base year Nominal GDP = Real GDP, in years after the base year Nominal GDP > Real GDP. In years before base year Nominal GDP < Real GDP.
4. GDP Deflator
)Nominal GDP/Real GDP x100) - In years before the base year, deflator less than 100, in base year it equals 100 and in years after it's greater than 100.
5. Consumer Price Index
(cost of market basket of goods in a given year/ cost of market basket of goods in base year x 100)
6. Inflation
(Price Index In Current Year- Price Index In Year 1/ Price Index In Year 1 x 100)
Thursday, January 28, 2016
GDP
A. What Is GDP? GDP is an abbreviation for Gross Domestic Product
Gross Domestic Product- the total market value of all final goods and services that is produced within a country's borders in a given year
B. What is GNP? GNP is an abbreviation for Gross National Product
Gross National Product- the total market value of all final goods and services by citizens of that country on its land or any other foreign lands.
C. What's Included in GDP?
(65%) C- Personal Consumption Expenditures
(17%) Ig- Gross Private Domestic Investment
Such as factory equipment, factory equipment maintenance, construction of housing, unsold inventory of products built in a year.
(20%) G- Government Spending
(-2%) Xn- Net Exports (Exports minus Imports)
D. What IS NOT included in GDP?
1. Intermediate Goods- goods that require further processing before they are ready for final use
2. Used or Secondhand Goods- not counted to avoid double counting
3. Purely Finacial Transactions- (stocks and bonds) not counted because it's not a good or service
4. Illegal Activities
5. Unreported Business Activity- (unreported tips)
6. Transfer Payments
a. Public Payments (Social Security, Veterans, Welfare)
b. Private Payments (Scholarship)
7. Non- market Activity (work you perform for yourself, babysitting for parents, etc.)
Gross Domestic Product- the total market value of all final goods and services that is produced within a country's borders in a given year
B. What is GNP? GNP is an abbreviation for Gross National Product
Gross National Product- the total market value of all final goods and services by citizens of that country on its land or any other foreign lands.
C. What's Included in GDP?
(65%) C- Personal Consumption Expenditures
(17%) Ig- Gross Private Domestic Investment
Such as factory equipment, factory equipment maintenance, construction of housing, unsold inventory of products built in a year.
(20%) G- Government Spending
(-2%) Xn- Net Exports (Exports minus Imports)
D. What IS NOT included in GDP?
1. Intermediate Goods- goods that require further processing before they are ready for final use
2. Used or Secondhand Goods- not counted to avoid double counting
3. Purely Finacial Transactions- (stocks and bonds) not counted because it's not a good or service
4. Illegal Activities
5. Unreported Business Activity- (unreported tips)
6. Transfer Payments
a. Public Payments (Social Security, Veterans, Welfare)
b. Private Payments (Scholarship)
7. Non- market Activity (work you perform for yourself, babysitting for parents, etc.)
Wednesday, January 27, 2016
Unit 2 Introduction (Market Economy)
A. Vocabulary
Circular Flow Diagram- represents the transactions in an economy.
Product Market- the place where good and services are produced by businesses
Factor Market- the place where households sell resources and businesses buy resources.
Firms- an organization that produces goods and services for sale
Household- a person or group of people that share their income. (In addition they share the factors of production with businesses)
Here's an example of a circular flow diagram:
Circular Flow Diagram- represents the transactions in an economy.
Product Market- the place where good and services are produced by businesses
Factor Market- the place where households sell resources and businesses buy resources.
Firms- an organization that produces goods and services for sale
Household- a person or group of people that share their income. (In addition they share the factors of production with businesses)
Here's an example of a circular flow diagram:
Sunday, January 24, 2016
Economics (1/21)
Peak- the highest point of real GDP. It exhibits the greatest amount of spending and the lowest unemployment. In this phase, inflation is a problem.
Expansion- also known as the recovery phase. Real GDP is increasing as a result of spending increasing and unemployment decreasing.
Contraction/ Recession- Real GDP declines for 6 months. In this phase, unemployment increases and spending reduces.
Trough- Lowest point of GDP, includes highest unemployment and least amount of spending.
Expansion- also known as the recovery phase. Real GDP is increasing as a result of spending increasing and unemployment decreasing.
Contraction/ Recession- Real GDP declines for 6 months. In this phase, unemployment increases and spending reduces.
Trough- Lowest point of GDP, includes highest unemployment and least amount of spending.
Total Revenue (Equations Included)
Total Revenue - The total amount of money a firm receives from selling goods and services. PxQ = TR
Fixed Cost - a cost that does not change no matter how much of a good is produced. Ex: Mortgage, rent, salary
Variable Cost - a cost that rises or falls depending upon how much is produced. Ex: electricity depends upon usage
Marginal Cost - the cost of producing one more unit of a good.
Formulas:
TFC + TVC = TC
AFC + AVC = ATC
TFC/Q= AFC
TVC/Q=AVC
TC/Q= ATC
AFC x Q= TFC
AVC x Q= TVC
Fixed Cost - a cost that does not change no matter how much of a good is produced. Ex: Mortgage, rent, salary
Variable Cost - a cost that rises or falls depending upon how much is produced. Ex: electricity depends upon usage
Marginal Cost - the cost of producing one more unit of a good.
