ECON 2120 Exam 1

Poor

Most of the world's population is _______ relative to the United States.

Slope

On the PPF, this is the opportunity cost of producing one unit of *X*.

1/slope

On the PPF, this is the opportunity cost of producing one unit of *Y*.

Profit

Total Revenue- Total Cost

C. People exchange things they do not want for things they do.

Trade creates value because: A. People get what they want. B. Raw materials are transformed into finished products. C. People exchange things they do not want for things they do. D. Idle resources are put to use.

Overestimate

We must EXCLUDE the value of *imported goods and services* otherwise we will __________ our productivity. (in the expenditure approach).

D. Ideas

What is the most important factor in explaining the standard of living in rich countries? A. Government regulations B. Taxes on capital and R&D C. Capital D. Ideas

Net Export

(EX-IM)

GDP does NOT include

1. The value of leisure 2. Goods in the underground economy 3. The value of goods that are difficult to price 4. How equally income is distributed

Consumption

=Units Output - Units Invested

Technology

A *proximate(direct) cause* of growth and thus a *factor of production*. This is knowledge about how the world works which is used to produce goods and services (something can be BOTH physical capital and this--but THIS is used to *advance production*).

Human Capital

A *proximate(direct) cause* of growth and thus considered a *factor of production*. This is the productive knowledge and skills that workers acquire through education, training, and experience. (A way to measure this would be to find the average education level of a population, a country with a higher average education would have more of this factor).

Physical Capital

A *proximate(direct) cause* of growth; the stock of tools, structure, and equipment. This is the main *factor of production*.

John Nash

A Nobel Laureate who advanced understanding on *non-cooperative behaviors*. This is when there is some optimal thing that could happen but because we assume/do not cooperate, it does not happen. (Ex: single girl wants BF and boys want a GF but all assume the girl already has a BF so she stays single even though it seems to be an optimal situation).

Gary Becker

A Nobel Laureate winner who studied the effects of social phenomenons such as crime, discrimination and marriage and *integrated social behaviors into economics*. (Why we do stuff...).

Higher

A Solow model prediction: countries with a HIGHER saving/investment rate should have a ________ level of GDP.

Macroeconomics

A branch of economics dealing with the behavior of decision making agents, the structure, and the performance of the whole economy.

Investment

A component of GDP in the expenditure approach. The purchase of goods that will be used in the *future* to produce MORE goods and services (such as capital equipment, inventories, and structures)(Ex: Starbucks buying a coffee maker counts as this but a household buying on does NOT).

Consumption

A component of GDP in the expenditure approach. The spending by *households* on goods and services including *durable* (cars) and *non-durable* (clothes and food) goods.

Government Expenditure

A component of GDP in the expenditure approach. This includes government purchases of goods and services (military expenses and salary of public servants). --this *does NOT* include *government transfers* (like welfare payments).

Sales Taxes

A difference between what consumers pay and what businesses and workers receive. The income approach *adds it back*.

PPF(Production Possibilities Frontier)

A graphical representation for all maximum output possibilities for two goods. -All points *UNDER* the line are *possible* but NOT necessarily *efficient*. -All points *ON* the line are both *possible AND efficient* -All points *ABOVE* the line are *impossible*

A. Greater than $3.

A grocery store is running a "buy-one-get-another-at-one-half-off" promotion on a dozen doughnuts. So the first dozen is $6 and the second would be $3. A person would buy the second dozen if their marginal benefit from the second dozen doughnuts is: A. Greater than $3. B. Greater than $6. C. Greater than $9. D. Less than $3.

GDP(Gross Domestic Product)

A measure of *well-being*(USUALLY a good indicator). Gives a summary statistic about a country's *standard of living*. Higher levels of this means: -higher life expectancy -more educated females -better health outcomes

Solow Growth Model

A model that relates savings, investment, and output to the *production function*. This model provides a theory to explain the factors that influence: -Cross-country differences in per capita income -Differences in growth rates over time.

D. Opportunity cost is lower for him than for other trading partners.

A person has a comparative advantage in activity X when that person's: A. Opportunity cost of performing the activity is very high. B. Ability to perform that activity exceeds that of all other people. C. Government negotiates a favorable trade agreement. D. Opportunity cost is lower for him than for other trading partners.

Further

A prediction of the Solow Model: countries that are ___________ from the steady-state capital tend to grow rapidly (due to diminishing marginal returns and investment is a larger than the amount needed to keep up with depreciation--lines are further apart).

