Download Course: Macroeconomics Instructor: Dr. Mohammad A. Magableh

Course: Macroeconomics
Instructor: Dr. Mohammad A. Magableh
Section: 103
Homework #1
Student Name: Amjad Awadallah
Student ID#: 200800752
College of Business Administration
Assignment #1 ECON 1311-103
Introduction to Macroeconomics
Chapter#1
Concepts:

Scarcity and Efficiency
o Scarcity is that economic resources in fact are limited in the short run.
On the other side the human wants are unlimited.
o When we say scarcity in economics it mean limited production (capital,
labor and land).
o Efficiency is a common word, it mean how to use the resources in the
best way (effectively).
o Economic efficiency is to produce the maximum quantity and the best
quality of goods and services given its technology and scarce resources.

Free goods vs. economic goods
o Free Goods are the available goods anytime, its not scarce.
o Economic Goods are goods that are useful but scarce with the change
in demand, people effort is required to get it.

Macroeconomics and Microeconomics
o Microeconomics is the small branch of economics; it focuses on individual entities
such as, markets, firms, and households.
o Macroeconomics is the second branch of economics; it focuses on the general
economic of the countries.

Normative vs. Positive economics
o Positive Economics describes the facts of economy as it is. Most of the times it
represent facts and numbers.
o Normative Economics it involves value judgments. Normative analysis make
recommendations about what should happen and done on that situation.

Fallacy of composition, post hoc fallacy
o
o

Fallacy of composition takes on a special meaning. The fallacy occurs economist
treats the economy as if it were a family or business. This leads to the assumption
that a policy that will work for a business will work for the economy as a whole.
When an economist assumes that what is good for a family is good for the economy,
they fallacy of composition has occurred.
post hoc is fallacy that happens when A occurs before B, so A is the Cause and
reason of B.
What, How, and for Whom
o
o
o

Command vs. market Economies
o
o

Means when the government keeps it hands off economics decisions.
Mixed economy
o

The command economy is directed by centralized government control; a Market
economy is guided by an informal system of price and profits in which most
decisions are made by private individuals and firms.
All societies have different command and market; all societies are mixed economies.
Laissez-faire
o

What kind and quantities are produced among the wide range of all possibilities of
goods and Services.
How are the resources used in producing these goods?
For Whom are the goods produced(that is what is the distribution of income and
consumption among different individual and classes.
Is an economy that uses the rules of command economy and market economy at the
same time?
Inputs and Outputs
o

Inputs are commodities or services that are used to produce goods and services, an
economy uses its existing technology to combine inputs to produce outputs. There is
always a process in between.
o Outputs are the various useful goods or services that results from the production
process and are either consumed or employed in further production.
Production Possibility Frontier
o

Productive Efficiency
o

Is a curve that shows the maximum quantity of goods that can be efficiently
produced by an economy, given its technological knowledge and the quantity of
available inputs?
Occur when an economy cannot produce more of one good without producing less of
another good, it should balance its resources when it produces a certain good.
Opportunity Cost
o
Opportunity cost is the cost of any activity measured in terms of the value of the next
best alternative forgone (that is not chosen).
Chapter #2:

Market, Market Mechanism, Markets for goods and for factors of
production
o Market is a mechanism through which buyers and sellers interact to
determine prices and exchange goods, services, and assets.
o The central role of markets is to determine the price of goods.

Prices as signals
o A price signal is a message sent to consumers and producers in the
form of a price charged for a commodity; this is seen as indicating a
signal for producers to increase supplies and/or consumers to reduce
demand.

Market Equilibrium
o Market equilibrium represents a balance among all the different buyers
and sellers depending upon the price, household, and firms all want to
buy or sell different quantities.

Perfect and imperfect competition
o Imperfect competition is a situation that happens in every market,
when the rules and conditions of perfect competition are not satisfied.
o Perfect Competition is the situation main in a market in which buyers
and sellers are so various and well informed that all elements of
monopoly are absent and the market price of a commodity is beyond
the control of individual buyers and sellers.

Invisible hands theory
o Term used by Adam Smith to describe the natural force that guides
free market capitalism through competition for scarce resources.
According to Adam Smith, in a free market each participant will try to
maximize self-interest, and the interaction of market participants,
leading to exchange of goods and services, enables each participant to
be better of than when simply producing for himself.

Specialization and Division of labor money.
o Specialization occurs when people and countries concentrate their
efforts on a particular set of tasks it permits each person and country to
use to best advantage the specific skills and resources that are
available. By specializing, people can become highly productive in a
very narrow field of expertise.

