Today is test day

Best of Luck. Its been quiet out there. No questions or comments. Maybe I should offer extra credit to those who comment on this post? What do you think?

Test on Tuesday, Please Study

Topics to review:

GDP
-how to calculate
-whats included
-whats excluded
-what makes it different from GNP
-C+Ig+G+Xn

Unemployment
-definition
-when is it calculated
-employed vs. unemployed
-4 types of unemployment
-economic norms
-why do we use this as an indicator?

Inflation
-definition
-why is it an important indicator?
-3 types of inflation
-economic norm
-how is it calculated

CPI
-market basket
-its use
-what is included?
-how is it calculated?

Real vs Nominal GDP

Here are a few topics to review just to name a few. Please read your text concerning these topics and study. Thanks.

Creating a Price Index

First a base year must be established. For the United States we use the years of 1982-1984 as our base year giving it the Consumper Price Index number of 100. this is calculated by finding the price of a market basket in a given year, divide by the base year (in the case of the base year it would be the same number) and then adding 100. This creates your CPI for any given year.

Value of Market Basket in a Given Year / Value of Market Basket in the Base Year * 100 = CPI

Once you calculate the CPI, then you can find the price change.

Price Change = (Change in CPI / Begining CPI) * 100

In other words, to calculate the inflation percentage from any two years a simple formula to determine slope can be used.

(CPI year 2 - CPI year 1)/(CPI year 1) * 100 = Inflation percentage

After finding the CPI and Inflation percentage then you can use the CPI to convert Nominal GDP to Real GDP in order to compare different years GDP on an equivalent dollar (i.e. - adjusted for inflation) such as the value of a dollar in 1996 of goods sold in 1986.

(Nominal GDP/CPI)*100 = Real GDP

Hope this was a helpful reminder and refresher. Took me a while to type it so enjoy!!!!!

Unemployment and Inflation

Our discussion on these topics have been limited to understanding the genreal concepts which we will master before moving on to applying them to the aggregate model.

Unemployment concerns people who do not have a job and are actively looking for work. The types include frictional, seasonal, cyclical and structural. The economic norm the US targets is about 4-5% yearly inflation. With current economic climates, this number might not be attainable but it is still the standard. Currently the US hovers around 9-10%.

Inflation types include demand-pull, cost-push and hyperinflation due to political error. However it occurs, it is a result of a rapid increase in the money supply that may not generate new growth in the economy.

Can you list any examples in history of hyperinflation ruining an economy due to a government printing more money for deficit spending? Especially ones not mention in class.

Flaws of GDP?

What are the flaws of using GDP as an indicator of overall health of the economy?

Is there a better system?

Other Test Questions?

If you are dying to know the answer to any of the test questions please leave a comment and I will answer them below in that section for you. If you believe they deserve their own post, please note that and I will scan in the question and get after it. Thanks and hopefully you proved you have learned something so far. If not, no big deal. Just hope you break your leg. . . . . . Just kidding. . . . . . . . . Maybe. . . . . . . . . . . I don't know*.





*Coach is not responsible for broken legs. Do not sue as I have no money. That is all.

Answer to Free Response Question - FOREX

A) US Dollar ($) depreciates in comparison to the Euro (E) which appreciates in comparison to the US Dollar. Increased demand for Euros and an increase in the supply of the Dollar.

B) European products become more expensive to Americans so they will import less goods. The EEUs net exports will fall.

Answer to Free Response Question - Comparative Advantage

Ai) The opportunity cost is 1/5 unit of food.
Aii) The opportunity cost is 10 units of cloth.
Bi) Beeland has a CA in cloth.
Bii) Newland has a CA in food.
C) It doesn't matter the ratios are the same even if it quadruples. No difference.


Part C is designed to eat up time if you are not thinking clearly and could be the difference between a 4 and a 5. Sneaky jerks!

Welcome To AP Macroeconomics

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