A. Real income and employment.

A recession is a period of significant, widespread declines in: A. Real income and employment. B. Real income and unemployment. C. Exports and imports. D. Inflation and unemployment.

Recession

A significant, *widespread* decline in real *income and employment*. (Ex: Not just one mcdonalds closing but alot of mcdonalds closing across the country).

Catch-Up Growth

A type of growth that shifts the production function; takes advantage of ideas, technologies, or methods if management that are *already in existence*. --Movement along the production function curve, increase in capital stock inputs

Cutting-Edge Growth

A type of growth that shifts the production function; this is the development of *new* ideas and focusing on developing *new technologies* for resources. (Better ideas make us produce more output from the same amount of capital inputs). --Looks like a jump; we get more outputs from same amount of inputs

Consumption

According to the Expenditure Approach, this is the factor that mostly drives GDP.

Exceed

According to thinking on the margin, we should keep doing the action until marginal costs ________ marginal benefits *in order to maximize the net gains*.

B. Behavior based on self-interest can lead to an overall benefit to society.

Adam Smith's metaphor of the "invisible hand" refers to the notion that: A. Greed is always good when externally motivated. B. Behavior based on self-interest can lead to an overall benefit to society. C. Market incentive can lead to negative side effects. D. Markets always align self-interest with social interest.

Trade

An *exchange* that leads to increased production through specialization.

Political Stability

An *ultimate(indirect) cause* of growth that refers to the fact that frequent changes in political regimes can create uncertainty in business environments. In addition, wars kill people and destroy a country's infrastructure.

Dependable Legal System

An *ultimate(indirect) cause* of growth. This is important because it ensures that property-rights are well enforced and helps the society run better.

Honest Government

An *ultimate(indirect) cause* of growth. This refers to a corruption-free government that does not deviate from its commitments. This is important because resources that are used in bribing politicians and bureaucrats (instead of being used for productive things) are *wasted resources*. --More corrupt countries have LOWER GDPs because resources are being wasted.

Property Rights

An *ultimate(indirect) cause* of growth. This refers to the right to receive benefits from, sell, or transfer a property in addition to the right to exclude others from the property. Without this, people will have incentive to *free-ride*(properties belong to the community and people can consume without paying for it --China in 1970s).

Expenditure Approach

An approach to calculating GDP that measures spending in order to tell us how productive we are (looks at money *leaving* the household). (looksby adding up aggregate spending on domestically produced final goods and services in the economy--the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports.

Increase in GDP

An increase in the average level of *prices* and/OR additional *production* causes this. *******Remember that an increase in production IS good but an increase in price levels is NOT! Yet, they both do the same thing to GDP...

Market

An institution that can be used to allocate resources. Behavior that is based on self-interest can lead to an overall benefit to society according to *Adam Smith's "Invisible Hand" metaphor*. ---Occasionally fails to allocate (public good provisions, externality) and then we DO need government intervention.

C. Tuition, the cost of books, and the income from his Microsoft pursuits.

Bill Gates dropped out of college and founded Microsoft. His opportunity cost of continuing to attend college was: A. Tuition, the cost of books, and room and board. B. Tuition, the cost of books, and a low-paying job. C. Tuition, the cost of books, and the income from his Microsoft pursuits. D. Only the income from his Microsoft pursuits.

D. With trade, Brazil should specialize in sugar cane and China in iPods.

Brazil can produce 1 unit of sugar cane for 1 unit of labor and one iPod for 8 units of labor. China can produce 1 unit of sugar cane for 2 units of labor and one iPod for 4 units of labor. Which of the following is TRUE? A. Before trade, China's opportunity cost of one unit of sugar cane is two iPods. B. China has an absolute advantage in sugar cane production. C. Both parties benefit if they specialize and trade at terms of one unit of sugar cane for two iPods. D. With trade, Brazil should specialize in sugar cane and China in iPods.

Stocks

Buying this is *NOT GDP* because it is simply a transfer of money. This is a commonly confused item that is NOT part of the expenditure approach calculation of GDP.

Endogenous Variables

Capital Stock and Output. When these variables do NOT change then *steady state* occurs.

Stable

Consumption Spending tends to bu *much MORE ___________* than investment spending (which is why consumption drives GDP).

Specialize

Countries will do this in order to *maximize gains* (trade leads to increased production through this).

Absolute Convergence

Countries with a lower level of income will grow faster than countries with a higher level of income.

Deflator Interpretation

Current year prices are _% higher (if positive) or lower (if negative) than previous year prices.

