Difficulty: 1/3 (Not a bad way to start macro-economics)
Review: 4/5 (Pretty well explained)
With the new year coming around, this blog's focus will shift from microeconomics to macroeconomics. But what is the difference? Microeconomics focuses on how individual households and firms make decisions and how they interact with one another. On the other hand, macroeconomics is the study of entire economies, where changes simultaneously affect many households, firms, and even markets.
The first topic of macroeconomics we will learn is GDP - gross domestic product, the most important economic statistic because it is thought as the best single measure of a country's economic well-being. GDP is the total income of a country and also the total expenditures of a country. This is because income equals expenditure, since every transaction has a buyer and a seller.
GDP per capita is the average person's income.
Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
-GDP adds all products together to one measurement, for example if an apple was priced twice an orange, an apple contributes twice as much to GDP.
-It also tries to be comprehensive, including intangible and tangible products and services. The government has to estimate the GDP of some things like owned houses, in this case as if the owner was self-renting. It also excludes illicit transactions like illegal drugs.
-The GDP only counts final goods, meaning it doesn't count intermediate goods. For example, if there was paper produced only to be made into a Hallmark greeting card, the GDP only calculates the value of the greeting card. There is an exception to this principle if the intermediate good is going to be stored for the future, in this case, its value as an inventory investment is added to GDP.
-GDP is confined to the country in which it is calculated. An American-owned factory in Haiti is part of Haiti's GDP rather than America's. A Canadian temporarily working in the U.S. contributes to American GDP for the duration he stays in America.
-GDP is measured in a specific time interval. Usually that interval is a year or a quarter (three months). Quarterly calculated GDP is then multiplied by 4 to represent annual GDP. Statisticians also use something called seasonal adjustment to account for holiday shopping season and other miscellaneous patterns in order to look past them.
The components of GDP are consumption, investment, government purchases, and net exports. Consumption is spending on goods and services. Investment is spending on capital equipment, inventories and structures (including new housing). Government purchases (otherwise called government consumption expenditure and gross investment) is spending by the government. Note that this does not include transfer payments like Social Security because it is not an exchange for a currently produced good. Finally, net exports are domestically produced goods shipped to foreign countries minus imports.
Nominal GDP is calculated using the current prices, Real GDP sets a previous GDP's prices as a base price, and calculates GDP based off of those old prices. Real GDP reflects changes in output and is more useful. GDP deflator is Nominal GDP divided by Real GDP multiplied by 100, and shows percent change in price.
Why does GDP matter? It matters because a larger GDP has positive correlation with a better quality life. This is because nations with larger GDP can afford better healthcare, education, and more. They can focus on laudable attributes instead of acquiring material necessities for living.
However, GDP is not a perfect measure of well-being. One incredibly high income person could offset the rest of the population by appearing to give them a high GDP. Transactions taking place within the home are not calculated either (for example a chef making dinner for the family). Volunteer work is also excluded.
Still, GDP is an important measurement to economists. But measurement is only a starting point. In the future, we will learn how governments use GDP to promote growth, why Japan has more GDP than Nigeria, and other interesting topics in the grand scale of macroeconomics.
Tuesday, December 27, 2016
Saturday, December 3, 2016
Economics: Facts of Factors of Production
Difficulty: 1/3 (See below)
Review: 4/5 (It's because 80% of the chapter should be review, haha, get it?)
This chapter focuses on factors of production: land, labor, and capital; the three inputs used to produce good and services. The demand for these inputs is known as derived demand, since it is derived from its decision to supply the good these inputs provide in another market.
Assuming the firm is competitive and profit maximizing, the market for the firm's good has a normal sloping supply and demand curve as well. Since it is competitive, it is a price taker for its good and its wages.
As learned before, the production function shows output with respect to input. It has diminishing marginal product due to coordination costs. Marginal product is the increase in amount of output with one more unit of input, downward sloping. Value of marginal product is marginal product multiplied by price, also downward sloping.
Logically, such a firm will hire workers until value of marginal product of a worker is equal to to wages.
Some things that shift the demand curve for labor (value of marginal product slope) is the output price, since price * marginal product = value of marginal product. Technological change usually makes demand shift right, but mechanized labor might reduce demand. Supply of other factors could also affect demand for labor.
Now, we discuss supply of labor. There is obviously a trade-off between work and labor, where opportunity cost of leisure is what you could've earned. We assume here that higher wages means working more for simplicity (supply curve slopes upward). Shifts in supply happen when there is a change in tastes, alternative opportunities, immigration, etc.
To connect these both, we must realize that a change in supply or demand for labor changes the equilibrium wage and the value of marginal product the same amount because these values must be equal.
Since the value of marginal product = wages, more productive workers earn more money and thus higher wages means better productivity and better standards of living.
Capital = the stock of equipment and structures used for production (accumulation of goods made in the past now being used the produce more goods). For example, ladders to climb trees, apple transport trucks, storage buildings, and the apple trees themselves.
There's rental price and purchase price too, you should know the difference. The equilibrium price of land or for capital also is equivalent to the value of marginal product those factors bring to the purchasing firm.
Review: 4/5 (It's because 80% of the chapter should be review, haha, get it?)
This chapter focuses on factors of production: land, labor, and capital; the three inputs used to produce good and services. The demand for these inputs is known as derived demand, since it is derived from its decision to supply the good these inputs provide in another market.
Assuming the firm is competitive and profit maximizing, the market for the firm's good has a normal sloping supply and demand curve as well. Since it is competitive, it is a price taker for its good and its wages.
As learned before, the production function shows output with respect to input. It has diminishing marginal product due to coordination costs. Marginal product is the increase in amount of output with one more unit of input, downward sloping. Value of marginal product is marginal product multiplied by price, also downward sloping.
Logically, such a firm will hire workers until value of marginal product of a worker is equal to to wages.
Some things that shift the demand curve for labor (value of marginal product slope) is the output price, since price * marginal product = value of marginal product. Technological change usually makes demand shift right, but mechanized labor might reduce demand. Supply of other factors could also affect demand for labor.
Now, we discuss supply of labor. There is obviously a trade-off between work and labor, where opportunity cost of leisure is what you could've earned. We assume here that higher wages means working more for simplicity (supply curve slopes upward). Shifts in supply happen when there is a change in tastes, alternative opportunities, immigration, etc.
To connect these both, we must realize that a change in supply or demand for labor changes the equilibrium wage and the value of marginal product the same amount because these values must be equal.
Since the value of marginal product = wages, more productive workers earn more money and thus higher wages means better productivity and better standards of living.
Capital = the stock of equipment and structures used for production (accumulation of goods made in the past now being used the produce more goods). For example, ladders to climb trees, apple transport trucks, storage buildings, and the apple trees themselves.
There's rental price and purchase price too, you should know the difference. The equilibrium price of land or for capital also is equivalent to the value of marginal product those factors bring to the purchasing firm.
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