Economics Summary

1st Semester, Year 1 Bachelor of Law

Theme 1 Economic Circuit and National Account

a. Fundamental economic objectives

Output
Potential GDP
High Employment
Stable prices
International commerce
b. How to market economies deal with these problems?
c. Gross Domestic Product the dollar value of all final goods and services produced within a
countrys borders in 1 year.
How to measure GDP?
Expenditures Approach
Adds up all the spending on final goods and services produced in a given year
GDP = C+I+G+(X-M)
C=Consumer spending; I=Investment and Business spending; G=Govt spending;
X=Exports; M=Imports

Income Approach
Adds up all the income that resulted from selling all final goods and services (produced and
sold for consumption or investment) produced in a given year
Income=R+W+ir+PR
R=Rent; W=Wages; ir=Interest rates; PR=profits

d. GDP per Capita (per person) GDP divided by the population. It identifies on average how
many products each person makes
What is not included in the GDP?
i. Intermediate Goods Goods used to produce the final goods (i.e. Tires and parts
of the car to make the car)
ii. Nonproduction Transactions Financial transactions (stocks, bonds and etc) and
Used goods (Old cars)
iii. Nonmarket and illegal activities Household production (pies), unpaid labor,
black markets, drugs
e. Real GDP vs. Nominal GDP
1. Real GDP GDP expressed in constant, or unchanging, dollars. Real GDP adjusts for
inflation. It is calculated by tracking the volume or quantity of production after
removing the influence of changing prices and inflation. It represents the change in the
volume of total output after price changes are removed.
2. Nominal GDP is GDP measured in current / actual prices. It does not count for inflation
from year to year. It is calculated using changing prices.
Q=Real GDP= Nominal GDP/GDP Price index= PQ/P

f. Double Counting
g. Amortizao
 h. Product-income-expenses

Factor Payments
Land Rent
Labor Wages
Capital Interest
Entrepreneurship Profit

Theme 2 Economic Cycles, aggregate demand and multiplier model

a. Economic Cycle - The business cycle is the periodic but irregular up-and-down movement in
economic activity, measured by fluctuations in real gross domestic product (GDP) and other
macroeconomic variables. H
b. How do we measure up-and-down movement in business activity? - Percent change in real
GDP
c. Different Phases of Business Cycle
Expansion: increased consumer confidence, which translates into higher levels of
business activity. It consists of three small stages 1.Recovery 2.Boom 3.Peak
1. Recovery: The turning point from depression to expansion is termed as
Recovery or Revival Phase. Consumers confidence starts to increase. Rise
in economic activities.
2. Boom: Consumers confidence starts to increase at a faster pace.
Unemployment levels fall. Business starts increase their construction
levels. Rise in National Income. Rapid increase in economy. Inflation
increase at very high rates.
3. Peak: The economy has reached its peak. Output starts to stand still and
level off. Consumers confidence starts to decline. People start to stop
their buying. GDP begins to decline(bust).
Contraction: It is a period of decrease in consumer confidence and economic activity. It
consists of three smaller stages: 1. Recession, 2. Depression, 3.Trough
1. Recession: is a period of reduced economic activity in which levels of buying
(consumer purchases), selling (business profits fall sharply), production,
inflation slows and employment typically diminish. Consumers confidence
starts to decrease a little. Unemployment is increasing while inflation is
dropping. It is a recurring period of decline in total output, income and
 employment, usually lasting from 6 months to a year and marked by
widespread contraction in many sectors of the economy.
2. Depression: Depression is the most fearful stage of a trade cycle. The phase of
depression (also called slump) is characterized by low economic activities.
Rapid decline in general output and employment. It is a recession that is
major in both scale and duration.
3. Trough: Contraction reaches a minimum, or Economy hits bottom. Output
starts to standstill and level off. Consumers confidence starts to level off. End
of recession, growth resumes.
d. Spending multiplier
e. Multiplier value
f. Marginal propensity to consume
g. Marginal propensity to save

Theme 3 Government intervention: Taxes and public spending

a. Tools of government policy

Taxes
Public Spending
Transfer payments
Regulations
b. Functions of the government
Improving economic efficiency
Competition and imperfect information
Externalities and public goods
c. Income distribution
Taxation
Transfer payments
Income policies
Prices
d. Fiscal Policies
e. Monetary Policies
f. Principles of Taxation
Benefit vs. Ability-to-pay Principles
Horizontal and Vertical Equity
Direct and Indirect Taxes
Progressive and Regressive Taxes
Efficiency vs. Justice
g. Income Classes
h. Quintiles
i. Measure inequality in income distribution
j. Lorenz Curve
k. Gini Coefficient

Theme 4 Unemployment, inflation and growth policies and stabilization

a. Concept of active and non-active population

b. Employment
c. Unemployment
d. Rate of unemployment
e. Impact of unemployment
f. Types of unemployment
g. Inflexibility of the labor market: qualifications, wage behavior and contracts
h. Inflation
i. Price Indices
j. Rate of inflation
k. Consumer Price Index
l. GDP deflator
m. Constant and market prices
n. Economic impacts of inflation
o. On Income and wealth distribution
p. On Economic Efficiency
q. Types of inflation
r. Causes of inflation
s. Relationship between unemployment and inflation
t. Phillips curve
u. Nonaccelerating inflation rate of unemployment
v. Role of fiscal policies and budget
w. Spending and taxes
x. Multiplier model
y. Public deficit
z. Costs of Public debt
aa. Difficulties of fiscal policies intervention and time lags?
bb.