Macro Review Sheet

Ch 2

 Individuals’ choices determine three key features of society:

o What gets produced?
o How is it produced?
o Who gets what is produced?
 capital: Things produced and used in the production of other goods and services.
o Ex: a factory building is used by the economy to produce other things
 factors of production: inputs into the process of production
 production: The process that transforms resources into goods and services.
 inputs or resources: Anything provided by nature that can be used to satisfy human wants.
o Primary resources: land, labor, and capital
 Outputs: Goods and services of value to households.
 opportunity cost: The best alternative that we give up when we make a choice or decision.
 absolute advantage: has a lower opportunity cost in everything you produce
 comparative advantage: A producer has a comparative advantage over another in the
production of a good or service if he or she can produce that product at a lower opportunity cost
(uses fewer resources)
o concerned with opportunity cost
 theory of comparative advantage: theory that specialization and free trade will benefit all
trading parties (even those with absolute advantage)
 specialization: taking advantage of what you’re good at
o allows parties to be better off
o motivation for free trade
o total production will be higher
 consumer goods: Goods produced for present consumption.
 Investment: The process of using resources to produce new capital.
 Production possibility frontier (ppf): A graph that shows all the combinations of goods and
services that can be produced if all of society’s resources are used efficiently.
o anything on the ppf is an efficiency
o anything inside is a n inefficiency
o anything outside the ppf requires economic growth
 marginal rate of transformation (MRT): The slope of the ppf.
o The negative slope tells us how much society has to give up of one output to get a unit
of another output.
 economic growth: An increase in the total output of an economy that occurs when a society
acquires new resources or when it learns to produce more using existing resources.
o Growth shifts the ppf up and to the right.
 command economy: a central government directly or indirectly sets output targets, incomes,
and prices.
 laissez-faire economy: individual people and firms pursue their own self-interest without any
central direction or regulation.
 o Aka Market Economy

Ch 3

 Households: The consuming units in an economy.

 Firm: An organization that transforms resources (outputs).
o primary producing units in a market economy.
 Entrepreneur: A person who organizes, manages, and assumes the risks of a firm, taking a new
idea or a new product and turning it into a successful business.
 A market: is an arrangement where buyers and suppliers meet to do business with each other
 a competitive market: no single buyer or seller can influence the price.
 labor market: factor market in which households supply work for wages to firms that demand
labor.
 capital market: factor market in which households supply their savings, for interest or for claims
to future profits, to firms that demand funds to buy capital goods.
 land market: factor market in which households supply land or other real property in exchange
for rent.
 factors of production: The inputs into the production process.
o Land, labor, and capital are the three key factors of production.
 The price of goods is common to both firms and households
 quantity demanded: the amount that consumers plan to buy during a particular time period,
and at a particular price.
o Changes in price changes the quantity demanded
o Changes in anything else changes the demand
 The Law of Demand: the higher the price of a good, the smaller is the quantity demanded, and
the lower the price of a good, the larger is the quantity demanded.
o Substitution effect: when the relative price (opportunity cost) of a good or service rises,
people seek substitutes for it, so the quantity demanded of the good or service
decreases.
o Income effect: When the price of a good or service rises relative to income, people
cannot afford all the things they previously bought, so the quantity demanded of the
good or service decreases.
 demand refers to the entire relationship between the price of the good and quantity demanded
of the good.
 A demand curve shows the relationship between the quantity demanded of a good and its price
o Movement along a curve the change in quantity demanded brought on by a change in
price
o Shift of a curve corresponds to a new relationship between quantity demanded and
price (original conditions change)
 Market demand: the sum of all the quantities demanded per period by all the households.
 Income: The sum of all a household’s wages, salaries, profits, interest payments, rents, and
other forms of earnings in a given period of time.
o flow measure.
 wealth or net worth: The total value of what a household owns minus what it owes.
o stock measure.
 normal goods: Goods for which demand goes up when income is higher and for which demand
goes down when income is lower.
 inferior goods: Goods for which demand tends to fall when income rises.
 Substitutes: Goods that can serve as replacements for one another; when the price of one
increases, demand for the other increases.
 perfect substitutes: Identical products.
 complements, complementary goods: Goods that “go together”; a decrease in the price of one
results in an increase in demand for the other and vice versa.
 Demand Shifts
o When demand increases, the demand curve shifts rightward.
o When demand decreases, the demand curve shifts leftward.

