General Information and Exam Structure

Overview

• Exam covers chapters 1, 2, 3, 4, and possibly 5.

• Question types: multiple choice and short-answer/fill-in-the-blank.

• Exam duration: 75 minutes.

• Permitted materials: pencil, eraser, and calculator (no books, notes, or electronic devices).

Foundations and Models

Scarcity and the Definition of Economics

• Scarcity: The fundamental economic problem of having limited resources to meet unlimited wants.

• Economics: The study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

Key Economic Assumptions

• People are rational and self-interested.

• Rational people think at the margin (marginal analysis).

• People respond to economic incentives.

Fundamental Economic Questions

• What and how much to produce?

• How to produce?

• For whom to produce?

Economic Systems

• Planned Economy (Command/Control Economy): Central authority makes economic decisions.

• Market System (Price System): Decisions made by individuals and firms interacting in markets.

Models in Economics

• Models are simplified representations of reality used to analyze economic issues and predict outcomes.

Scope of Economics

• Positive Economics: Describes and explains economic phenomena ("what is").

• Normative Economics: Involves value judgments about what the economy should be like ("what ought to be").

• Microeconomics: Study of individual markets and agents.

• Macroeconomics: Study of the economy as a whole, including inflation, unemployment, and economic growth.

Demand and Supply

Demand

• Demand: The quantity of a good or service that consumers are willing and able to buy at various prices.

• Quantity Demanded: The amount of a good or service consumers are willing to buy at a specific price.

• Difference between change in demand (shift of the demand curve) and change in quantity demanded (movement along the curve).

• Shift Factors in Demand: Income, tastes, prices of related goods, expectations, number of buyers.

Supply

• Supply: The quantity of a good or service that producers are willing and able to sell at various prices.

• Quantity Supplied: The amount of a good or service producers are willing to sell at a specific price.

• Law of Supply: As price increases, quantity supplied increases, ceteris paribus.

• Ability to construct a supply curve from a set of prices and quantities supplied.

• Shift Factors in Supply: Input prices, technology, expectations, number of sellers, government policies.

• Difference between change in supply (shift of the supply curve) and change in quantity supplied (movement along the curve).

Market Equilibrium

• Market Equilibrium: The point where quantity demanded equals quantity supplied.

• Equilibrium Price: The price at which the market clears.

• Equilibrium Quantity: The quantity bought and sold at the equilibrium price.

• Ability to identify and calculate surplus (excess supply) and shortage (excess demand).

GDP – Measuring Total Production and Income

Gross Domestic Product (GDP)

• GDP: The market value of all final goods and services produced within a country in a given period.

• Includes only current production and goods/services produced within a country.

• Measures market values, not quantities.

Calculating GDP

• Use the expenditure approach: where:

  • = Consumption

  • = Gross private investment

  • = Government purchases

  • = Net exports (exports - imports)

• Understand the circular-flow diagram showing the movement of goods, services, and money in the economy.

• Calculate GDP in a simple hypothetical economy.

Value-Added Approach

• Value Added: The additional value created at each stage of production.

• GDP can be calculated by summing the value added at each stage.

Shortcomings of GDP

• As a measure of total production:

  • Does not include household production.

  • Excludes transactions in the underground economy.

• As a measure of well-being:

  • Does not account for leisure time.

  • Does not account for pollution or negative externalities.

  • Not adjusted for crime or income distribution.

Real vs. Nominal GDP

• Nominal GDP: Measured using current prices.

• Real GDP: Measured using constant base-year prices.

• Calculate the GDP deflator:

• Calculate the inflation rate using the GDP deflator:

Gross National Product (GNP)

• GNP: The market value of all final goods and services produced by a country's residents, regardless of location.

• Difference between GDP and GNP is net factor income from abroad.

Unemployment and Inflation

Unemployment

• Unemployed: Individuals not working but actively seeking work (as per the Current Population Survey).

• Employed: Individuals currently working for pay.

• Labor Force: The sum of the employed and unemployed.

• Groups not in the labor force: retirees, full-time students, homemakers, discouraged workers, etc.

• Calculation of key rates:

  • Unemployment Rate (UR):

  • Labor Force Participation Rate (LFPR):

  • Employment to Population Ratio (EPR):

• Official unemployment rate may overstate or understate true joblessness due to factors like part-time work, discouraged workers, or misreporting.

• Types of unemployment:

  • Frictional: Short-term, due to job search or transitions.

  • Structural: Mismatch between skills and job requirements.

  • Cyclical: Caused by economic downturns.

• Data sources: Household Survey vs. Establishment Survey (payroll survey).

Inflation

• Inflation: The sustained increase in the general price level of goods and services.

• Price Index: Measures the average change in prices over time.

• Consumer Price Index (CPI): Measures the cost of a fixed "basket" of goods and services purchased by a typical consumer.

• Formula for CPI:

• Formula for inflation rate using CPI:

• Biases in CPI:

  • Substitution bias

  • New products bias

  • Outlet bias

• Producer Price Index (PPI): Measures the average change in selling prices received by domestic producers.

• Use price indexes to compare dollar values at different times.

• Nominal vs. Real Interest Rates:

  • Nominal interest rate: Stated rate without adjustment for inflation.

  • Real interest rate: Adjusted for inflation.

  • Formula:

• Effects of anticipated and unanticipated inflation on income distribution.

Example Table: Types of Unemployment

Example Table: GDP vs. GNP

Additional info: Some explanations and formulas have been expanded for clarity and completeness based on standard macroeconomics curriculum.