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Introduction to Macroeconomic Section: ID: 201100724 Dr. MOHAMMAD MAGABLEH Abdulaziz Al-Omair Introduction to Macroeconomics Assignment#1 Concepts for review Chapter#1 1- Scarcity: The distinguishing characteristic of an economic good. That an economic good is scarce means not that it is rare but only that is not free available for the talking. To obtain such a good, one must either produce it or offer the economic goods in exchange. Efficiency: Absence of waste, or the use of economic recourses that produces the maximum level of satisfaction possible with the giving input and technology. For example, a car that has a v6 engine and has a more power and less fuel emissions and consumption than any car in its category. 2-Economic good: A good that is scarce relative to the total amount of it that is desired. It must therefore be rationed, usually by charging a positive price. Although in economic theory all goods are considered tangible, in reality certain classes of goods, such as information, only are in intangible forms. For example, among other goods an apple is a tangible object, while news belongs to an intangible class of goods and can be perceived only by means of an instrument such as print, broadcast or computer. Free good: Those goods that are not economic goods. Like air or sea water, hey exist in such larger quantities that they need not be rationed out among those wishing to use them. Thus, their market price is zero. A good that is made available at zero price is not necessarily a free good. Examples include ideas and works that are reproducible at zero cost, or almost zero cost. For example, if someone invents a new device, many people could copy this invention, with no danger of this resource running out. Other examples include computer programs and web pages. 3-Macroeconomics: it means dealing with the behavior of the economy as a whole with the respect to output, income, the price level, foreign trade unemployment, and other aggregate economic variables. Microeconomics: It means dealing with the behavior of individual elements in an economy such as the determination of the price of a single product or the behavior of a single consumer or business firm. 4-Normative vs. positive economics: normative part means what ought to be , value judgments, or goals, of public policy. In the other hand, positive part means analysis of facts and behavior in an economy. For example, The price of milk should be $6 a gallon to give dairy farmers a higher living standard and to save the family farm. This is a normative statement, because it reflects value judgments. This specific statement makes the judgment that farmers need a higher living standard and that family farms need to be saved. 5- Fallacy of composition: The fallacy of assuming that what holds for individuals also holds for the other group or entire system. The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole. For example, This fragment of metal cannot be broken with a hammer, therefore the machine of which it is a part cannot be broken with a hammer. This is clearly fallacious, because many machines can be broken into their constituent parts without any of those parts being breakable. 6-Laissez faire: The view that government should interface as little as possible in economic activity and leave decisions to the marketplace. As expressed by classical economics like Adam smith, this view held that the role of government should be limited to maintenance of law and order, national defense, and provision of certain public goods that private business would not undertake. 7-Mixed economy: The dominant of economic organization in noncommunist countries. Mixed economics rely primarily on the price system for their economic organization but use a variety of government interventions such as taxes, spending, regulation to handle macroeconomic instability and market failures. 8- Inputs: Commodities or services used by firms in their production process, such as labor, land, and capital; the resources needed to produce goods and services. Outputs: The various useful goods or services that are either consumed or used in further production. 9-Production possibility frontier: A graph showing the menu of goods that can be produced by an economy. In a frequently cited case, the choice is reduced to two goods, guns and butter. Points outside the PPF are unattainable. Points inside it are in inefficient since resources are not being fully employed, resources are not being used properly, or outdated production technique are being utilized. 10-Productivity efficiency: A situation in which an economy cannot produce more of one good without producing more of one good without producing less of another good. A more detailed theory of productivity is needed, which explains the phenomenon productivity and makes it comprehensible. In order to obtain a measurable form of productivity, operationalization of the concept is necessary. In explaining and operationalizing a set of production models are used. A production model is a numerical expression of the production process that is based on production data, i.e. measured data in the form of prices and quantities of inputs and outputs. 11-Opportunity cost: The value of the best alternative use of an economic good. Thus, say that the best alternative use of the inputs employed to mine a ton of coal was to grow 10 bushels of wheat. the opportunity cost of a ton of coal is thus the 10 bushels of wheat could have been produced but were not. Opportunity cost is particularly useful for valuing non marketed goods such as environment health or safety. Chapter#2 1-Market:An arrangement whereby buyers and sellers interact to determine the prices and quantities of a commodity. Some markets take place in physical locations, other markets are conducted over the telephone or are organized by computers, and some markets now are organized on the internet. 