ECON 111

GDP components

1. consumption (C) 2. investment (I) 3. govt. purchases (G) 4. net exports (NX)

GDP equation

C+I+G+NX

what is GDP

Gross Domestic Product - GDP measures the total expenditure of everyone on the economy's output of goods and services

Refer to Figure 2-16. Which of the following statements is true about the opportunity cost of obtaining approximately 20 additional gadgets by moving from point B to point C?

The opportunity cost is zero because the economy does not give up producing widgets to go from producing at point B to point C.

market failure definition

a situation when the markets don't work as intended

what is cpi

consumer price index - way to measure a typical consumers cost of living

cpi equation

cost of basket in current year/cost of basket in the base year

The goal of the consumer price index is to measure changes in the

cost of living.

percentage equation

new value-original value/original value

In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by

surveying consumers.

rational people defintion

systematically and purpose fully do the best they can to achieve their goals

definition of economics

the study of how society manages its scarce resources.

externality definition

"bystander effect" market failure example -people who are not the buyer or seller of the product are affected in some way

Consider Larry's decision to go to college. If he goes to college, he will spend a total of $120,000 on tuition,$30,000 on room and board, and $3,500 on books over four years. If he does not go to college, he will earn$30,000 annually working in a store and spend $7,000 on room and board each year. Larry's cost of going to college is

$245,500

Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars?

$37.11

Why is GDP good for well-being

- better school - cleaner environment - health care

real interest rate

- corrected for inflation - tells you the rate of growth in the purchasing power of your deposit

cpi problem with well being of living

- fixed basket - substitution bias

nominal interest rate

- interest rate not corrected for inflation - tells you the rate of growth of dollar

PPF model

- production possibilities frontier - a graph: combinations of output that the economy can possibly produce - given the available - graph and chart diagram -opp cost is slope of ppf Look at it

GDP nominal

- valuing the total output using current prices - not corrected for "inflation" - reflects price changes and quantity changes

circular flow model

- visual model of the economy - shows how dollars flow through markets among households and firms - the square diagram - market for goods and services and market for production - labor, capital, raw materials Look at it

Why is GDP bad for well-being

-doesn't value the quality of the environment - doesn't value leisure time - doesn't include non market activity - doesn't value an equitable distribution of income

look at comparative and absolute advantage

....

Ten principles

1. People face trade-offs 2. The cost of something is what you give up to get 3. Rational people think at the margin 4. People respond to incentives 5. trade can make everyone better off 6. markets are usually a good way to organize economic activity 7. governments can sometimes improve market outcomes 8. a country's standard of living depends on its ability to produce goods and services 9. prices rise when the government prints too much money 10. society faces a short-run trade off between inflation and unemployment

Role of economists

1. household (consumers) decision making process. 2. firms (producers) decision making process.

determinants of productivity

1. physical capital (k) 2. physical capital per worker (k/l) 3. human capital (h) 4. natural resources (n) 5. technology knowledge (a)

Assume that the farmer and the rancher can switch between producing pork and producing tomatoes at a constant rate. Hours Needed to Make 1 Pound Pounds Produced in 24 Hours Pork Tomatoes Pork Tomatoes Farmer 6 3 4 8 Rancher 4 4 6 6 Refer to Table 3-23. The opportunity cost of 1 pound of tomatoes for the farmer is

1/2 pound of pork.

Refer to Figure 2-16. The opportunity cost of obtaining 30 additional widgets by moving from point A to point C is approximately

10 gadgets.

calculate GDP deflation

100x (nominal GDP/real GDP)

Assume that Max and Min can switch between producing mittens and producing hats at a constant rate. Labor Hours Needed to Make 1 Quantity Produced in 36 Hours. Mittens Hats Mittens. Hats Max 2 6 18 6 Min 2 4 18 9 Refer to Table 3-11. Assume that Max and Min each has 36 labor hours available. If each person divideshis/her time equally between the production of mittens and hats, then total production is

18 mittens and 7.5 hats.

Table 24-12. Will's expenditures on food for three consecutive years, along with other values, are presented in the table below. Year 2009 2010 2011 Expenditures on Food $5,000 $5,800 $6,600 Consumer Price Index 160.0 168.0 x Refer to Table 24-12. Suppose Will's 2010 food expenditures in 2011 dollars amount to $6,235. Then x, the consumer price index for 2011, has a value of

180.6.