A. The marginal product of capital is decreasing.

Diminishing returns to capital implies that: A. The marginal product of capital is decreasing. B. More capital produces less output. C. The production function is downward sloping. D. Capital is not the most efficient input.

Resource Allocation

Economics is all about doing this because our resources are *limited* but our wants are *unlimited*. We must allocate the limited resource to the unlimited wants.

D. Trade-offs when making decisions.

Economics is the study of: A. What is good and what is bad. B. How to make everyone rich. C. How to make the world most productive. D. Trade-offs when making decisions.

Milton Friedman

Famous American economist and Novel Laureate. Known for *consumption-saving* and the *related-policy analysis*. He specifically discussed how government policy can affect our consumption and saving behaviors. He strongly promoted the idea of free trade and condemned government regulation and socialism.

19th Century

For most of human history there was *NO long-run growth in real per capita GDP*. It wasn't until this time period that we started to see changes in growth become visible.

A. Current market value of government purchases of goods and services.

GDP includes the: A. Current market value of government purchases of goods and services. B. Sales of stocks and bonds at current market prices. C. Current market value of used cars. D. Current market value of all existing homes, regardless of when they were built.

Institutions, self, social

Good _________ align ______-interest with __________ interest.

C. Either production or the price level, or both, rose in 2016.

If NOMINAL GDP rose in 2016, we can conclude that: A. Production rose in 2016. B. The price level rose in 2016 C. Either production or the price level, or both, rose in 2016. D. Neither production nor the price level rose in 2016.

Rule of 70

If the annual growth rate of a variable is *x%*, the doubling time is *70/x* years. Tells us that small differences in growth rate ultimately have large impacts on future economic progress.

Underestimate

If we do not count the value of *exported goods and services* we will __________ our productivity. (in the expenditure approach).

C. Are motivated by self-interest.

In his book, The Wealth of Nations, Adam Smith claimed that individuals: A. Always act in an altruistic way. B. Always consider the effect of their actions on others. C. Are motivated by self-interest. D. Are not concerned with resources.

Why do we grow?

In order to spend more, we have to EARN more. In order to earn more, we have to PRODUCE more.

Productive, price, real

In regards to GDP, we care about how ________ we are and *changes* in _______ can contaminate this measure SO we must hold them constant by using a *_________ GDP calculation*.

B. They both decrease.

In the Solow model, if the depreciation rate increases, what happens to the steady-state capital level and output level? A. They both increase. B. They both decrease. C. The steady-state capital stock will increase, and the output will decrease. D. The steady-state capital stock will decrease, and the output will increase.

$700-1000

In the early years when *everyone was poor*, the GDP per capita was the SAME everywhere in the world and was about this.

D. All levels of government, not including transfer payments.

In the national spending approach, government purchases include spending by: A. The federal government only, including transfer payments. B. The federal government only, not including transfer payments. C. All levels of government, including transfer payments. D. All levels of government, not including transfer payments.

B. Only increases in production.

Increases in REAL GDP per capita are considered the best measure of increases in living standards because they measure: A. Only increases in prices. B. Only increases in production. C. Both increases in prices and increases in production. D. Only increases in the cost of living.

Capital Decreases

Investment<Depreciation

Capital stays the same

Investment=Depreciation

Capital Increases

Investment>Depreciation

GDP

Is the market value of all final goods and services that are newly produced within an economy during a given period.

D. Joe should decline the job, since he would lost $20 per hour worked.

Joe runs a landscape business. He knows that providing landscaping services costs him $100 per hour on average, while the cost of providing such services is $150 per hour after 5 PM (due to overtime pay, reduced productivity, and the added wear and tear on his equipment). A potential client offers Joe $130 per hour to provide services but needs him to provide the services after 5 PM due to circumstances at the property. A. Joe should take the job, since $130 exceeds his average cost of production. B. Joe should take the job, since he is making a $30 profit per hour. C. Joe should decline the job, since he would lost $150 per hour worked on the job. D. Joe should decline the job, since he would lost $20 per hour worked.

Technology

Long-run growth relies on growth in this (aka cutting edge growth).

A. The principle of comparative advantage.

Patterns of specialization and trade are explained by: A. The principle of comparative advantage. B. The principle of absolute advantage. C. People's productivity. D. Government control and regulation.

Conditional Convergence

Poorer countries grow faster than richer countries, *conditional* on *similar steady-state characteristics*.

Real GDP per capita

Provides a useful *summary statistic* about a country's *standard of living*.

Self-Interest

Refers to the fact that *people respond to incentives*. This is a descriptive term that does NOT mean selfishness.

