I have included more information than in a typical review sheet because of the chaos.  Between my missed day and our snow day everything has been a bit crazy; nevertheless, we need to keep moving forward.  I should note  that I have typed several  ………   These are topics you should review before the exam.

I.    Review of the Definitions of Microeconomics and Macroeconomics

A.   Definition of microeconomics: the study of how households and firms make decisions and how they interact in markets.

B.   Definition of macroeconomics: the study of economy-wide phenomena including inflation, unemployment, and economic growth.

II.   The Economy’s Income and Expenditure

A.   To judge whether or not an economy is doing well, it is useful to look at Gross Domestic Product (GDP).

1.   GDP measures the total income of everyone in the economy.

2.   GDP measures total expenditure on an economy’s output of goods and services.

3.   GDP measures total production in an economy.

B.   For an economy as a whole, total income must equal total expenditure, which must equal total production.

1.   If someone pays someone else $100 to mow a lawn, the expenditure on the lawn service ($100) is exactly equal to the income earned from the production of the lawn service ($100).

2.   We can also use the circular-flow diagram from Chapter 2 to show why total income and total expenditure must be equal.

III. The Measurement of Gross Domestic Product

A.   Definition of gross domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time.

B.   “GDP Is the Market Value . . .”

C.   “. . . Of All . . .”

D.   “. . . Final . . .”

E.   “. . . Goods and Services . . .”

F.   “. . . Produced . . .”

G.   “. . . Within a Country . . .”

H.   “. . . in a Given Period of Time.”

IV.  The Components of GDP

A.   GDP (Y ) can be divided into four components: consumption (C ), investment (I ), government purchases (G ), and net exports (NX ).

B.   Definition of consumption ……

C.   Definition of investment  ……..

D.   Definition of government purchases  …….

E.   Definition of net exports   …………..

V.   Real Versus Nominal GDP

A.   There are two possible reasons for total spending to rise from one year to the next.

1.   The economy may be producing a larger output of goods and services.

2.   Goods and services could be selling at higher prices.

B.   When studying GDP over time, economists would like to know if output has changed (not prices).

C.   Thus, economists measure real GDP by valuing output using a fixed set of prices.

Definition of nominal GDP  ………………

Definition of real GDP  …………..

      VI.  Is GDP a Good Measure of Economic Well-Being?  ...........................

I.    Economic Growth Around the World

A.   The data reveal the fact that living standards vary a great deal between these countries.

      Because of different growth rates, the ranking of countries by income per person changes over time.

B.   FYI: Are You Richer Than the Richest American?

According to the magazine American Heritage, the richest American of all time is John B. Rockefeller, whose wealth today would be the equivalent of $200 billion  .Yet, because Rockefeller lived from 1839 to 1937, he did not get the chance to enjoy many of the conveniences we take for granted today such as television, computers, internet and air conditioning.  Thus, because of technological advances, the average American today may enjoy a “richer” life than the richest American who lived a century ago.  What do you think?

II.         Productivity: Its Role and Determinants

Definition of productivity  …………..

B.   How Productivity Is Determined

1.   Physical Capital per Worker

2.   Human Capital per Worker

3.   Natural Resources per Worker

4.   Technological Knowledge

III. Economic Growth and Public Policy

A.   Saving and Investment ……………..

B.   Investment from Abroad …………

D.   Education  ……………

E.   Health and Nutrition  ………………….

F.   Property Rights and Political Stability  ………………

G.   Free Trade  ……………………

H.   Research and Development  …………………

      I.    Population Growth  ………………..

I.    The Consumer Price Index

A.   Definition of consumer price index (CPI): a measure of the overall cost of the goods and services bought by a typical consumer.

B.   How the Consumer Price Index Is Calculated

1.   Fix the basket.

a.   The Bureau of Labor Statistics uses surveys to determine a representative bundle of goods and services purchased by a typical consumer.

2.   Find the prices.

3.   Compute the basket’s cost.

4.   Choose a base year and compute the index.

5.   Compute the inflation rate.

a.   Definition of inflation rate: the percentage change in the price index from the preceding period.

b.   The formula used to calculate the inflation rate is:

      Problems in Measuring the Cost of Living

1.   Substitution Bias

2.   Introduction of New Goods

3.   Unmeasured Quality Change

4.   The size of these problems is also difficult to measure.

5.   Most studies indicate that the CPI overstates the rate of inflation by approximately one percentage point per year.

6.   The issue is important because many government transfer programs (such as Social Security) are tied to increases in the CPI.

.     Correcting Economic Variables for the Effects of Inflation

A.   Dollar Figures from Different Times

1.   To change dollar values from one year to the next, we can use this formula:

B.   Indexation

1.   Definition of indexation: the automatic correction of a dollar amount for the effects of inflation by law or contract.

2.   As mentioned above, many government transfer programs use indexation for the benefits. The government also indexes the tax brackets used for federal income tax.

3.   There are uses of indexation in the private sector as well. Many labor contracts include cost-of-living allowances (COLAs).

I.              Unemployment

A.   The economy’s natural rate of unemployment refers to the amount of unemployment that the economy normally experiences.

B.   Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate.

II.   Identifying Unemployment

A.   How Is Unemployment Measured?

1.   The Bureau of Labor Statistics (BLS) surveys 60,000 households every month.

2.   The BLS places each adult (age 16 or older) into one of three categories: employed, unemployed, or not in the labor force.

3.   Definition of labor force …………………

4.   Definition of unemployment rate ……………………..

5.   Definition of labor-force participation rate  …………………….

      Definition of discouraged workers  …………………..

      Definition of frictional unemployment: unemployment that results because it takes time for workers to search for the jobs.

      Definition of structural unemployment: unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.