Econ 2

Double counting occurs when inputs are included in the calculation of the gross domestic product. depreciation is included in the calculation of the gross domestic product unsold inventories are included in the calculation of the gross domestic product. household production is included in the calculation of the gross domestic product.

inputs are included in the calculation of the gross domestic product.

Microeconomics vs Macroeconomics

Microeconomics is the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents. Macroeconomics is the study of the economy as a whole. Ex. growth rate of a country's total economic output, or the percentage increase in overall prices, or the fraction of the labor force that is looking for work but cannot find a job (unemployment rate).

​Debbie, a member of your​ team, advocates finding random people and then breaking them up into two groups. Group A would be shown an increase in the price of gas before taking the survey. Group B would be told there was no increase in the price of gas before taking the survey.​ Troy, another member of your​ team, recommends finding two groups of people already sorted by whether or not they have recently noticed an increase in the price of gas. ​Debbie's method is a ____________and​ Troy's method is a ______________. Group A is the _____________ and Group B is the _______. .

controlled experiment and natural experiment . treatment group and control group

Economics

the study of how agents choose to allocate scare resources and how those choices affect society.

The GDP deflator is calculated using.. Supposed for the year 2013 the economy of Uplandia has a nominal GDP of $6800 billion and a real GDP of $5440 billion. For 2013. this economy's GDP deflator is ?

(Nonimal GDP / Real GDP) x 100 125

Law of Demand and negatively related

- In almost all cases, the quantity demanded rises when the price falls. They are also negatively related. - If the two variables move in the opposite direction.

Law of supply

- In almost all cases, the quantity supplied rises when the price rises. This leads to positively related.

The supply curve shifts when these variable change:

- Prices of inputs used to produce the good - Technology used to produce the good - Number and scale of sellers - Sellers' beliefs about the future

Perfectly competitive market

- Seller all sell an identical good or service, - Any individual buy or any individual seller isn't powerful enough on his or her own to affect the market price of that good or service.

Quantity demanded

- The amount of a good that buyers are willing to purchase at a given price. Ex. if gas prices rises , a student who lives off campus might bike to school instead of driving. She might join a carpool or shift to public transportation. - She can also adjust to use less gas in a long term.

Competitive equilibrium Competitive equilibrium price Competitive equilibrium quantity Excess supply Excess demand

- When the crossing point of the supply curve and the demand curve. - When it equates quantity supplied and quantity demanded. - The quantity that corresponds to the competitive equilibrium price. - When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded. - When the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied.

Price taker

- a buyer or seller who accepts the market price - buyers can't bargain for a lower price and seller can't bargain for a higher price.

experiment and randomization

- a controlled method of investigating casual relationships among variables. Ex. Medicine, an experiment that new drugs work before they re approved for general public use. Randomization - is the assignment of subjects by chance, rather than by choice, to a treatment group or control group. Ex. half control group and half treatment group. Natural experiment - an empirical study in which some process out of control of the experimenter has assigned subjects to control and treatment groups in a random or nearly random way.

Chapter 2: The scientific method

1. Develop models of the world - A model is a simplified representation of the world. - Models generate hypotheses (predictions) 2. Test those models with data - Does the data provide empirical evidence in support of the model? That is, does the data support the model's predictions?

A student has two options: she can either surf the web, or work part-time. Working part-time pays her $20 per hour. What is the student's opportunity cost of surfing the web for 5 hours? $4 $20 $50 $100

20 x 5 = 100

Which of the following are not included in GDP but probably should be? 1. financial asset transactions 2. The value of intermediate goods used in the assembly of final products. 3. Home production 4. The value of externalities

3 and 4

Let's say that you are trying to decide what to do on Friday at 11 a.m. You rank your possible options from the one you value the most to the one that you value the least in the following​ order: going to​ class, sleeping in​ late, going to work​ early, getting​ lunch, going to the gym to​ exercise, and watching television. If you decide to go to​ class, then what do we know about the opportunity cost of your​ decision? A. The opportunity cost would be sleeping in​ late, since it was your​ next-best option. B. The opportunity cost would include sleeping in​ late, going to work​ early, getting​ lunch, going to the gym to​ exercise, and watching television. C. The opportunity cost would be​ working, since it is the only option that can be put in a dollar amount. D. There would be no opportunity cost in this example.

