Macroeconomics Chapter 2 Test-Study Guide

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is the measure of a nations total economic activity
Intermediate Good
a good or service that is used in the production of final goods. Ex. wool –> sweater
Transfer Payment
a payment made or income received in which no goods or services are being paid for
GDP equation
GDP = Consumption + Investment + Government Expenditures (Exports-Imports)
Durable Goods
goods not for immediate consumption
Two approaches to GDP
Income approach (wages, rental income, profit)
Expenditure approach (personal consumption, durable goods)
Nominal GDP
GDP that has not been adjusted for inflation
Real GDP
Measure of the value of economic output adjusted for price changes
Price Index
The average of price relatives for goods/services
Real GDP per capita
the average output of the economy per person measured in a base year prices
Rule of 70
in order to estimate the number of years for a variable to double

Rule of 70 = 70/growth rate

Modern Economic Growth
an increase in the capacity of an economy to produce goods and services
Growth Promoting Structure
Strong property rights, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, and competitive market
Growth determinants
supply factors, demand factor, efficiency factor, production possibilities analysis
Accounting for Growth
increase in hours of work, increase in labor productivity
Economies of scale
reductions in per unit production costs that will result from increases in output levels
Increase in Productivity Factors
Microchip/Informative technology, start up firms and increasing returns, sources of increasing returns, specialized inputs, spreading of development costs, network effect
Business cycle
alternating increases and decreases in economic activity overtime. Peak, Recession, Trough, Expansion
Unemployment and types
Frictional- individuals searching for or waiting to take jobs soon
Structural-occurs due to change in the structure of the demand for labor
Cyclical-caused by a decline in total spending
Full employment
All who are willing to work are employed
a rise in the general level of prices
Types of inflation
Demand-Pull–excess spending relative to output
Cost-Push–increase in prices of inputs like labour, raw materials, leads to a decreased supply of these goods
is the difference between actual GDP and potential GDP
APC (Average Propensity to Consume)
fraction of total income consumed
APC= Consumption/Income
APS (Average Propensity to Save)
fraction of the total income saved
APS= Saving/Income
MPS (Marginal Propensity to Save)
proportion of a change in income saved
MPS= Change in Saving/Change in Income
MPC (Marginal Propensity to Consume)
proportion of a change in income consumed
MPC= Change in Consumption/Change in Income
Investment Schedule
something that shows the amount of firms plan to invest at various possible values of real GDP
a change in spending changes real GDP more than the initial change in spending
Multiplier=Change in Real GDP/Initial change in Spending
Categories: Macroeconomics