Factors of production (land, labor, capital)
o Land: which include all natural resources, the return on land is Rent
o Labor: physical or mental human effort, the return is Wages
o Capital: the durable goods like machines and buildings that are used to
produce goods and services. The return on capital is Interest Rate.

Private property, and property rights.
o Tangible and intangible things owned by individuals or firms over
which their owners have exclusive and absolute legal rights, such as
land, buildings, money, copyrights, patents, etc.

Efficiency, equity, stability.
o Efficiency is a common word, it mean how to use the resources in the
best way (effectively).
o Economic efficiency is to produce the maximum quantity and the best
quality of goods and services given its technology and scarce resources.
o Markets do not necessary produce a fair distribution of income. A
market economy may produce inequalities in income and consumption
that are not acceptable to the electorate.

Inefficiencies: monopoly and externalities.
o Markets fail to provide an efficient allocation of resources in the
presence of imperfect competition or externalities. Imperfect
competition, such as monopoly, produces high prices and low levels of
output. To combat these conditions, governments regulate businesses
or put legal antitrust constraints on business behavior. Externalities
arise when activities impose costs or bestow benefits that are not paid
for in the marketplace. Governments may decide to step in and
regulate these spillovers (as it does with air pollution) or provide for
public goods (as in the case of public health).

Macroeconomic policies: fiscal and monetary policies, Stabilization and
growth.
o The government has undertaken a third role: using fiscal powers (of
taxing and spending) and monetary policy (affecting credit and interest
rates) to promote long-run economic growth and productivity and to
tame the business cycle's excesses of inflation and unemployment.
Since 1980, the blend of the mixed economy called the welfare state
has been on the defensive in the enduring struggle over the boundary
between state and market.
Chapter #3

Supply and demand analysis
o The analysis of supply and demand shows how a market mechanism
solves the three problems of what, how and for whom?. A Market
blends together demands and suppliers. Demand comes from
consumers who are spreading their dollar vote among available goods
and services, while businesses supply the goods and services with the
goal of maximizing their profits.

Demand Schedule or curve.
o In economics, the demand schedule is a table of the quantity demanded
of a good at different price levels. Thus, given the price level, it is easy
to determine the expected quantity demanded. This demand schedule
can be graphed as a continuous demand curve on a chart having the Yaxis representing price and the X-axis representing quantity.

Law of downward-sloping demand
o The law of demand states that there is an inverse relationship between
price and quantity demanded. The law of demand implies a downward
sloping demand curve, with quantity demanded increasing as prices
decrease.

Influences affecting demand curve
o Consumer income
o Prices of related goods
o Tastes
o Expectations of “income” and “prices”
o Number of consumers

Supply schedule or curve
o A supply schedule is a table that shows the relationship between
the price of a good and the quantity supplied. A supply curve is a
graph that illustrates that relationship.

Influences affecting supply curve
o Input prices: an increase in input prices will decrease supply of the
good; supply will shift to the left.
o Technology: improvement in technology will increase supply of the
good; supply will shift to the right.
o Number of producers: an increase in number of producers will increase
supply of the good; supply will shift to the right.

Equilibrium price and quantity
o Equilibrium Price: The price that balances supply and demand. On a
graph, it is the price at which the supply and demand curves intersect.
o Equilibrium Quantity: The quantity that balances supply and demand.
On a graph it is the quantity at which the supply and demand curves
intersect.

Shift of supply and demand curves
o Surplus (Excess Supply): Price is above equilibrium price. Producers
are unable to sell all they want at the going price.
o Shortage (Excess Demand): Price is below equilibrium price.
Consumers are unable to buy all they want at the going price.

Rationing by price
o The distribution or allocation of a limited commodity using
markets and prices. Rationing is needed due to the scarcity
problem. Because wants and needs are unlimited, but resources
are limited, available commodities must be rationed out to
competing uses. Markets ration commodities by limiting the
purchase only to those buyers willing and able to pay the price.
Chapter #20

National Income and Product
o Its an account for a firm or nation is a numerical record of all
flows (output, costs, etc.) during a given period of time.

Real and Nominal GDP
o Real GDP: Real Gross Domestic Product is a macroeconomic
measure of 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.
o Nominal GDP is GDP evaluated at current market prices.
Therefore, nominal GDP will include all of the changes in
market prices that have occurred during the current year due to
inflation or deflation. Inflation is defined as a rise in the overall
price level, and deflation is defined as a fall in the overall price
level. In order to abstract from changes in the overall price
level, another measure of GDP called real GDP is often used.
Real GDP is GDP evaluated at the market prices of some base
year.

