BEC chapter 2
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what is used to measure the state of the economy
- 1.Gross domestic Product-total dollar value of all good and services producted in a country
- 2.Gross national product-total market value of final goods and services produced by residents in a country. no foreign productd
- 3.Net Domestic poduct-GDP less depreciation
- 4. National Income-NDP Plus a country's net income earned abroad-indirect business tax.
- 5.Personal Income-
- 6.Disposable Income
- 7.Real per-capita Output
- 8.Balance of power-Distribution of power
- 9.unemployement rate
- 10.interest rate
- 11.inflation rate
nominal GDP and Real GDP
Nominal GDP: value of all final goods and services in current price. No inflation
Real GDP: valuse of all final goods and service in constant price. adjusted to account for change in price level.
Expenditure approach to measuring GDP (Flow of product)
- G: Government purchases of goods
- I: Gross private domestic investment
- C: Personal Consumption expenditure
- E: Net Exports
Income approach to measuring GDP (earning and Cost)
- I: Income of Propritors
- P:Profit of Corporation
- I: Interest(net)
- R: Rental Income
- A: Adjustment for net forenign income
- T: Taxes (indirect business taxes)
- E: Employeecompensation
- D: Depreciation (capital consumption allowance
Phases of the business cycle
- 1.Trough-Low level economic activity and resource under-use.
- 2. recovery-increase levels of economic activity.
- 3. Peak-high level of economic activity and levels of resources.
- 4. Recession (Contractionary)-falling economic activity and growth. following a peak.
Leading indicators before the cycle change.
- 1. Average hours worked per week increase because employer may not want to hire additional ppl.
- 2. Increase in new unemployment claims
- 3.increase in stock price
- 4. Raw material price change
- 5. Residential building permit
- 6. Vendor delivery time and unfille durable orders increase due to high demand.
- 7. money supply changes-increase in bond cost indicates investors are willing to pay more.
what are some lagging indicators
- 1. average interest rate charged by banks.
- 2.average duration in unemployment
- 3.bank loans outstanding
- 4.unit labor cost in private business sector.
what is the cause of the business cycle
The business cycle is the result of the aggregate demand curve and aggregate supply curve.
Aggregate demand curve is the maximum quantity of all goods and serviecs that households,firms,and the goverment are willing and able to purchase at any given price leve.
Aggregate supply curve-maximum quantity of all goods and serviecs that producers are willing and able produce at any given price leve.
effects of the economic fluctuations
- Increase in demand: increase in AD,GDP, P
- Drease in demand: Decrease in AD,GDP,P
- Reduction in supply: Decrease in SRAS,GDP ,^ P
- Increase in supply: ^ SRAS,GDP, decrease in P
Factors that shift AD
- Change in wealth: Increase W,spending,AD,GDP,P
- Change in real interest: increase I,Decrease borrowing,spending,AD,GDP,P
- Change in expectation about the future Economic outlook:confident outlook,increase Spending,AD,GDP,P
- Change in Exchange Rate: Appre $, decrease exports, ^imports ,AD,GDP,P
- Change in Goverment spending:increase G, AD,GDP,P
- Change in comsumer tax: increase CT, decrease Spending AD,GDP,P
Factors that shift the SRAS Curve
- 1. Changes in input: ^ input price, decrease in SRAS,GDP,P
- 2. Supply shock: supplies are plentiful,^SRAS,GDP,P
Increase in consumer,firm,or government spending, produces a multiplies increase in the level of economic activity.
Types of unemployment
1. Fractional: normal unemployment from workers changing jobs. time needed to match job seekers with jobs.
2. Structural: jobs available to not match the skills or location of the workers.
3. Cyclical: resulting from a decline in real GDP. rises during a recession and falls during a expansion/recovery
4. seasonal: seasonal change in demand of supply of labor.
normal rate of unemployment Vs. Full employment
- Normal rate: fluctuares due to cyclical employment.
- Full Employment: level of unemployment when there is no cyclical.
Inflation and Deflation
- Inflation: is an increase in the general price level.
- Deflation: Decrease in the general price level.
Impact of inflation
- Restricts lending: credit becomes hard to get
- Relationsship strained: long term contract renegotiated
- Wealth Redistribution: debtors repays loans DB takes the place of Pensions
Measurements of inflation/deflation
- Consume price index: comparison of items in a shopping cart to a base value over time.
Wholesale Price index: Comparison of price of items in a shopping cart at wholesale quantities to a base value.
GDP Deflator: Factor that includes all production of an economy at the price used for the GDP Calculation.
Causes of inflation and Deflation
Demand-pull Inflation: caused by an increase in AD. Increase in government spending, Decrease in tax, Increase in wealth, Increase in money supply.
Cost-Push: caused by the reduction in SRAS. increase in oil price, increase in nominal wages.
EXPANSIONARY MONETARY POLICY:(INCREASES IN THE MONEY SUPPLY)-Purchase Federal Securities and lower the interest rate.
CONTRACTIONARY MONETARY POLICY: (DECREASES IN THE MONEY SUPPLY)-Selling securities and raising the interest rates.
Balance of payments.
The balance of payments is an account summary of a nation’s transactions with other nations.
Current account: Shows the flow of goods and services and government grants for a period of time.
Capital account: Shows the flow of investments in fixed and financial assets for a period of time.
Official reserve account: Shows the changes in the nation’s reserves
ECONOMIES OF SCALE vs DISECONOMIES OF SCALE
- ECONOMIES OF SCALE:
- Companies that are able to reduce per unit costs by using large plants to produce large amounts of output are said to have economies of scale. Economies of scale are reductions in unit costs resulting from increased size of operations.
- DISECONOMIES OF SCALE
- Diseconomies of scale may occur when these large firms become inefficient and are no longer cost productive. Diseconomies of scale are increases in average costs of operations resulting from problems in managing large scale enterprises.
PERFECT (PURE) COMPETITION- Many firms in the market selling the same product.
Monopolistic Competition- many firms selling a differentiated product.
Oligopoly- few markets in the firm selling differentiated products.
Monopoly- One firm in the market selling only one product.
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