Economics Vids Notes  Cause of Shifting the PPC

-Trading between countries

I. SUMMARY OF MACROECONOMICS

Economics
Absolute and Comparative Advantages
 Social science that analyzes the most
efficient way to use our scarce resources Absolute Advantage

Scarcity  Producer that can produce the most output

OR requires the least amount of inputs
 Unlimited wants but limited needs (resources)

Opportunity Cost Comparative Advantage

 Most desirable alternative given up when  Producer with lower opportunity cost
we make a choice
 Requires calculations
Factors of Production
Terms of Trade
1. Land
 Agreed upon conditions that would benefit
2. Labor both countries

3. Capital Example: trade 1 ton of wheat for 1.5 ton of

sugar
4. Entrepreneurial Skills

Components of the Circular Flow Model

Production Possibilities Curve/Frontier
1. Private sector - run by individuals
 It may be:
2. Public sector- controlled by government
1. Unattainable
3. Factor Payments - payment for the factors
2. Efficient of production (rent, wages, interest and
profit)
3. Inefficient
4. Transfer Payments - when government
Constant Opportunity Cost redistributes income

 Corn and wheat 5. Subsidies- government payments to

business
Straight line

o Countries should trade if they have a

Increasing Opportunity Cost
relatively lower opportunity cost. They
 Cactus and pineapples should specialize in the good that is
cheaper for them to produce
Curve line

Demand and Supply

Demand  identifies how much each person make

 Inverse relationship with price ( y 2− y 1 )

%Change in GDP = ( x 100
y1
Supply

 Direct relationship with to price

Not included in GDP

1. Intermediate Goods
 If price goes up, there is no shift. It just
moves along the curve. There is just  Good inside the product don’t repeat
shortage and surplus
Price of chip inside the computer
Single shifts

1. Demand increase

2. Demand decrease

3. Supply increase
1. Non-production transactions
4. Supply decrease
 Financial transactions (nothing is produced)
Monetary Policy
 Actions central banks take to pursue Stocks, bonds
objectives such as price stability and
maximum employment Used goods

Fiscal Policy
 Government’s revenue collection and 2. Non-market transactions-
spending decisions
Black market

Unit 2. Macro Measures Drugs

3 Major Economic Goals

Ways to Calculate GDP
1. Promote economic growth
1. Expenditure Approach
2. Limit unemployment
 Add up all the spending on final goods and
services produced in a given year
GDP
 GDP= C + I + G + (X-M)
 dollar value of all final goods and services
2. Income approach
 anything produced by the country
 Add up all income that resulted from selling
all final goods and services produced in a
year
GDP per capita
 GDP= Rent + Wages + Interets + FP
 divided by population
Kinds of GDP  Unemployed X 100

1. Nominal labor force

 GDP measured in current prices Labor Force

 Not account for inflation from year to year  No. of people willing and able to work

Labor Force Participation Rate

2. Real
 % of population in the labor force
 best measure of economic growth

 GDP expressed in constant or unchanging

dollars Three Types of Unemployment

1. Frictional Employment
 Adjusts for inflation
 temporary unemployment or being between
 Best way to show us through business cycle
jobs

 individuals are qualified workers with

transferable skills

Inflation  Seasonal

 Difference between peak and line -Type of frictional

-due to time of year and nature of job

Unemployment

 Difference between line and trough in the 2. Structural Employment

curve
 Changes in labor force make some skills
FULL EMPLOYMENT OUTPUT (Y) obsolete
 The Real GDP created when there is no
cyclical unemployment.  Jobs that will never come back
Full employment
 Workers must learn new skills to get a job
 Difference between GDP line and GDP
curve
 Technological Unemployment
 Recession = contraction
-automation and machinery replace human
 Recovery = expansion

2. Limit unemployment
3. Cyclical Unemployment
Unemployment
 Caused recession
 Actively looking for a job but unemployed
 Demand fails, demand for labor fails and
Unemployment rate workers are fired
  Goal is frictional and structural  adjust for inflation
unemployment. These two will always be
between jobs or replaced by technology Nominal interest rate

National Rate of Unemployment  percentage increase in money not adjusting

for inflation
= Frictional + structural unemployment
 real interest rate + inflation rate
 Exists when economy is healthy and
growing

Real GDP Real interest rate

 if there is no cyclical unemployment  increase in purchasing power

 real interest rate = inflation rate

Criticisms of Unemployment rate  Real = nominal – expected inflation

UR can misdiagnose actual UR because of: Consumer price index ( CPI)

 most commonly used measurement for

1. Discouraged workers inflation for customers
 some people no longer looking for a job and  measures only goods bought by customers
already given up

2. Underemployed Priceof market basket

x 100
 wants more hours without equivalent salary price of market basket of the base year

Inflation GDP Deflator

 Reduce purchasing power
 measures all goods produced domestically
 rising general level of prices
Imported Goods
 each dollar of income will buy fewer goods
 Not part of GDP
than before
 Don't show up in GDP deflator
3. Keep Prices stable
Formula of GDP Deflator
Unexpected inflation

 helps borrowers
Nominal GDP
GDP Deflator = x 100
 hurts lenders and people with fixed income Real GDP

Nominal wage

 measured by dollars rather than purchasing 3 Causes of Inflation

power
1. Government prints TOO MUCH money
Real wage (Quantity theory)
  results to hyperinflation

•Quantity theory of money identity

MxV=PxY

M- Money supply

V- Velocity

P- Price level

Y- Quantity of output

2. Demand-Pull inflation

 Demand pulls-up prices

 Too many dollars chasing few goods

 Overheated economy with excessive

spending but same amount of goods

3. Cost-Push Inflation

 Higher production costs - increases prices

Negative Supply Shock

 increases costs of production

 forces producers to increase prices