ECON 104 GSG Exam Review PDF

ECON 104 GSG EXAM #1 REVIEW 5:00 - 8:00 PM 2/16/25 Owen McDonnell About the EXAM  This Wednesday during lecture!  Mix of short answer/math questions and multiple choice  Make sure to arrive early that way you don’t lose out on any time!  Bring a pencil, calculator,...

ECON 104 GSG EXAM #1 REVIEW 5:00 - 8:00 PM 2/16/25 Owen McDonnell About the EXAM  This Wednesday during lecture!  Mix of short answer/math questions and multiple choice  Make sure to arrive early that way you don’t lose out on any time!  Bring a pencil, calculator, and your PSU ID Defining Economics  Many people define economics as being the study of SCARCITY  Scarcity is something that appears in all economics classes. How could this term be defined? Scarcity  Scarcity: Occurs when there is not enough of our wants at a zero price. This means we never have enough of everything, to satisfy each desire.  Unlimited wants exceed limited resources  Cannot be eliminated by government, but forces governments and individuals to make choices to satisfy our wants Basic Economic Assumptions In economics, there are general assumptions about how people make decisions 1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin What does acting rational mean? How does this influence our decision making? Rationality  Our first assumption is that people act rational  This means people gather information about their decisions, and never intentionally do an action that will leave themselves worse off  Does this mean that when humans make mistakes they are acting irrationally? Responding to Incentives and Margin  Governments create economic policies that create incentives for individuals to produce and consume  Optimal decision-making is conducted at the MARGIN  What is meant by at the margin?  As long as our marginal benefits exceed our marginal costs, we will continue doing that action and vice versa Opportunity Cost  Opportunity Cost: The Highest valued, next best alternative that must be sacrificed to obtain something or to satisfy a want or to engage in an activity  It Is not the collection of all alternatives, but just the next best option  Occurs within every decision, for ever single individual (Cannot be escaped)  What is your opportunity cost when coming to this gsg session? Positive vs. Normative  In economics, statements can be analyzed and placed into two categories: Positive and normative  Positive Economics: “If A, then B” written in a way that allows it to be proven true or false  Normative Economics: Value Judgements and opinions, cannot be proven true or false Micro vs. Macro  Microeconomics: Decision making by individuals and firms, focused on the smaller parts of the economy  Macroeconomics: Behavior of the economy as a whole (Inflation, unemployment, etc.)  Concepts of microeconomics AGGREGATE into the concepts and ideas seen in macroeconomics Chapter 2 Production  Production: Any activity that results in the conversion of resources into products that can be used in consumption  Factors of Production:  Land  Labor (L)  Physical Capital (K)  Human Capital  Entrepreneurship (Subdivision of labor) Economic Systems  Since all of our resrouces and inputs are SCARCE, governments must implement economic systems that answer how we allocate our scarce resources  Economic System: A society’s institutional mechanics for determining the way in which scarce resources are used to satisfy human wants  What are the main 3 questions each economy must answer? Economic Systems  In order for an economic system to be successful, it must answer 3 questions  1. WHAT goods will be produced?  2. HOW will goods be produced?  3. WHO will receive the goods that are produced? Communism Communism: An economic system in which most or all property and resources are collectively owned and distributed by the government. No private ownership of land or economic resources The government provides people with their necessities, which is determined by the government “From each according to his ability, to each according to his needs” Problems with Communism  No matter the effort level of each individual, the income (which was very low) would be the same no matter what  This led to a large free rider problem  People were not motivated to innovate and create new technology  Everyone is equal, but equally POOR  Humans rights issues  Leaders are rich, while the rest of citizens are poor Socialism  Socialism: An economic system under which each person – through a democratically elected government- is given an equal share of the economic inputs  “from each according to his ability, to each according to his contribution”  The economy is planned by the central government, but individuals can own personal property (Industrial property is communally owned by government)  Classes can exist, but the large differences are diminished. Democratic Socialism  Democratic Socialism: An economic and social ideology that while both society and economy should be run democratically, they should be dedicated to meeting the needs of people as a whole  Extensive social welfare programs to help provide basic needs to people  The government provides goods such as education, public transportation, and health care for FREE (Other goods are distributed by free markets)  Are these goods actually provided for free? How come? Capitalism  Decentralized decision making  Free Markets determine prices and allocation of goods  Private property  Factors of production owned by firms and individuals  How do the characteristics of capitalism differ from socialism? Communism? United States Free Market  Despite employing capitalism, the United States' usage of government-created safety nets and policies is similar to what is used in social democracy.  Welfare programs are widely criticized and debated in American politics. What could be some problems faced as a result of these welfare programs in the United States? Incentives  When creating programs, governments must design these safety nets to have correct and appropriate benefits and incentives for its users  How has this been seen in history? What can occur when benefits are too large?  