During a certain year, the nominal interest rate was 8 percent, the real interest rate was 3 percent, and the CPI was 176.7 at the beginning of the year. The CPI at the end of the year was

185.5.

During a certain year, the nominal interest rate was 7 percent, the real interest rate was 4 percent, and the CPI was 198.3 at the end of the year. The CPI at the beginning of the year was

192.5

The table below pertains to Napandsnack, an economy in which the typical consumer's basket consists of 2pillows and 15 hotdogs. Year Price of a Pillow. Price of aHotdog 2009 $40 $3 2010 $45 $4 2011 $50 $3 Refer to Table 24-6. If the base year is 2010, then the economy's inflation rate in 2010 was

20.0 percent.

If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?

20.0%

Refer to Figure 2-16. The opportunity cost of obtaining approximately 10 additional gadgets by moving from point C to point A is

30 widgets

Refer to Figure 2-16. The opportunity cost of obtaining 30 additional gadgets by moving from point B to point A is

30 widgets.

For an imaginary economy, the value of the consumer price index was 140 in 2013 and 146.5 in 2014. Theeconomy's inflation rate for 2014 was

4.6 percent.

Which of the following is a correct statement about production possibilities frontiers?

An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier.

Over the period 1900-2014, which of the following countries experienced the highest average annual growth rate of real GDP per person?

Brazil

Which of the following is correct? a. How much an increase in capital increases a country's output is independent of that country's current level of capital. b. Natural resources clearly place limits on growth; there is simply no way to reduce either the amount or type of natural resources needed to produce goods. c. Economists argue that outward rather than inward policies are likely to promote economic growth. d. There is no debate about the effects of higher population growth on economic growth.

Economists argue that outward rather than inward policies are likely to promote economic growth.

GDP inflation rate

GDP deflator (2022)-GDP deflator (2021)/ GDP deflator (2021)

Which of the following statements about GDP is correct?

GDP is to a nation's economy as household income is to a household.

Which of the following is an example of a positive, as opposed to normative, statement?

Prices rise when the government prints too much money.

cpi vs gdp deflator

The CPI measures price changes in goods and services purchased out of pocket by urban consumers, whereas the GDP price index and implicit price deflator measure price changes in goods and services purchased by consumers, businesses, government, and foreigners, but not importers.

In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hotdogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in2007. Which of the following statements is correct? a. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007. b. When 2006 is chosen as the base year, the consumer price index is 90 in 2007. c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006. d. When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007.

When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.

productivity equation

Y (output)/L(input)

If there are constant returns to scale, the production function can be written as

Y/L = A F( 1, K/L, H/L, N/L).

productivity definition

a country's standard of living depends on his ability to produce goods and services - the amounts of goods and services

The short-run tradeoff between inflation and unemployment implies that, in the short run,

a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

market economy definition

a group of buyers and sellers

property rights definition

ability to own and exercise control over your resources

In a simple circular-flow diagram,

all goods and services are bought by households, households spend all of their income, and expenditures flow through the markets for goods and services, while income flows through the markets for the factors of production.

How do you compare dollar values at different time periods? (e.g., $1 in 1950 v/s $1 in 2019)

amount in year 't' dollars x (spi today/cpi in year 't')

All else equal, which of the following would tend to cause real GDP per person to rise?

an increase in investment in human capital

inflation definition

an increase in the overall prices in the economy

relationship with output and productivity

any advance in knowledge that boosts productivity allows society to get more output from its resources

Tom produces baseball gloves and baseball bats. Steve also produces baseball gloves and baseball bats, but Tomis better at producing both goods. In this case, trade could

benefit both Steve and Tom.

cpi inflation rate equation

cpi this year-cpi last year/cpi last year

Rosa deposits $100 in a bank account that pays an annual interest rate of 20 percent. A year later, after Rosa has accumulated $20 in interest, she withdraws her $120. Rosa's purchasing power

did not change if the inflation rate was 20 percent.

For an economy as a whole, income must equal expenditure because

every dollar of spending by some buyer is a dollar of income for some seller.

imports definition

goods and services produced abroad and sold domestically - us consumers buying BMW (which is made in Germany) US consumers paying for hotel in Japan

exports definition

goods and services produced domestically and sold abroad - a person in kenya watching hollywood movie a family from china visiting us and watching a show in MN

During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person

grew, but by less than 12 percent.