GDP Deflator
o GDP deflator (implicit price deflator for GDP) is a measure of
the level of prices of all new, domestically produced, final
goods and services in an economy. GDP stands for gross
domestic product, the total value of all final goods and services
produced within that economy during a specified period.

GDP = C + I + G + X
o GDP is used for many purposes, but the most important one is
to measure the overall performance of an economy.

Net Investment = Gross – Depreciation
o Net investment refers to an activity of spending which
increases the availability of fixed capital goods or means of
production. It is the total spending on new fixed investment
minus replacement investment, which simply replaces
depreciated capital goods.

GDP in two equivalent views: 1) Product 2) Earning
o 1) Product: Total GDP is the sum of gross value added by
institutional units that are resident in the economy (in different
economic activities) plus taxes on products and import (VAT,
excise tax and customs duties) less subsidies on products.
Calculation scheme is as follows: Total output (goods and
services) by types of activities in market prices -intermediary
consumption for generating goods and services=GDP at market
prices + taxes on products and import -subsidies on
products=Total GDP at market prices.
o 2) Earning: Sum total of incomes of individuals living in a
country during 1 year.”Another way of measuring GDP is to
measure total income. If GDP is calculated this way it is
sometimes called Gross Domestic Income (GDI), or GDP(I).
GDI should provide the same amount as the expenditure
method described below.

Intermediate Goods, Value Added
o Intermediate goods or producer goods or semi-finished
products are goods used as inputs in the production of other
goods, such as partly finished goods. Also, they are goods used
in production of final goods.[1] A firm may make then use
intermediate goods, or make then sell, or buy then use them. In
the production process, intermediate goods either become part
of the final product, or are changed beyond recognition in the
process.
o The difference between the sale price and the production cost
of a product is the value added per unit. Summing value added
per unit over all units sold is total value added. Total value
added is equivalent to Revenue less Outside Purchases (of
materials and services).

Government transfer
o A Government transfer is a redistribution of income in the
market system. These payments are considered to be exhaustive
because they do not directly absorb resources or create output.
In other words, the transfer is made without any exchange of
goods or services. Examples of certain transfer payments
include welfare (financial aid), social security, and government
making subsidies for certain businesses.

Disposable income
o Disposable income is total personal income minus personal
current taxes. In national accounts definitions, personal income,
minus personal current taxes equals disposable personal income.

Investment Saving identity
o Savings identity or the savings investment identity is a concept
in National Income Accounting stating that the amount saved
(S) in an economy will be amount invested (I). More
specifically, in an open economy (an economy with foreign
trade and capital flows), governmental borrowing plus private
investment must equal private savings plus foreign investment.
In other words, investment must be financed by some
combination of private domestic savings, government savings
(surplus), and foreign savings.

Inflation, Deflation
o Inflation is a rise in the general level of prices of goods and
services in an economy over a period of time. When the general
price level rises, each unit of currency buys fewer goods and
services. Consequently, inflation also reflects erosion in the
purchasing power of money – a loss of real value in the internal
medium of exchange and unit of account in the economy. A
chief measure of price inflation is the inflation rate, the
annualized percentage change in a general price index
(normally the Consumer Price Index) over time.
o Deflation is a decrease in the general price level of goods and
services. Deflation occurs when the inflation rate falls below
0% (a negative inflation rate). This should not be confused with
disinflation, a slow-down in the inflation rate (i.e. when
inflation declines to lower levels). Inflation reduces the real
value of money over time; conversely, deflation increases the
real value of money – the currency of a national or regional
economy. This allows one to buy more goods with the same
amount of money over time.

GDI
o The Gross Domestic Income (GDI) is the total income received
by all sectors of an economy within a nation. It includes the
sum of all wages, profits, and taxes, minus subsidies. Since all
income is derived from production (including the production of
services), the gross domestic income of a country should
exactly equal its gross domestic product (GDP). The GDP is a
very commonly cited statistic measuring the economic activity
of countries, and the GDI is quite uncommon.

GDP price index
o

PPI -
Its is the same of deflator.

Growth rate formulas -
The End of Homework 1
Some Definitions and examples are from the Internet.
Some of the definition is not covered.
The book is not giving a straight explanation.