What are some characteristics of properly designed incentives? How will citizens respond to these incentives? Proper Incentives  Incentives that will incentivize productive behavior are:  Temporary  Gradually phase out benefits  Proper defined times and benefits Markets  Markets: A group of buyers and sellers of a good and the arrangements by which they come together to trade  Product Market - Market for goods and services (Final goods/ services/ outputs)  Factor Market - Markets for the factors of production As individuals, we often purchase goods and services in the product market, and sell our labor and work in the factor market Circular Flow Diagram General Notes about Circular Flow  Households BUY from PRODUCT market and SELL to FACTOR market  Firms BUY from FACTOR market and SELL to PRODUCT market  Financial systems for lending are not represented in the diagram  International trades are not represented in the diagram Chapter 8 GDP  Gross Domestic Product: the market value of all final goods and services produced in a country during a period of time, typically one year  Sum of all goods makes up the GDP  This definition specifically states all FINAL goods. What makes a final good? Final Goods and Services  Final goods and services are purchased by a final user (Final transaction)  Why would it not make sense to count intermediate goods such as tires in a car?  What would this do in terms of a nation’s GDP calculation? GDP  If a good was made in a previous year but was sold in 2025, would it count for the GDP of this current year? GDP  Goods are included in GDP in the year they were produced  Make sure to look at the year goods were produced in when answering GDP related questions!  GDP can represent our total production or total income, as production constitutes income for another individual GDP GDP can be broken up into four major categories: Personal Consumption (c) Gross Private Investment (I) Government Purchases (G) Net Exports (NX) The sum of these categories makes up total GDP (Y) GDP: Y = C + I + G + NX Consumption  Consumption: Spending by households on goods and services, not including spending on a new house Services: House cleaning, Landscaping, childcare Nondurable goods: Food, Drink, Clothing Durable Goods: Appliances, Furniture, Cars, Tools Investment  Investment: Spending by firms on new factories, buildings, and spending by households on new houses Broken down into… Business fixed investment (New equipment and buildings) Residential Investment (New house) Change in inventory Government Purchases  Government Purchases: Spending by federal, state, local government on goods and services  Transfer payments are NOT included in government purchases… How come?  What are some goods that would fall under government purchases? Net Exports  Net Exports = Exports – Imports  This value can be positive or negative. What would a negative value indicate for a country? What countries might be experiencing this?  Because we only want to consider our domestic production, we subtract the imports as they were not produced in the country Household Production in GDP  Household production is NOT included in the calculation of GDP  Childcare, cleaning, and cooking not typically paid for with money  If instead of doing the childcare or cooking yourself, you pay for a chef and day care service. Would this be considered in GDP? Underground Economy in GDP  The Underground economy is NOT included in the calculation of GDP  Trades that are hidden to avoid taxes, or simply because the goods or services are illegal are not counted  Simple cash transactions are not reported, and not counted in GDP  Many developing countries have a large informal sector, which is being unreported for calculations Practice Consumption Expenditures: 1000 Investment Expenditures: 400 Government Purchases: 200 Transfer Payments: 75 Imports: 100 Exports: 200 Wages: 750 What is the GDP for this given country?  1000 + 400 + 200 + (200-100) = 1700  Which of the following items would be considered apart of the 2025 GDP for the United States? If so, which part of GDP? 1. Purchasing dinner at a restaurant for Valentine’s Day 2. Spending on a real estate agent to purchase a house 3. Purchasing a brand new home 4. Your grandma receives a social security payment from the government 5. Purchasing a car that was built in 2011 6. A company sells 500 products to someone who lives in Mexico  1. Consumption  2. Consumption  3. Investment  4. Not Included (Transfer payment)  5. Not Included (Not built in current year)  6. Net Exports GDP and Well-Being  While GDP measures for production, it does not include:  The value of leisure  Pollution or other negative effects of production  Crime, other social problems  The distribution of income GDP and Well Being  Production can be very high, but this doesn’t always mean people are better off  Think about WW2, highest GDP but were people better off living in a war? GDP and Population  How do we make comparisons of GDP between countries with different populations?  