2-Market equilibrium: The balancing of supply and demand in a market or economy characterized by perfect competition. Because perfectly competitive sellers and buyers individually have no power to influence the market, price will move to the point at which it equal both marginal cost and marginal utility. 3-Perfect competition: Term applied to markets in which no firm or consumer is large enough to affect the market price. This situation arises where 1- the number of sellers and buyers is very large. 2- the products are offered by sellers are homogenous. Under such conditions each firm faces a horizontal demand curve. Imperfect competition: Term applied to markets in which perfect competition does not hold because at least one seller is larger enough to affect the market price and therefore faces a downward sloping demand curve. Imperfect competition refers to any kind of market imperfect. 4-Invisble hand: A concept introduced by Adam smith in 1776 to describe the paradox of laissez-faire market economy. The invisible hand doctrine holds that, with each participant pursuing his or her own private interest, a market system nevertheless works to the benefit of all as though a benevolent invisible hand were directing the whole process. 5-Division of labor: A method of organizing production whereby each worker specializes in part of the productive process. Specialization of labor yields higher total output because labor van become more skilled at a particular task because specialized machinery can be introduced to perform more carefully defined subtasks. 6-Factors of production: Productive inputs, such as labor, land, and capital; the resources needed to produce goods and services. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function. All factors of production like land, labor, capital and technology are required in combination at a time to produce a commodity. In economics, production means creation or an addition of utility. Factors of production are any commodities or services used to produce goods and services. 7-Property rights: Rights that define the ability of individuals or firms to own , buy, sell, and use the capital goods and other property in a market economy. property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government, collective bodies, or by individuals. Property rights can be viewed as an attribute of an economic good. This attribute has four broad components and is often referred to as a bundle of rights. 8-Efficiency: Absence of waste, or the use of economic resources that produces the maximum level of satisfaction possible with the given inputs and technology. 9-Monopoly: A firm or industry whose average cost per unit of production falls sharply over the entire range of its output, in local electricity distribution. Thus a single firm, a monopoly, can supply the industry output more efficiency than can multiple firms. Externalities: Activities that affect others for better or worse, without those paying or being compensated for the activity. Externalities exist when private costs or benefits. The two major species are external economies and external diseconomies. 10-Monetry policy: The objectives of the central banks in exercising its control over money, interest rates, and credit conditions. The instruments of monetary policy are primarily open-market operations, reserve requirements, and the discount rate. Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. Chapter#3 1- Demand curve: A schedule or curve showing the quantity of a good that buyers would purchase at each price, other things equal. Normally a demand curve has a price on the vertical or y axis and quantity demanded on the horizontal or x axis. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price, the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price and the equilibrium quantity of that market. 2-Law of downward sloping demand: The nearly universal observation that when the price of a commodity is raised, buyers but less of the commodity. Similarly, when the price is lowered, other things being constant, quantity demanded increases. 3- Supply curve: A schedule showing the quantity of a good that suppliers in a given market desire to sell at each price, holding other things equal. In addition, in graph the change in the variable on the vertical axis per unit of change in the variable on the horizontal axis. Upward sloping curves have negative slopes, and horizontal lines have slopes of zero. 4-Equilbrium price: That position or level of output in which the firm is maximizing its profit, subject to any constrains it may face, and therefore has no incentive to change its output or price level. In the standard theory of the firm, this means that the firm has chosen an output at which marginal revenue is just equal to marginal cost. For example, in the standard text-book model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal. Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes. 5-Shifts of supply and demand curve: A graph the change in the variable on the vertical axis per unit of change in the variable on the horizontal axis. Upward sloping curves have negative slopes, and horizontal lines have slopes of zero. 6-Rationing by prices: By determining the equilibrium prices and quantities, the market allocates or rations out the scarce goods of society among the possible uses. The marketplace, through the interaction of supply and demand, does the rationing. Chapter#4(20) 1-National accounts: A set of accounts that measures the spending, income, and output of the entire nation for a quarter or a year. By construction such accounting makes the totals on both sides of an account equal even though they each measure different characteristics, for example production and the income from it. As a method, the subject is termed national accounting or, more generally, social accounting. Stated otherwise, national accounts as systems may be distinguished from the economic data associated with those systems. While sharing many common principles with business accounting, national accounts are based on economic concepts. 2-Nominal GDP: The market value of all final goods and services from a nation in a given year. The GDP dollar estimates presented here are calculated at market or government official exchange rates. Several economies which are not considered to be countries are included in the lists because they appear in the sources. These economies are not ranked in the charts here, but are listed where applicable. For example, Some countries/regions may have citizens which are on average wealthy. These countries/regions could appear in this list as having a small GDP. This would be because the country/region listed has a small population, and therefore small total economy; the GDP is calculated as the population times the wealth per capital. Real GDP: Is a macroeconomic measure of the value of economic output adjusted for price changes. This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output. Real GDP is an example of the distinction between real vs. nominal values in economics. Nominal gross domestic product is defined as the market value of all final goods and services produced in a geographical region, usually a country. That market value depends on the quantities of goods and services produced, and their respective prices. 3-GDP deflator: The price of GDP, the price index that measures the average price of the components in GDP relative to a base year. GDP stands for gross domestic product, the value of all final goods and services produced within that economy during a specified period. For example, for computer hardware, we could define a "unit" to be a computer with a specific level of processing power, memory, hard drive space and so on. A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation. 4-Net investment: Gross investment minus depreciation of capital goods. Net investment is what an investment company receives in capital gains, dividends and interest payments, less administrative fees. For example, let's assume Fund ABC is reporting its performance results for the year. It has invested in a portfolio of growth stocks, income stocks and corporate bonds. The growth stocks realized a capital gain of $100,000, the income stocks realized a capital loss of $50,000 but also paid out $10,000 in dividends, and the corporate bonds maintained their value and paid out $20,000 in interest. Fund ABC paid $5,000 in administrative fees. 5-Intrmidiate goods: Goods that have undergone some manufacturing or processing but have not yet reached the stage of becoming final products. . Also, they are goods used in production of final goods. 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. Intermediate goods are not counted in a country's GDP, as that would mean double counting, as the final product only should be counted. For example, steel and cotton yarn are intermediate goods. 6-Government transfers: 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, social security, and government making subsidies for certain businesses. 7-Disposable income: Roughly, take home pay, or that part of the total national income that is available to households for consumption or saving. More precisely, it is equal to GDP less all taxes, business saving, and depreciation plus government and other transfer payments and government interest payments. 8-Inflation: The inflation rate is the percentage of annual increase in a general price level. Hyperinflation is inflation at extremely high rates, galloping inflation is a rate of 50 or 100 or 200 percent annually. Moderate inflation is a price-level rise that does ot distort relative prices or incomes severely. In general, is a measure of inflation, or the rate of increase of a price index such as the consumer price index. It is the percentage rate of change in price level over time, usually one year. The rate of decrease in the purchasing power of money is approximately equal. Deflation: In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. This should not be confused with disinflation, a slow-down in the inflation rate. 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. 9- Price index: An index number that shows how the average price of a bundle of goods changes over time. In computation of the average, the prices of the different goods are generally weighted by their economic importance by each commodity's share of total consumer expenditures. 10-Growth rate: In group theory, the growth rate of a group with respect to a symmetric generating set describes the size of balls in the group. Every element in the group can be written as a product of generators, and the growth rate counts the number of elements that can be written as a product of length n. For example, A finite group has constant growth – polynomial growth of order 0 – and includes fundamental groups of manifolds whose universal cover is compact.