o 1)The prices of related goods DEMAND

o 2)Expected future prices
o 3)Income INCREASE DECREASE
o 4)Expected future income and () ()
credit
o 5)Population
o 6)Preferences 1. Price of Substitute  
 Expectations affect decisions on what
you buy today and on today’s prices. If 2. Expected Future Price  
you expect them to increase, you will
3. Income  
buy it now. If you expect it to
decrease, you will buy it later. 4. Expected Future Income (Credit)  
 The quantity supplied of a good or
service is the amount that producers 5. Population  
plan to sell during a given time period  
6. Price of Complements
at a particular price.
 The Law of Supply: the higher the
price of a good, the greater is the quantity supplied, and the lower the price of a good, the
smaller is the quantity supplied.
 This lowest price is marginal cost.
 supply refers to the entire relationship between the quantity supplied and the price of a good.
 The supply curve shows the relationship between the quantity supplied of a good and its price
o Movement along: change in quantity supplied brought on by a change in price
o Shift: change that occurs when relationship changes (change in original conditions)
 Supply Shifts
o When supply increases, the supply curve shifts rightward.
o When supply decreases, the supply curve shifts leftward.
o 1)The prices of factors of production
o 2)The prices of related goods produced
o 3)Expected future prices
o 4)The number of suppliers
o 5)Technology
 o 6)State of nature
 Equilibrium is a situation in which opposing forces balance each other. Equilibrium in a market
occurs when the price balances the plans of buyers and sellers.
o The equilibrium price is the price at which the quantity demanded equals the quantity
supplied.
o The equilibrium quantity is the quantity bought and sold at the equilibrium price.
 Price regulates buying and selling plans.
 2) Price adjusts when plans don’t match.
 At prices above the equilibrium price, a surplus forces the price down:
 1)At prices below the equilibrium price, a shortage forces the price up.
 2) At the equilibrium price, buyers’ plans and sellers’ plans agree and the price doesn’t change
until an event changes demand or supply.

Ch5

 Macroeconomics: Deals with the economy as a whole. Macroeconomics focuses on the

determinants of total national income, deals with aggregates such as aggregate consumption
and investment, and looks at the overall level of prices instead of individual prices.
o Three of the major concerns of macroeconomics are:
 Output growth
 Unemployment
 Inflation and deflation
 aggregate behavior: The behavior of all households and firms together.
 sticky prices: Prices that do not always adjust rapidly to maintain equality between quantity
supplied and quantity demanded.
 business cycle: The cycle of ups and downs in the economy.
 aggregate output: The total quantity of goods and services produced in an economy in a given
period.
 Recession: A period during which aggregate output declines.
 Depression: A prolonged and deep recession.
 expansion or boom: The period in the business cycle from a trough up to a peak during which
output and employment grow.
 contraction, recession, or slump: The period in the business cycle from a peak down to a trough
during which output and employment fall.
 unemployment rate: The percentage of the labor force that is unemployed.
o that the aggregate labor market is not in equilibrium.
 Inflation: An increase in the overall price level.
 Hyperinflation: A period of very rapid increases in the overall price level.
 Deflation: A decrease in the overall price level.
 we divide the participants in the economy into four broad groups:
o Households
o Firms
o The government
o The rest of the world
  Households and firms make up the private sector, the government is the public sector, and the
rest of the world is the foreign sector.
 We divide the markets into three broad arenas:
o The goods-and-services market
 Households and the government purchase goods and services from firms in the
goods-and-services market.
 Firms purchase goods and services from each other and also supply to the
goods-and-services market.
 Households, the government, and firms demand from this market.
 The rest of the world buys from and sells to the goods-and-services market.
o The labor market
 In the labor market, households supply labor, and firms and the government
demand labor.
 Labor is also supplied to and demanded from the rest of the world.
o The money (financial) market
 Households supply funds to the money market (or financial market) in the
expectation of earning income in the form of dividends on stocks and interest
on bonds.
 Households also demand (borrow) funds from this market to finance various
purchases.
 Firms borrow to build new facilities in the hope of earning more in the future.
 The government borrows by issuing bonds.
 The rest of the world borrows from and lends to the money market.
 Much of this borrowing and lending is coordinated by financial institutions,
which take deposits from one group and lend them to others.
 Money Market Instruments
o Treasury bonds, notes, or bills: Promissory notes issued by the federal government
when it borrows money.
o corporate bonds: Promissory notes issued by corporations when they borrow money.
o shares of stock Financial instruments that give to the holder a share in the firm’s
ownership and therefore the right to share in the firm’s profits.
o Dividends: The portion of a firm’s profits that the firm pays out each period to its
shareholders.
 fiscal policy: Government policies concerning taxes and spending.
 monetary policy: The tools used by the Federal Reserve to control short-term interest rates.
 Fine tuning: the gov’s role in regulating inflation and unemployment
 Stagflation: high inflation and high unemployment

