MACROECONOMICS AP STUDY GUIDE

[Pages:8]MACROECONOMICS AP STUDY GUIDE

CONTENTS UNIT 1: Introduction to Macroeconomics UNIT 2: GDP UNIT 3: Aggregate Expenditures UNIT 4: Aggregate Demand/Supply & Fiscal Policy UNIT 5: Monetary Policy & Banks UNIT 6: Extended Aggregate Supply UNIT 7: International Trade

1: INTRO TO MACROECONOMICS

VOCABULARY (with some additional terms)

Economics ? The study of choices people make in an effort to satisfy their unlimited needs and wants from limited resources 1 Economizing Problem ? Choices have to be made due to scarce resources unable to satisfy society's unlimited wants Economic Perspective ? Involves scarcity and choice, rational self-interests, and marginal analysis Analytical Economics ? Analysis of cause and effect Economic Hypothesis ? Possible explanations for cause and effect Economic Theory ? Status of a hypothesis that produces favorable outcomes (re-tested hypothesis that produces desired outcomes) Economic Laws/Principles ? Well-tested and widely accepted theory, "generalizations of economic behavior

Ceteris Paribus ? "Other things equal" assumption that serves as the basis of graphs/charts. There can only be two variables that are assumed to be unaffected by outside events Policy Economics ? Recognition of theories to be used as courses of action Positive Statements ? "straight facts" that can serve as concrete evidence Normative Statements ? "biased facts" that stem from opinions Utility ? Satisfaction Trade-off ? A decision to get more of something is to accept less of another Full Employment ? Utilization of all available resources Full Production ? Using full employment to maximize efficiency

Allocative Efficiency ? Producing the mix of goods based on what society wants with the lowest cost possible

Productive Efficiency ? Production of any particular mix of goods or services into the least costly way

Marginal Costs ? The negative circumstances as a result of an economic decision; you want to have an equal balance of costs and benefits

Marginal Benefits ? The benefits as a result of an economic decision

Opportunity Cost ? What is sacrificed when you make a decision

Market Economy ? Driven by consumers' demand

Traditional Economy ? Determined by traditions and considered primitive in nature, includes subsistence farming

Demand Economy ? Controlled by the government who commands for what is to be produced and of what type

Macroeconomics ? Concerned with the economy as a whole or with aggregates, "an overview of the economy" (EX: government spending, business sectors, households in general)

Microeconomics ? Concerned with specific economic units or individual markets (EX: Individual households, industries, firms)

Wants ? Divided into necessities and luxuries

Capital Goods ? "invested capital", items used to produce goods that are worth both the value of the capital good itself and the money it generates

Consumer Goods ? Goods meant for immediate consumption

Law of Increasing Opportunity Cost ? Increased production of goods results in increased opportunity costs for making additional items

CHAPTER 1

Economics is the "science of scarcity", the study of choices people make in an effort to satisfy their unlimited needs and wants from limited resources

SCARCITY BASIC ECONOMIC CHOICES WHAT TO PRODUCE (based on demand) HOW TO PRODUCE (cheaply? Outsourced?) WHO RECEIVES (target consumer)

ANSWERED BY TYPE OF ECONOMIC SYSTEM - Market - Traditional - Demand

Macroeconomics deals with the "overview of the economy", especially the government, business sectors and household across the nation

Microeconomics deals with the "details of the big picture", concerned especially with specific households, industries or firms

Economic models (theories) stem directly from the scientific method - Facts ? gather facts about the problem (What is causing the household slump?) - Theory ? focus on two variables to explain (Maybe lower interest rates = more sold) - Policy ? taking a course of action intended to influence or control behavior of economy

PROPER SOLUTION does not equal BEST SOLUTION

(Solution should benefit the most people) The models can be displayed as: - Verbal statements - Pictorially (pictures) - Graphically (charts and graphs) - Mathematical equations

The Economic models ignore most details in order to focus on the important ones:

ONLY TWO VARIABLES ? Ceteris Paribus

Ceteris Paribus ? "other things equal", relationship between "x" and "y" without interference by "z". It is an assumption that "z" will not affect the variables.

