ECON Final

• The four core principles

  • The Marginal Principle
  • The Cost-Benefit Principle
  • The Opportunity Cost Principle
  • The Interdependence Principle
• The Marginal Principle


  Break decisions down into a series of smaller decisions
• The Cost-Benefit Principle


  Assess the marginal costs and marginal benefits

  
• The Opportunity Cost Principle


  The cost of the next best alternative you must give up
• The Interdependence Principle


  Broad-based dependencies of our choices
• The circular flow diagram shows the flow of money and its relation to GDP
• GDP


  The market values (prices) of all final goods and services produced within a country in a year
• GDP is total spending


  Y = C + I + G + NX
• GDP is total output

  Sum of value added (= total sales − cost of intermediate inputs)

  
• GDP is total income


  Total wages + Total profits
• GDP is an imperfect measure of economic activity
• Nominal GDP


  P x Q
• Real GDP


  P = (Pt + Pt-1)/2 if there are just two goods = P × Q
• % Change in real GDP ≈ % Change in nominal GDP − % Change in prices

  
• Years it takes something to double ≈ 70/Annual growth rate
• A country's output depends on available inputs: Labour input, Human capital, Physical capital, and Recipes for transforming inputs into output
• Discovering new and more efficient production techniques allows us to transform a given quantity of inputs into even more output
• Institutions matter for economic growth
• Capital accumulation alone cannot sustain economic growth, but technology progress can, and technological progress relies on new ideas
• Components of the labour force

  • Working-age population
  • Not in the labour force
  • Labour Force
  • Employment
  • Unemployed
• Labour Force Participation Rate


  Labour Force/Working-age population *100
• Unemployment Rate


  Unemployed/Labour Force*100
• Types of unemployment


  • Frictional Unemployment
  • Structural Unemployment
  • Cyclical Unemployment
• Constructing the consumer price index

  • 1. Find out what people buy (fixed basket of goods)
  • 2. Collect prices
  • 3. Tally up the cost of the basket
  • 4. Calculate inflation as the percentage change in the prices of the basket
• Inflation rate


  (Price level this year - Price level last year)/Price level last year x 100
• GDP deflator


  Nominal GDP/Real GDP x 100
• Real variable has been adjusted to account for inflation

  
• Inflation erodes the functions of money
• Recall Y=C+I+G+(X-M)
• Consumption


  Household spending on final goods and services
• Consumption function


  A curve plotting the level of consumption associated with each level of income

  
• Marginal propensity to consume


  The fraction of each extra dollar of income that households spend on consumption
• Saving


  The portion of income that you set aside, rather than spending on consumption
• Savings


  Income - Consumption
• Rational rule for consumers


  Consume more today if the marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar-plus-interest in the future
• Consumption smoothing


  The idea that you should maintain a steady or smooth path for your consumption spending over time
• Permanent income hypothesis


  The idea that you choose how much to consume based on your permanent income (your best estimate of your long-term average income) rather than current income
• Some consumers won't follow sophisticated consumption plans
• Credit constraints limit the amount that some people can borrow
• Hand-to-mouth consumers spend their current income