Ch6

 gross domestic product (GDP): The total market value of all final goods and services produced
within a given period by factors of production located within a country.
o Market value – goods and services valued at market prices
o Final goods and services – is an item bought by its final user during a period of time; we
do not count intermediary goods
  intermediate goods: Goods that are produced by one firm for use in further
processing or for resale by another firm.
 value added: The difference between the value of goods as they leave a stage
of production and the cost of the goods as they entered that stage.
o Produced within a country- services and goods in a specific country
o In a given time period – GDP is measured either quarterly or yearly
o In calculating GDP, we can sum up the value added at each stage of production or we
can take the value of final sales.
o We do not use the value of total sales in an economy to measure how much output has
been produced.
 GDP is concerned only with new, or current, production. Old output is not counted in current
GDP because it was already counted when it was produced.
 GDP does not count transactions in which money or goods change hands but in which no new
goods and services are produced.
 gross national product (GNP): The total market value of all final goods and services produced
within a given period by factors of production owned by a country’s citizens, regardless of where
the output is produced.
 Calculating GDP
o 1. expenditure approach: A method of computing GDP that measures the total amount
spent on all final goods and services during a given period.
 Personal consumption expenditures (C): household spending on consumer
goods
 durable goods: Goods that last a relatively long time
 nondurable goods: Goods that are used up fairly quickly
 services: The things we buy that do not involve the production of
physical things
 Gross private domestic investment (I): spending by firms and households on
new capital—that is, plant, equipment, inventory, and new residential
structures
 nonresidential investment: Expenditures by firms for machines, tools,
plants, and so on.
 residential investment: Expenditures by households and firms on new
houses and apartment buildings.
 change in business inventories: The amount by which firms’
inventories change during a period. Inventories are the goods that firms
produce now but intend to sell later.
 GDP = final sales + change in business inventories
 Government consumption and gross investment (G): Expenditures by federal,
state, and local governments for final goods and services
 Depreciation: The amount by which an asset’s value falls in a given
period.
 gross investment: The total value of all newly produced capital goods
(plant, equipment, housing, and inventory) produced in a given period.
 net investment: Gross investment minus depreciation.
  capitalend of period = capitalbeginning of period + net investment
 Net exports (EX – IM): net spending by the rest of the world, or exports (EX)
minus imports (IM)
 net exports (EX – IM) The difference between exports and imports
o GDP = C + I + G + (X – M).
o 2. income approach: A method of computing GDP that measures the income—wages,
rents, interest, and profits—received by all factors of production in producing final
goods and services.
 national income: The total income earned by the factors of production owned
by a country’s citizens.
 compensation of employees: Includes wages, salaries, and various
supplements paid to households by firms and by the government.
 proprietors’ income: The income of unincorporated businesses.
 rental income: The income received by property owners in the form of rent.
 corporate profits: The income of corporations.
 net interest: The interest paid by business.
 indirect taxes minus subsidies: Taxes the government pays for which it receives
no goods or services in return.
 net business transfer payments: Net transfer payments by businesses to
others.
 surplus of government enterprises: Income of government enterprises.
 net national product (NNP): Gross national product minus depreciation; a
nation’s total product minus what is required to maintain the value of its capital
stock.
 statistical discrepancy: Data measurement error.
 personal income: The total income of households.
 GDP

 Plus: Receipts of factor income from the rest of the world

 Less: Payments of factor income to the rest of the world

 Equals: GNP

 Less: Depreciation

 Equals: Net national product (NNP)

 Less: Statistical discrepancy

 Equals: g

 Real GDP is the value of final goods and services produced in a given year when valued at the
prices of a reference base year.
 Nominal GDP is the value of goods and services produced during a given year valued at the
prices that prevailed in that same year.
 Deflator = (nominal GDP / real GDP) * 100