A

Which of the following factors will NOT cause a shift in the demand for a good? A change in the number of consumers A change in the market price of the good A change in tastes and preferences A change in consumer incomes

A change in the market price of the good.

A market Market price

A group of economic agents who are trading a good or service, and the rules and arrangements for trading. If all sellers and all buyers face the same price.

Empirical evidence

A set of facts established by observation and measurements. Using data to answer questions about the world and using data to test models.

The definition of economics states that it is the study of how A. agents choose to allocate scarce resources and the impact of those choices on society. B. businesses make decisions and how those decisions impact other​ firms, the​ government, and consumers. C. money influences the economy in the short run and the long run. D. the government determines​ policies, businesses set​ prices, and consumers choose how much to buy.

A.

Economics is divided into two broad fields of​ study: microeconomics and macroeconomics. Microeconomics studies​ _________, while macroeconomics studies​ _________. A. a small piece of the overall​ economy; the economy as a whole. B. ​economy-wide phenomena; decisions made by the government. C. issues relating to​ businesses; choices made by individuals and consumers. D. ​money; policy. Policy decisions made by the government are analyzed by​ _________. A. only microeconomics. B. both microeconomics and macroeconomics. C. neither microeconomics nor macroeconomics. D. only macroeconomics. A policy such as reducing government spending to control the national debt would be studied under ____________. since it deals with __________________

A. B. Macroeconomics and the economy as a whole.

Economic Agents and resource Allocation

An Economic agent is an individual or a group that makes choices. Example: A Consumer chooses to eat bacon cheeseburgers or tofu burgers. A parent chooses to enroll her children in public school or private school. Scarce Resources are things that people want, where the quantity that people want exceeds the quantity that is available.

Equilibrium

An economic system is in equilibrium when no one wishes to change their behavior. - If everyone is already behaving optimally, then no one can benefit from changing their behavior. Free-Rider problem Example - Lazy roommates who don't spend their time cleaning their mess and only benefit themselves from watching youtube and netflix. Don't contribute anything but still benefit themselves from others investments.

Identify the cause and effect of the following examples: Lower infant mortality is _________ and an improvement in nutrition is the __________. A surge in cocoa prices is ___________ and a pest attack on the cocoa crop is ____________.

An effect and the cause. An effect and the cause.

Which of the following is likely to lead to a right shift in the supply curve of cotton? A decrease in the price of cotton A rise in labor costs due to wage demands by labor unions An increase in the price of cotton An increase in labor productivity due to training programs

An increase in labor productivity due to training programs

Omitted variable and Reverse causality

An omitted variable is something that has been left out of a study that, if included would explain why two variables that are in the study are correlated. Ex. Christmas make sales increase (positive correlation) Reverse causality - Healthy people = wealthy or wealthy = healthy people because if you are rich u can buy good stuff.

Diminishing marginal benefit

As you consume more of a good, your willingness to pay for an additional unit declines. Ex. you will pay $4 for the 150th gallon of water, but only $3 for the 200th gallon of water because you had enough of water.

Empiricism refers to the process of : A. measuring variables B. Testing ideas using data C. collecgting and organizting data D. making choices using the values and beliefs

B

How does the sample size affect the validity of an empirical​ argument? A. The smaller the sample size the better. B. The larger the sample size the better. .C. The sample size is not relevant if it is greater than 30. D. The sample size is not relevant if it is greater than 50.

B

Which of the following is true regarding the concept of​ causation? A. It states that if event A causes event​ B, then event B must also cause event A. B. It describes how one event can bring about change in another. .C. For any two events that​ occur, economists state that the first must have caused the​ second, since it came first. D. It states that if event A causes event​ B, then event B cannot have a causal effect on event A. Which of the following is not an example of​ causation? A. Playing contact sports will lead to knee injuries. B. Driving without car insurance will lead to getting into an accident. C. Graduating college will lead to being smarter. D. All of the above are examples of causation.

