Economics Flashcards
(33 cards)
Income Approach for Gross Domestic Product (GDP)
Income approach also grosses up National Income (NI) back to GNP
GDP = Factor Pmts + Wages/Rent/Interest/Profits + Capital Consumption Allowance + Indirect Taxes, net of subsidies
Capital Consumption Allowance = Depreciation is added back in b/c it is a benefit that adds value to the production of goods
Expenditure Approach for Gross Domestic Product
GDP = C + Ig + G + Xn
C = Personal consumption expenditures - favorite pastime Ig = Gross private domestic investment - i.e. investments by businesses in capital assets like a building, equipment G = Government purchases - what the gov't does best Xn = Net exports - foreigners' spending on our exports
(Silly Mnemonic: the eX is consuming a CIGGy )
Compute Net Domestic Product (NDP)
GDP
(Capital Consumption Account)
=Net Domestic Product
Compute National Income
Net Domestic Product
(Net Foreign Income Factor)
(Indirect Business Taxes - paid by final consumers)*
= National Income
*indirect business taxes means that US companies pass on the taxes to the final consumers, which makes the tax indirect. Companies act as a “tax collector” for the Government
National income excludes income earned by foreigners and includes income earned by our US nationals whether they are at home or overseas
Compute Personal Income and Disposable Income
National Income \+ Transfer payments* (Social Security Contributions) (Undistributed Corporate Profits)** (Corporate Income Taxes)
= Personal Income
x Personal Tax %
= Dispsoable Income
- payments from the Gov’t such as welfare
**exclude undistributed corp profits b/c have not converted into actual income
What represents the intensity and duration of a business cycle?
Intensity is represented by the troughs and peaks of the cycle.
Duration is represented by the recession and expansion phases.
What do the peaks and troughs in the business cycle represent?
Peaks = Econcomy reached its highest level of output (Real GDP)
Troughts = Economy reached its lowest level of output (Real GDP)
Marginal prosensity to consume
% delta in spending / % delta in income = MPC
Marginal prospensity to save
% delta in savings / % delta in income = MPS
What do Marginal Prospensities to consume and save tell us?
1 - MPC = amount that is being saved by others.
When we consume our income, it becomes someone’s else source of savings and vice versa.
1 - MPS = amount that is being consumed (spent) by others
What causes the demand and supply curves to shift?
When there are changes in factors OTHER than price.
What moves up and down the demand and supply curves respectively?
Changes in price.
Supply curve’s relationship
Price of supply directly affects the quantity supplied to the market.
Firms will only increase the quantity of the supply when it would fetch higher prices because they are motivated to maximize profits, need to fetch highest prices when possible.
Price Elasticity of Demand
Tells us whether consumers will respond to a change in prices. Elastic ( > 1) means consumers will subsitute with lower-cost options. Inelastic (
Income Elasticity of Demand
Tells us whether consumers will demand more when their income increases.
The more income a consumer has, the more the consumer can demand of a normal good.
Lower income = demand for inferior goods increases
% change in Qty Demanded / % change in income = IED
What is the catch about inferior goods vs. normal goods?
Has nothing to do with the quality of inferior and normal goods. Has to do with the consumers’ buying power. The more that consumers can buy, the more demand there is for normal goods. The less that consumers can buy (i.e. lost a job), the more the consumers will grativate towards inferior goods (canned foods over fresh foods).
What is the meaning behind “liquidity preference”?
It really means that we consumers prefer money (cold hard cash) over anything else because it is the most liquid asset to have on hand.
When or where is profit maximized? What’s the logic behind it?
MR = MC is when profit is maximized.
Logic is MR represents the additional revenue earned on selling one more unit while MC represents cost of producing one more unit
MC is a u-shaped curve. When MC intersects with the MR line, that is where profit is maximized.
MC concerns only VARIABLE cost. The ATC (and VC) follows the MC curve.
If MC is below MR, firm will want to produce more output to meet that MR.
If MC is above MR, firm will want to cut back on output and lower price to get MC to meet MR to maximize profit.
GDP represents…
The monetary value of all final goods and services produced in an economy during a year using either domestic- or foreign-supplied resources (the country’s output)
Excludes intermediate goods, which are goods that are purchased for resale or for further processing or manufacturing.
Excludes nonproductive transactions that have nothing to do with the production of final goods and services like financial transactions - making a home loan has nothing to do with producing a good or service.
Compute either under Income or Expenditure approach (X consuming a CIGGy)
What is the opportunity cost for using capacity of a factory for $25,000 compared to renting out the factory space for $10,000?
Answer is $10,000 because it represents the lost opportunity to make $10,000 by renting even though it may have been the right decision to use the capacity. Remember we are looking at the opportunity COST, not the difference (we are not looking at margin). Opportunity cost questions are asking us to look at the whole cost, not the difference.
Net Exports
Part of GDP Expenditure approach
Represents the spending by foreigners on goods produced in the home country (OUR domestic production), less by home country’s spending on foreign imports
Total Exports (X) - Total Imports (M) = Net Exports aka Xn
What economic variable relates to the activity of net exports?
Changes in relative income between the domestic and foreign countries affect the net exports.
Why? We spend more on imports when our disposable income increases because we can buy more imports.
For foreigners, when their income increases, they buy more of our exports.
Multiplier Effect
Economists are interested in the multiplier effect because it explains how one small change in an investment can have a greater impact on the GDP.
An investment is an autonomous expenditure. When we change our own investments at an individual level, we can cause a GREATER shift in the national income and GDP. Hence, this is why economists and policy makers focus on the multiplier effect. Helps them figure out what policies to influence the autonomous spending to cause an economy-wide shift. Example - make people save more for retirement in 401(k) than relying on Social Security pay outs from the Government.
Basically, one small change multiplies to a greater overall impact (like the Butterfly Effect. One swish of a butterfly’s wings can cause a hurricane across the world).
What is the story between the Multiplier Effect and an economy’s money supply?
We can figure out how much the banking system can expand the money supply when banks get new deposits or additional reserves.
Beware - if the exam question asks you about what economists think of the multiplier effect and is silent on the money supply, it is really asking you about the investment spending. Has nothing to do with the money multiplier (tricky!!)
