Macroeconomics - Midterm - Definitions and Concepts

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I.DEFINITIONS

1. Macro Economics: Based on the definition we learned during class, Macro Economics studies the behavior of the aggregate economy. It looks at the economy as a whole and analyzes phenomena such as Gross domestic product (GDP), unemployment, national income, inflation, price levels or rate of growth.

2. Micro Economics: It studies the market behavior of consumers and firms to understand the decision-making process of firms and households. In opposition to macroeconomics, microeconomics looks at the smaller picture and focuses on how individual businesses decide how much of something to produce and how much to sell it for. It focuses on patterns of supply and demand and the determination of price and output in individual markets.

3. Deficit: Deficit corresponds to the expenses that exceed income or when costs are higher than revenues. It is the opposite of surplus. For example, if the US exports $3 billion and imports $4 billion in 2012 it has a trade deficit of $1 billion for the year 2012.

4. Real Capital: Real capital corresponds to fix assets in accounting. It is capital, such as equipment and machinery, which is used to produce goods. Real capital is distinguished from financial capital, which corresponds to funds available to acquire real capital. Real capital appears on the asset side of the balance sheet, while financial capital appears in either the liabilities section or the shareholder’s equity section.

5. Debt: It is a certain amount of money borrowed by one party from another. Bonds, loans and commercial paper are examples of debt.

6. Consumer price index: It is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

7. Inflation: It is the rate at which the general level of prices for goods and services is rising. As a consequence purchasing power falls. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

8. GDP (nominal and real): Nominal Gross Domestic Product is a summary statistic (estimate) dollar measure of final output of goods and services produced in an economy within some period of time. However, today, when economists use the term GDP they refer to “real GDP” which measures the value of economic output adjusted for price changes (i.e., inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output.

As a formula we have:
GDP = C + I + G + (X-M)
C: private consumption
I: Investment
G: Government spending
X: Exports
M: Imports

9. Production Possibility Curve: It’s a graphic representation that shows the maximum potential combination of offers an economy can produce with its current resources and technologies.

10. Net exports: It represents the value of a country's total exports minus the value of its total imports. It is used to determine GDP. In other words, Net exports is the amount by which foreign spending on a home country's goods and services exceeds the home country's spending on foreign goods and services. For example, if foreigners buy $200 billion worth of U.S. exports and Americans buy $150 billion worth of foreign imports in a given year, net exports would be positive $50 billion.

II. ESSAY QUESTIONS:

1.
a)
What is supply? Supply is the total amount of a specific good or service available to consumers.

What is demand? Demand is a behavior. It is the consumer’s desire and willingness to pay a price for a specific good or service.

b)
To understand the supply and demand curve it is important...
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