The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20pounds of meat and 10 toys. Year Price ofMeat. Price of aToy 2004 $3 per pound $2 2005 $1 per pound $7 2006 $4 per pound. $5 Refer to Table 24-5. The cost of the basket

increased by $10 from 2004 to 2005.

The CPI differs from the GDP deflator in that

increases in the prices of domestically produced goods that are sold to the U.S. government show up in theGDP deflator but not in the CPI.

The table below contains data for the country of Togogo. The base year is 1974. Year. Nominal GDP. GDP Deflator 1974 $2000 100 1975 $3000 120 1976 $3750 150 1977 $6000 200 Refer to Table 23-7. From 1976 to 1977,

inflation was 33.3% and output grew at a rate of 20%.

Which of the following public policies would be least likely to result in more rapid economic growth for a poor or developing country?

inward-oriented policies

Human capital is

knowledge and skills that workers have acquired.

Which of the following is an example of human capital?

knowledge learned from reading books

market power definition

market failure example situation when the seller or buyer holds substantial power over the market price and/or quantity

invisible hand definition

metaphor for why markets function well

micro vs macro economics

microeconomics is concerned with how supply and demand interact in individual markets for goods and services macroeconomics, the subject is typically a nation

The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called

natural resources.

real interest rate equation

nominal interest rate-inflation

Refer to Figure 2-16. The opportunity cost of obtaining 20 additional widgets by moving from point C to point D is

none of the above; the economy cannot move from point C to point D.

The signals that guide the allocation of resources in a market economy are

prices.

productivity definition

quantity of goods and services produced from each unit of labor

equality definition

resources are uniformly distributed among members

Which of the following is an example of a produced factor of production?

skills that people accumulate in high school and college, a plant in which automobiles are assembled, and skills that people accumulate through experience in the workplace

marginal changes definition

small incremental adjustment to a plan of action

incentive definition

something that induces a person to act

Juanita and Shantala run a business that programs and tests cellular phones. Assume that Juanita and Shantalacan switch between programming and testing cellular phones at a constant rate. The following table applies. Minutes Needed to Number of Phones Tested in a 40-Hour p 1 Phone. t 1 Phone Phones Programmed. Phones Tested Juanita ? 2 160 1200 Shantala 10 4 240 600 Refer to Table 3-29. Juanita has an absolute advantage in

testing cellular phones and a comparative advantage in testing cellular phones.

An important difference between the GDP deflator and the consumer price index is that

the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.

The key determinant of the standard of living in a country is

the amount of goods and services produced from each hour of a worker's time.

Which of the following is an example of physical capital?

the equipment in a factory

If the CPI was 125 this year and 120 last year, then

the inflation rate for this year was 4.2 percent, the cost of the CPI basket of goods and services increased by 4.2 percent this year, and the price level increased by 4.2 percent this year.

Which of the following is not an example of physical capital?

the knowledge of workers

scarcity definition

the limited nature of society's resources (time, money, labor). Because resources are scarce, we cannot consume or produce everything we want.

When an economy is operating inside its production possibilities frontier, we know that

there are unused resources or inefficiencies in the economy.

The consumer price index is used to

turn dollar figures into meaningful measures of purchasing power.

efficiency defintion

utilizing the resources the best possible way (not being wasteful)

GDP real

valuing the total output by fixing prices some year in the past - use base year - reflects only changes in quantity

Output of pottery in one six-hour session Vases Mugs Sarah 8 32 Charles 10 25 ​Refer to Table 3-37. Sarah and Charles are both potters and each can switch between the production of vases and mugs at a constant rate. The table shows the total number of vases or decorative mugs that each person can produce in a six-hour session of producing pottery. Suppose that Sarah and Charles produce for two 6-hour sessions and they split this time equally between the production of vases and mugs. If they then produce for two6-hour sessions and produce only the good that each person has the comparative advantage for, then total production of

vases would rise by 2 and total production of mugs would rise by 7.

opportunity cost definition

whatever must be given up to obtain sole item

constant return to scale

when an increase in input results in a proportional increase in output.

production function

y=f(k,h,l,n)*a