Econ 1A 2-13-2012
1. -GDP
2
a. *Measure of our “Material health”
b. *Production = Purchases = peoples earnings
c. Country to country comparison is called “cross section”
d. $730/year is the world average poor income
Problems
a. Fixable-calculations
i. currency discrepancies
ii. use per person calculation
b. Unfixable
i. cost of living
ii. non market goods = goods and services not measured in GDP= underground
economy
1. estimated to be 10%
a. i.e. marijuana, gambling, prostitution, barter, DIY
i. poor countries will sometimes count DIY
b. things to hide from govt for tax evasion
iii.
c. How do we fix that?
i. Convert from nominal (current price) to real (constant prices)
ii. P x Y = Nominal income (P=price and Y=qty of goods and services made)
iii. when you divide by P you get “real income”
iv. FedFRED is the goto website for econ conversion numbers
v.
1.
Next Chapter
3
Cost of Living
a. Price Level Definition= Price index= Prices= P= Cost of living
i. Take a list of goods, gather prices and average them
ii. In “index” number, take a “base year” and set it = to 100%. All other years
are relative. Index numbers are given in %
1. Govt tracks 3 main Price indexes
a. CPI – consumer price index (goods in index=what typical
consumer must buy)
b. PPI – Producer price index (goods = what producers buy)
c. GDP Deflater – goods= all goods in the GDP calculation
i. Used to convert from nominal to real
b. Inflation – the growth of a price level
i. Inflation is calculated by dividing the price level of the later year by the price
level of the earlier year and subtract 1. Convert to %.
c. Problems measuring prices and inflation
i. Substitution (overestimate inflation by approx. 1% per year)
1. Assumes people keep same spending habits all year
ii. Quality changer
1. Higher quality can cause higher prices instead of inflation
iii. New goods
1. Prices not tracked for several years until a history has been
established
iv. Bargain hunting
1. Internet and “discount store” not included in price searches
v.
Next chapter
1 Theory of Production – Real income is determined by the quantity and/or quality of
resources(inputs, factors).
a. Land- all natural resources
b. Labor- human resources - quantity of worker hours (can’t cause an increase b/c
productivity is measured per worker hour)
c. Capital- Physical and human capital(human knowledge)
vi. A,b and c were the economical formula for a long time
d. Technology/technological knowledge(not the machine, but knowing how to build it)
e. Institutions- the rules, laws and customs that we live by
vii. Ergotic- history repeats itself
2
Economic Growth- a sustainable increase in Productivity( real GDP per worker hour).
a) Primary Causes – Increases in
i) Technology ( about 50%-100% depending on who you ask)
ii) Physical Capital (tools, buildings, machines)
iii) Human capital (skills, education knowledge, experience, training)
(1) Physical and human capital are equally important
(2) Investment is required for any growth to be possible
(a) Businesses is usually happy to invest in physical
(b) Human is dangerous as the business doesn’t keep the asset (the employee can quit)
(c) Technology is risky. Once it is dreamed, it is “for the public good” and anyone can
use the ideas. There are more investments in patentable sectors
b) Contingent Causes – growth is contingent on environment containing these
i) private property rights
ii) stable government
iii) open economy (fewer trade restrictions)
iv) stable financial system and money(no high or erratic inflation)
(1) these have been classified as “institutions”
c) Limiting factors
i) Lots of capital
(1) Due to diminishing returns(with every added machine, production doesn’t grow as
much as the one before)
(a) This leads to the belief that poor countries grow faster than rich countries. This is
convergence –the “catch up” effect
ii) Population growth
(1) Warning- be careful about drawing conclusions about gov’t policy
(a) Not the only
(2) Fast growing population leads to limited resources
iii) Natural resources
(1) Limit growth in 2 ways
(a) Limited supply
(i) Though resources are finite, humans will adapt
(b) Abundance of resources = slow growth
(i) If abundance in resources is in an item the economy is dependent on, it doesn’t
grow as fast since there is not much investment in technology (how to apply
new economic resource)
iv) Poverty traps
(1) Corrupt gov’ts
(2) Conflict - War and violence
(3) Abundant natural resources- causes fighting over control
New Chapter
1) Interest Rates-Extra that you pay when you borrow/Extra that you get when you lend
a) When you loan $300 @ 4% - After 1 year on an annual loan you pay $300 + (300x.04)=$312
b) Real vs. Nominal
i) Nominal- Money return
ii) Real- goods able to be purchased with return
Money
Prices
Goods(qty)
Now
$100
10/good
10
Rate
Nominal=10%
Inflation =2%
Real Rate=8%
Next year
$110
$10.20/good
10.8
Nominal Interest rate= Real rate + Inflation rate
2) Market for Loanable Funds- we will use real interest rate this chapter
a) Demand
i) Who invests? Firms. They invest in Physical capital, Human capital and technology
(1) Firm investment decision making
(a) Why?- increase profits!!!
(b) Lots of options
(c) Not all investments are equally profitable
(d) Investments are financed= expensive to borrow
(e) Invest in all projects that increase profits including covering the interest cost
(i) Marginal investments will turn from profitable to costly if interest rates go too
high
b) Supplyi) Banks are an intermediary(matchmaker) between Firms(demander) and the 3 suppliers
(1) Suppliers are
(a) Households
(i) Private savings=Income - taxes - consumption
1. Income-taxes= disposable income
2. Interest is peoples incentive to invest
a. As Real interest rates rise people save more, but firms don’t invest as
much
(b) Foreigners
(c) Government
c) System Overview
i)
d) Equilibrium
i) It is the point of where household savings and firms demand meet
a. If rates are above equilibrium, people save more, but firms don’t invest
as much so there is a surplus of money in banks. This causes interest
rates to fall.
i. Conversely, when rate is below equilibrium, there is a shortage of
household savings and a higher demand from firms for loans. Banks
raise interest rates on firms.
(2) If supply of savings increases, equilibrium moves higher on the investment axis of the
graph and firms invest more
e) Changes in Equilibrium
i) .
f) Public Savings - Government and the Deficit
i) Total savings = Private savings+ Public Savings
(1) Public Savings = Tax Revenue – Gov’t Spending
(a) If Public Savings >0 = budget surplus. If it’s < 0 = Budget Deficit
(i) “Crowding Out” - When a gov’t deficit drives up interest rates and reduces
investment
3) Consumer confidence is the consumer’s confidence in their ability to earn income in the future
4) _____________________________end of test area_______________________________________