B. B.

During the process of optimization economists believe that people are considering​ _________. A. only the decisions that will result in the least cost to the individual. B. the benefits of their choices for others more than the benefits to themselves. C. the feasibility of a​ choice, given the information available at the time. D. what they would do if they had no money or time constraints of any kind. The goal of optimization for an individual is to maximize ___________________

C. Overall well-being

Cost benefit Analysis

Calculation that adds up costs and benefits using a common unit of measurement, like dollars. Supposed that you and a friend are going to the beach from boston for spring break. The only question is whether you should drive or fly. You friend argues that you should drive because splitting the cost of a rental car and gas "will only cost $200 each." He tries to seal the deal by pointing out "that's much better than a $300 plane ticket." Opportunity cost = $10 an hour. Driving = 50 hours. Flying = 10 hrs. so driving = 50 x 10 = 500 Flying = 300 + 10x10 = 400

Causation and Correlation

Causation: one thing directly affects another Correlation: two things are related - If A causes B then A and B are correlated - However, if A and B are correlated it is not necessarily true that A causes B.

Free riding occurs when ______________________ are out of sync with ______________ . Which of the following is subject to the​ free-rider problem? A. Public libraries. B. A neighborhood watch. C. National security. D. All of the above. Which of the following is more susceptible to the​ free-rider problem: fishing in public lakesfishing in public lakes or street lightsstreet lights​? A. Fishing in public lakesFishing in public lakes​, since a fishing licensea fishing license cannot be denied to anyone so everyone​ benefits, while street lightsstreet lights only benefit a small number of people at any given time. B. Use of street lightsstreet lights is more susceptible since even those who​ don't pay taxes still​ benefit, while fishing in public lakesfishing in public lakes can charge for a fishing licensea fishing license​, so that everyone who goes pays their share. .C. Both are equally susceptible to the​ free-rider problem. D. Neither are susceptible to the​ free-rider problem.

D B

To say that economists use the scientific method means that they are using​ ___________. A. a method to develop recommendations for policy makers to run economies. B. a process to develop models that are intended to exactly represent all the details of a system. C. a method to determine the best course of action for fiscal and monetary policy. D. an ongoing process to develop models of the world and then test and evaluate those models. How do economists distinguish between models that work and those that​ don't? A. They publish their model results in academic journals. B. They test their models against​ real-world data. C. They program their models into computers to test via simulation. D. They have their models reviewed by other economists.

D B

Suppose your New Year resolution is to get back in shape. You are considering various ways of doing​ this: you can sign up for a gym​ membership, walk to​ work, take the stairs instead of the​ elevator, or watch your diet. How would you evaluate these options and choose an optimal​ one? A. You should choose an activity randomly to avoid regretting your decision later. B. It makes the most sense to do the action that costs the least amount of money. C. You should do the activity that gives you the greatest personal​ benefit, regardless of the cost. D. Do a​ cost-benefit analysis to compare the alternatives. When making your decision about which activity to​ choose, you should consider the monetary cost ____________ the opportunity cost of the activities. The goal is to choose the option that offers the greatest ____________ benefit.

D as well as Net

Comparing a set of feasible alternatives and picking the best one is an optimization process called​ _________. A. normative analysis. B. likelihood estimation. C. statistical inference. D. ​cost-benefit analysis.

D.

Which of the following is an example of a normative economic statement? A. A cut in the tax rate will lead to an increase in consumption. B. A relaxation in import duties will encourage imports. C. An increase in subsidies to farmers will boost agricultural production. D. An increase in social security benefits will increase the welfare of all economic agents.

D.