Economic Growth

Refers to the growth rate of real per capita GDP.

Investment, loss, increase(grow)(when the investment curve is above depreciation then you will grow).

Rule: When your ________ is enough to cover the _____ (from *depreciation*), then in the NEXT PERIOD your overall level of *capital stock* will _________.

B. Is when there isn't enough to satisfy all our wants.

Scarcity: A. Is when a resource is completely used up. B. Is when there isn't enough to satisfy all our wants. C. Happens only in few economies around the world. D. Can be fixed with good economic policy.

Business Fluctuations (Business Cycles)

Short-run movements in real GDP around its long-term trend. Fluctuations of *real* GDP around its long-term trend or "normal" growth rate.

B. 3.2%

Since World War II, the long-term average rate of real GDP growth in the United States has been about: A. 1.35% B. 3.2% C. 6.5% D. 13.5%

B. Increase by $10,000.

Suppose you spent $10,000 in 2016 remodeling your house, which you originally built for $200,000 in 2000. As a result, GDP in 2016 would: A. Not change. B. Increase by $10,000. C. Increase by $200,000. D. Increase by $210,000.

C. $48,900

Susan quits her administrative job, which pays $40,000 a year, to finish her 4-year college degree. Her annual college expenses are $8,000 for tuition, $900 for books, and $2,500 for food. The opportunity cost of attending college for the year is: A. $11,400 B. $8,900 C. $48,900 D. $51,400

More, same

Technological knowledge and advancement means we can get _________ output from the ________ amount of input.

Institution

The *rule of game* (formal laws/rules/culture/peer pressure) that governs our behaviors.

Capital, output(thus if capital is in steady state, output is also in steady state).

The ________ stock drives ________.

Absolute Advantage

The ability to produce the same good using *fewer inputs* than another producer.

Comparative Advantage

The ability to produce the same good with the *lowest opportunity cost* compared to other producers.

Income Approach

The approach to GDP measurement that measures how much we earn (income/wages) in order to measure how many products we produce (looks at money *entering* the household). that determines GDP as the sum of all incomes received by economic agents contributing to production

Real GDP per capital

The best indicator of well-being aka the best GDP measure. This is a rough estimate of the standard of living in a nation and is corrected for *inflation* by using the same set of prices in every year.

Depreciation

The deterioration of capital, rendering these units useless.

Solow

The first to formulate the idea of growth. He ONLY considers *physical capital*.

8.5%(per year)

The growth rate of Japan from 1950 to 1970 following their status of poorest country following WWII. This makes them an example of a *growth miracle*.

7.2%(per year)

The growth rate of South Korea from 1970 to 1990 following the time in 1950 when they were poorer than Japan. This makes them an example of a *growth miracle*.

Steady State(Or called Static State Capital)

The level of capital stock (K) where *investment=depreciation*. The two lines intersect at this point and this is equilibrium where the capital stock level will stay the same. --This occurs with the *endogenous variables* DO NOT change (these variables are capital stock and output).

C. Profit

The main incentive for business activity is: A. Government Subsidies B. Technological Advancement C. Profit D. Employment

A. High

The marginal product of capital in China is __________ relative to the marginal product of capital in developed economies. A. High B. Moderate C. Low D. Zero

Opportunity Cost

The next best option we give up. When we decided to do one thing we have to give up something, this can be an *explicit cost* (requires a money payment) or *implicit cost* (does not require money payment).

75%(book says 73%)

The percentage of the world's population (~5.2 billion people) that lives in a country where the *GDP per capita* is LESS than that world average.

Production Function

The relationship between inputs and outputs. We assume that technology equals 1 (unless told otherwise) and only focus on *physical capital*. Ultimately the formula describes the relationship between GDP and physical capital (how much GDP is needed to produce one unit of physical capital). --This is a line that gets flatter overtime because the longer you work, the more tired you get. *NOT A 1:1 RATIO OF INPUT TO OUTPUT*

Incentives

The rewards and penalties that motivate behaviors. These include *both* monetary and non-monetary. Can influence where you live, whether you vote, producers and consumers, where you go to school, etc.

B. A mother who is baking cookies at home.

The sale of sugar will contribute to GDP when the buyer is: A. Krispy Kreme Doughnuts B. A mother who is baking cookies at home. C. A Mexican food restaurant. D. A grocery store chain.

Poverty, wealth

The world income distribution tells us that _____ is normal and ______ is unusual.