Formulas:
TFC + TVC = TC
AFC + AVC = ATC
TFC/Q= AFC
TVC/Q=AVC
TC/Q= ATC
AFC x Q= TFC
AVC x Q= TVC
Elasticity of Demand (a.k.a. Now We Add Math) & Intro to Supply
Elasticity of Demand
A. Elasticity of Demand: a measure of how consumers react to a change in price.
B. Elastic v. Inelastic
Elastic -
Demand that is very sensitive to a change in price.
A product is elastic when it's greater than 1.
Product is not a necessity and there are available substitutes.
Inelastic -
Demand that is not very sensitive to a change in price.
A product is elastic when it is less than 1.
People will buy it no matter what.
C. How to calculate : Price Elasticity of Demand (PED)
Step 1: Calculate the Quantity
Subtract the old quantity from the new quantity and divide it by the old quantity.
Step 2 : Price
Subtract the old price from the new price and divide it by the old price.
Step 3 : PED
Take the percent change in quantity demanded and divide it by the percent change of the price. So the answer of step 1 divided by the answer of step 2.
Supply
Supply is the quantities that producers/sellers are willing and able to produce at various prices.
Supply down = left, supply up = right
A. Elasticity of Demand: a measure of how consumers react to a change in price.
B. Elastic v. Inelastic
Elastic -
Demand that is very sensitive to a change in price.
A product is elastic when it's greater than 1.
Product is not a necessity and there are available substitutes.
Inelastic -
Demand that is not very sensitive to a change in price.
A product is elastic when it is less than 1.
People will buy it no matter what.
C. How to calculate : Price Elasticity of Demand (PED)
Step 1: Calculate the Quantity
Subtract the old quantity from the new quantity and divide it by the old quantity.
Step 2 : Price
Subtract the old price from the new price and divide it by the old price.
Step 3 : PED
Take the percent change in quantity demanded and divide it by the percent change of the price. So the answer of step 1 divided by the answer of step 2.
Supply
Supply is the quantities that producers/sellers are willing and able to produce at various prices.
Supply down = left, supply up = right
The Law of Supply: There is a direct relationship between price and quantity supplied. Change in price causes a "change in quantity supplied".
What causes a "change in supply"?
1. A change in expectations
2. Change in weather
3. Change in the number of suppliers
4. Change in costs of production
5. Change in taxes or subsidies
6. Change in technology
PPC & PPG
A. Trade-offs: Alternatives that we give up when we chosen course of action over the other.
B. Opportunity cost: The next possible alternative.
C. Production possibilities curve (PPC): Shows alternative ways to use an economies resources.
4 Assumptions of a (PPG)
1. Two goods
2. Fixed resources
3. Fixed technology
4. Full employment of resources
D. Efficiency: Using resources in such a way as to maximize the production of goods and services.
· Allocative efficiency: Products being produced are the ones most desired by society
· Productive efficiency: Products are being produced in the least costly way (any point in the PPC)
Underutilization: Using fewer resources than an economy is capable of using.
Points B & C would be obtainable and efficient, while Point F would be attainable yet inefficient and Point G would be unattainable and inefficient,
E. Three Types of movement that occur within the PPC
1. Inside of the curve- it occurs when resources are unemployed or under employed
2. Along the PPC
3. Shifts of the PPC
F. What causes the PPC/PPF to shift?
Technological changes
Economic growth
∆ in resources
∆ in the labor force
Natural disaster/ War/ Famine
More education and training ( human capital)
G. Demand: quantities that people are willing and able to buy at various prices
The Law of Demand: there is an inverse relationship between price and quantity demanded
H. What causes a "change" in quantity demand ?" - change in price
What causes a "change in demand?"
∆ in buyer's taste
∆ in number of buyers
∆ in income: Inferior goods, Normal goods
∆ in price of related goods: Complementary goods, Substitute goods
∆ in expectations (future)
B. Opportunity cost: The next possible alternative.
C. Production possibilities curve (PPC): Shows alternative ways to use an economies resources.
4 Assumptions of a (PPG)
1. Two goods
2. Fixed resources
3. Fixed technology
4. Full employment of resources
D. Efficiency: Using resources in such a way as to maximize the production of goods and services.
· Allocative efficiency: Products being produced are the ones most desired by society
· Productive efficiency: Products are being produced in the least costly way (any point in the PPC)
Underutilization: Using fewer resources than an economy is capable of using.
Points B & C would be obtainable and efficient, while Point F would be attainable yet inefficient and Point G would be unattainable and inefficient,E. Three Types of movement that occur within the PPC
1. Inside of the curve- it occurs when resources are unemployed or under employed
2. Along the PPC
3. Shifts of the PPC
F. What causes the PPC/PPF to shift?
Technological changes
Economic growth
∆ in resources
∆ in the labor force
Natural disaster/ War/ Famine
More education and training ( human capital)
G. Demand: quantities that people are willing and able to buy at various prices
The Law of Demand: there is an inverse relationship between price and quantity demanded
H. What causes a "change" in quantity demand ?" - change in price
What causes a "change in demand?"
∆ in buyer's taste
∆ in number of buyers
∆ in income: Inferior goods, Normal goods
∆ in price of related goods: Complementary goods, Substitute goods
∆ in expectations (future)
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