POSITIVE & NORMATIVE ECONOMIC STATEMENTS

Positive ? factual, can be used as evidence "The rate of inflation was about 2% last year, an all-time low for the past decade." Normative ? biased and marked with opinion "The unemployment rate is too high and should be reduced through government actions." Everyone agrees that economies are to help sections of society, therefore everyone shares:

8 ECONOMIC GOALS

1) Economic growth (increase GDP [per capita wealth] by 3% annually) 2) Full employment (96% of labor employment) 3) Economic efficiency (obtain most stuff from limited resources) 4) Stable price levels (avoid deflation/inflation. Maintain about 3% annually)

5) Equitable distribution of wealth (no super-wealthy group should exist with extreme poverty) 6) Economic freedom (businesses, workers, consumers have a high degree of freedom with resources; market determines use/cost of them) 7) Economic security (economic benefits for those that can't care for themselves) handicapped, disabled, old age citizens 8) Balance of trade (sell as much to word as we buy)

NOTE: - 6 & 7 sometimes conflict (taxes for social security results in less freedom) - 1, 2 and 3 complement each other

CHAPTER 2

ECONOMIZING PROBLEM

Economizing problem ? scarcity, when there is not enough for everyone so someone suffers

SCARCITY IS A RESULT OF UNLIMITED WANTS BUT LIMITED RESOURCES Because our resources are limited, we are required to make choices. Therefore we have:

Trade-offs ? A decision to get more of something is to accept less of another Opportunity costs ? "second choice", what you sacrifice when you make a decision

WANTS

NECESSITIES

or

LUXURIES

4 FACTORS OF PRODUCTION (RESOURCES)

1) Land (all natural resources coming from the earth and atmosphere) 2) Labor (human resources in the form of INTELLECTUAL or PHYSICAL labor) 3) Real Capital (man-made items that take the inputs and create consumer goods & services 4) Entrepreneurship (Combine land, labor and capital to introduce a new product or business to grow the economy)

REAL CAPITAL (tools, machinery) FINANCIAL CAPITAL (money)

Capital goods ? goods used to produce other goods in the future (tractor, factory, etc.) WORTH THEIR VALUE AND THE PROFITS THEY ACQUIRE ? FOR FUTURE PRODUCTION Consumer goods ? goods meant for immediate consumption

ENTREPRENEURSHIP (4 FUNCTIONS)

- Combine all resources to make goods or service - Make all basic business-policy decisions (non-routine decisions that set course of enterprise) - Act as innovator to make new product or business

- Risk-bearer (either gain profits or losses)

RESOURCE AND PAYMENT

Land =Rental income Labor =Wage income Capital =Interest income Entrepreneurship =Profits and losses

PPC (PRODUCTION POSSIBILITY CURVE)

Effects of scarcity can be lessened by having an efficient economy. To measure efficiency (resource health), we use the PPC model, a "frozen snapshot of the U.S. economy". 4 ASSUMPTIONS 1) Only two products produced by economy (ceteris paribus) 2) Resources are fixed ? no way to increase resource availability 3) Technology is fixed ? no new tech breakthroughs 4) All resources can be fully employed ? no unused resources

Had the PPC been a straight line, the two products would be equally substitutable, that is, no specialized for particular uses so the opportunity costs would remain constant. Resources aren't always adaptable to alternative uses. Thus, the PPC graph has a curve that indicates a changing trade-off between resources. Obtaining more of one good requires giving up larger amounts of the alternative good.

LAW OF INCREASING OPPORTUNITY COST As production of goods increases, the opportunity costs of producing additional goods increase Unattainable points on the graph mean that there is over-extension, over-production, labor and employment are at 100% (above full employment. Remaining on the curve, or frontier, requires 96% employment and 80-90% factory output. Right now, we can't reach any unattainable point, but it is possible by growing the economy.

GROWING THE ECONOMY

ONLY THREE WAYS TO GROW THE ECONOMY (GOAL #1) - Increase resources ("Hitler method" of gaining new land for resources) - Better quality resources (EX: Educate labor force or give them health care) - New technology (better productivity) ALL THREE REQUIRE INVESTMENT IN CAPITAL GOODS Economic growth is also a result of selling more consumer goods. These consumer goods lead to higher standard of living. LOOK AT ABOVE GRAPH, as the curve moves out, the economy is growing as it reaches larger and more plausible efficiency levels.

COMPARING ECONOMIES Suppose the two above graphs represented two different PPC's of different national economies. If an economy invests in more capital goods (graph 1), then there will be greater economic growth. The trade-off is a lower standard of living.

Which economy is healthier? The answer is neither. Both economies lie on the efficiency curves. However, you can argue that the economy in graph 1 is "healthier" due to greater investment in capital goods resulting in a wealthier future.

MONEY

MONEY CAN ONLY BE USED IN TWO PRIMARY WAYS

BEING SPENT

or BEING SAVED

CONSUMER GOODS

or CAPITAL GOODS

Money itself does not produce, therefore it isn't considered "real capital". It is part of "financial capital".

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