Fixed Costs

These DO NOT MATTER when facing a trade-off (opportunity cost situation). (Ex: Once you pay $5 to get into the buffet, this does NOT affect how many burgers you eat at the buffet).

Proximate(direct) Causes

These causes of growth are *factors of production*. Have a direct impact on our outcome (determinant of growth(

Ultimate(Indirect) Causes

These causes of growth are the *institutions*.

Rational

These type of individuals will make decisions based on the additional gains (marginal benefits) and additional losses (marginal costs) of an action. This allows an individual to MAXIMIZE their profit/utility/social welfare/etc.

Argentina(Nigeria is another disaster example)

This country is an example of a *growth disaster*. Their GDP per capita was 75% as large as the U.S.'s in the 1900s but is only *1/3 of the size of the U.S.'s by 2000*. The gap is continuing to grow.

Diminishing Marginal Returns

This explains why the *production function* curve has a *concave* shape. This is the idea that the *marginal*(additional) product of capital diminishes as more and more capital is added. (Ex: giving a millionaire a dollar does much less than giving a very poor person a dollar..). --Following WWII Germany and Japan both grew faster than the US because they both had NOTHING --China has a higher growth rate than the US because they have less capital than us

MB=MC

This is the optimal level of MC and MB because it means we are maximizing our net gains.

Good Institution

This type of institution creates incentives in a way that individuals in their own self-interest achieve the objectives of what society wants. Ex: Reduced Tuition- creates incentive so more people can go to school and then more people are educated and can innovate and behave well in society.

50

Today, GDP per capita is more than _______ times as large in the richest countries as in the poorest countries (*even though in the past they were somewhat similar*--$700-1000).

D. Making choices by comparing the additional benefits and additional costs from doing a little bit more of some activity.

What is thinking on the margin? A. Making decisions that are of noneconomic importance. B. Making choices that are based on historical precedents. C. Making choices that ignore the marginal benefits, but not the marginal costs, of some activity. D. Making choices by comparing the additional benefits and additional costs from doing a little bit more of some activity.

Behavior

When *incentives change*, _________ will likely change in predictable ways.

Higher

When looking at the PPF, the flatter the curve, the ________ the opportunity cost of producing the good on the *Y-axis*.

Right, above

When the *investment/saving* curve shifts UPWARDS, the new steady-state capital stock will be to the _________ of the old steady-state capital stock. The new steady-state OUTPUT will be _______ the old steady-state output.

B. The ship's captain is paid $100 by the government for every live prisoner that is unloaded at point B.

Which financing method for transporting prisoners from point A to B will result in the greatest number of prisoners surviving the trip? Assume there are 50 prisoners being transported. A. The ship's captain is pain $100 by the government for every live prisoner that is loaded on board at point A. B. The ship's captain is paid $100 by the government for every live prisoner that is unloaded at point B. C. The ship's captain is paid $400 by the government for every live prisoner that is loaded on board at point A. D. The ship's captain is paid a flat rate of $3,000 for the trip, rather than being paid per prisoner.

B. A calculator

Which is NOT an example of human capital? A. An understanding of mathematics B. A calculator C. Computer programming skills D. Experience using computers

A. Factors of production

Which is the most immediate (or direct) cause of growth in real GDP per capita? A. Factors of production B. Institutions C. The political system in the economy D. Incentives

C. GDP does not include goods and services produced privately inside the home.

Which of the following is TRUE in the calculation of GDP? A. GDP is positively adjusted to include production in the underground economy. B. GDP is negatively adjusted to account for environmental damage caused by businesses. C. GDP does not include goods and services produced privately inside the home. D. GDP includes a positive adjustment for leisure activities, even if no purchase is required.

A. Toyota, a Japanese car company, producing cars in the United States.

Which of the following would be included in GDP for the United States? A. Toyota, a Japanese car company, producing cars in the United States. B. A U.S. professor taking a year off to teach at the London School of Economics. C. A tire manufacturer making and selling tires to Ford to be used in their new cars. D. Jane's purchase of a used car after her old car is destroyed in an accident.

B. Wood used for making furniture.

Which of these goods is an intermediate good that would NOT be counted in GDP in the year it is produced? A. A tractor. B. Wood used for making furniture. C. An oven for installation in a bakery. D. Flour sold in a grocery store.

B. Robert Solow

_________ first developed the model that explains economic growth using a production function. A. Milton Friedman B. Robert Solow C. John Maynard Keynes D. Ben Bernanke

Nominal, Real

__________ GDP measures changes in production, price, or both. ___________ GDP ONLY measures changes in *production* (so it is a better measure of changes in living standards).