We divide GDP by population to calculate the GDP per capita GDP Can be broken into two separate distinctions: Real and Nominal. What is the difference between real and nominal GDP? How do we calculate these values? Nominal vs Real GDP  Nominal GDP: The value of final goods and services evaluated at current year prices  Real GDP: The value of final goods and services evaluated at base year prices GDP Deflator GDP Deflator  Using the GDP Deflators from separate years, what can we do to calculate an estimate of inflation? Estimating Inflation  By taking the percentage change of the GDP Deflators, we can estimate inflation Practice Using the Information Provided: Calculate the nominal GDP for each year NOMINAL GDP 2017: (5000 x 3) + (500 x 25) + (310 x 45) = 41450 2025: (6500 x 5) + (710 x 31) + (400 x 52) = 75310 2026: ( 7050 x 7) + (800 x 40) + (415 x 50) = 102100 Practice Using 2017 as your base year, calculate the Real GDP for each year REAL GDP 2017: Same as nominal = 41450 2025: (6500 x 3) + (710 x 25) + (400 x 45) = 55250 2026: (7050 x 3) + ( 800 x 25) + (415 x 45) = 59825 Practice Using the information provided, calculate the GDP deflator for each year GDP DEFLATOR 2017: GDP deflator in base year always – 100 2025: (75310/55250) x 100 = 136.31 2026: (102100/ 59825) x 100 = 170.66 Practice Using the information provided, calculate the change in price level (Inflation rate) between 2025 and 2026  ((170.66 – 136.31)/ 136.31) x 100 = 25.21% Chapter 9  5 MIN BREAK Labor Force  Labor force: The sum of employed and unemployed workers in the economy This means that in order to be considered unemployed, you must be in the workforce! Unemployment  Individuals can be classified into 3 separate groups Employed: - Worked 1+ hours in reference week - Or were temporarily away from job Unemployed - Not currently at work, but available to work - Actively looked for work during the previous month - What characteristics qualify someone to be considered not in the labor force? Unemployment  Discouraged workers: people who are available for work, but have not looked for a job within the previous four weeks Are these individuals considered unemployed? Unemployment Rate Labor Force Participation Rate Employment Population Ratio  Employment population ratio: (# employed) / (# working age population) Practice Total Population: 20000 Working Age Population: 17500 Employed People: 13000 Unemployed People: 1200 What is the Labor Force Participation Rate for this economy? ((13000 + 1200)/17500) x 100 = 81.14% Practice Total Population: 20000 Working Age Population: 17500 Employed People: 13000 Unemployed People: 1200 What is the unemployment rate for this economy?  1200/(13000+1200) x 100 = 8.45% LFPR  Over time, the LFPR for adult men has declined greatly  The LFPR for adult women has increased greatly  Why has the LFPR for women increased so much? Traditional Gender roles have reduced and become obsolete Education – more women in college today (Earning professional jobs after education) More difficult for a household to live off of a single income Increased access to childcare (one parent doesn’t need to always stay home) Divorce Rates have increased Median age of Marriage has increased (For both men and women)  Why has the LFPR for adult men decreased?  Less manufacturing and manual labor jobs in the workforce  Men may be staying in school longer  Criminal Records  Drug use, Injury, Disability  Marrying later – less “Urgency” to get a job to support a potential family  Video Games Types of Unemployment  Frictional Unemployment: Short-term unemployment that arises from the process of matching workers with jobs  ”Not bad”  Occurs mostly because of job search  Entering or reentering the labor force  Or between jobs  Also includes seasonal unemployment (Ski workers or farm work) Types of Unemployment  Structural unemployment: Unemployment that arises from persistent mismatch between skills and attributes of workers and requirements of jobs  “Kind of bad”  Longer length of being unemployed  VCR repairman  May require more training to earn a more “modern” job Types of Unemployment  Cyclical Unemployment: Unemployment caused by a business cycle recession  “BAD”  In normal recoveries after a recession, unemployment due to cyclical factors will fall Inflation  Inflation Rate: The percentage increase in the price level from one year to the next Price Level: a measure of the average prices of goods and services in an economy Two commonly used measures are: -Consumer Price Index -Producer Price Index Calculating CPI  Use quantity of goods from a base year (this is kept constant)  Calculate the cost to purchase the same basket in each year  Remember: Expenditures = Price x Quantity  Take the cost to purchase in current year and divide by cost in the base year (Multiply by 100) to calculate the CPI CPI Inflation Rate  Using the CPI calculations, we can take the percentage change of these values to calculate the INFLATION RATE Practice Using 2012 as a base year, calculate the CPI for 2025 2025 CPI: Expenditures in current year: 4020 Expenditures in Base year: 2730 CPI: (4020/2730) x 100 = 147.25 Practice Using 2012 as a base year, calculate the CPI for 2026 2026 CPI Expenditures in Current Year: 5550 Expenditures in Base year: 2730 CPI: (5550/2730) x 100 = 203.30 Practice Using all information, calculate the inflation rate between 2025 and 2026 Inflation Rate: (203.30 – 147.25)/147.25 x 100 = 38.06% Price Index for Inflation Adjustments  We can use CPI to estimate the purchasing power of money in current year dollar evaluations.  Formula: Value in Today’s dollars = value in year born dollars x (CPI TODAY/CPI OLD) Practice  Suppose in 1999 your parents were paid $40,000. What is the value of those dollars today?  Given info: 1999 CPI: 166.6 2025 CPI: 315.6 40000 x (315.6/ 166.6) = 75774.31 Interest Rates  When we lend money to someone, there is typically an agreement that consists of interest  1000 with 6% interest would be paid back as 1060 within a year  The interest rates attached are nominal, and do not change over time… However prices continue to rise Nominal and Real interest Rates  We can adjust for inflation by calculation the real interest rate REAL INTEREST RATE = NOMINAL RATE – INFLATION RATE While this is an approximation, it tends to be most accurate for low interest and inflation rates  How does the unpredictability of inflation make borrowing and lending money risky? Closing Activity  Using all of the information provided, calculate the Increase in price level between 2025 and 2026 via calculating their deflators  Thats all I got!  Make sure to practice with the resources and supplements posted on canvas  There will be no GSG sessions this week  Ask any questions you may still have!