Positive Economics and Normative Economics

Economic Analysis: 1. Positive economics describes what people actually do are objective statements about the world. Ex. It is a fact that 2010. 50% of US households earned less than 52,000 dollars a year. Predicting the future can also be positive economics. 2. Normative Economics recommends what People ought to do. It's always dependent on subjective judgments, which means personal feelings, tastes, or opinions. Ex. If an economist were helping a worker to decide how much to save for retirement, the economist would first ask the worker about her own preferences.

An economic model

Exmample: Four additional years of education will increase earnings by 10% four times over, implying a 46% total increase. Extra year = 10% (1.10)^4 = 1.46 Worker with 12 years = 32,941 Worker with 16 years = 51,780 32,941 / 51,780 = 1.57 = 57% increase but close to 46% in the model.

Changing income or changing wealth Normal good vs inferior good

For a normal good, an increase in income causes the demand curve to shift to the right. For interior good, an increase in income causes the demand curve to shift to the left.

The GDP deflator

GDP deflator = Nominal GDP / Real GDP x 100

On May​ 22, 2013, Forbes LOADING... magazine reported that Bill Gates had overtaken Mexican businessman Carlos Slim as the​ "richest man in the​ world." Gates's fortune on that date was estimated at​ $70 billion, whereas​ Slim's was a mere​ $69.86 billion. But does this make Gates the richest American who ever​ lived? John D.​ Rockefeller, the founder of Standard​ Oil, is usually credited with this distinction. At the time of his death in​ 1937, the founder of the Standard Oil​ empire, had an estimated net worth of​ $1.4 billion. The following table has data from the Bureau of Labor Statistics​ (BLS) for the consumer price index​ (CPI-U; 1982dash-84 ​= 100) for 1937 and 2012 along with​ Gates's estimated 2012 net worth Year Consumer Price index Bill's gate net worth 1937 14.4 x 2012 229.6 70.0 Using the data above, Bill's Gates's net worth measured in 1937 dollars is ? Some analyst say that Rockefeller's net worth was economically equivalent to $250 billion today. However, this figure is arrived at in a particular way. First, his net worth in 1937 is caluclated as a percentage of total U.S. GDP in 1937. that percantage is then multiplied by the current level of GDP to arrive at the equivalent figure in current dollars Year U.S. Nominal GDP Rockefeller's NEt worth 1937 93.0 1.4 2012 16,224.6 x Combining this table's data and the estimation method cited above, an estimate of Rockefeller's net worth in 2012 dollars is

Gates's 2012 net worth in 1937 dollar sis found as: 70/229.6 x 14.4 = 4.39 billion In 1937, Rockefeller's net worth of 1.4 billion amounted to 1.51 percent (1.4/93) of the U.S. GDP for that year. applying this ratio to the U.S. 2012 GDP projects his wealth 2012 dollars to be 244.5 billion.

In May​ 2013, the value of the Consumer Price Index​ (CPI) in a certain​ country, Polonia, reached an​ all-time high of 212 index points and per capita nominal GDP was ​$36,700. In January​ 1950, the CPI was at its lowest at 76 index points. Per capita nominal GDP in 1950 was ​$9,800. Calculate real GDP per capita for 1950 by converting that​ year's nominal GDP per capita into current​ (2013) dollars.

In order to compare living standards across time, economists generally look at per capita GDP. The simplest way to accomplish this commonality is to express the values in current dollars. Value in 2013 dollars = (Price index in 2013 / Price index in 1950) x value in 1950 dollars Value in 2013 dollars = (207/66) x 9100 = 28540.9

Income per capita

Income per person. This is calculated by dividing a nation's aggregate income by the number of people in the the country.

In the context of the firm's supply curve, as the firm produces more of a good, the cost of producing each additional unit _____________. This implies that the marginal cost of producing a good ______________ as it makes more of that good. The firm's supply curve represents_____________ A. the maximum price buyers are willing to pay to buy an extra unit of a good. B. the minimum price buyers are willing to pay to buy an extra unit of a good. C. the maximum price the seller is willing to accept to sell an extra unit of a good. D. the minimum price the seller is willing to accept to sell an extra unit of a good.

Increase and increase D.

3 principles of Economics: Optimization Equilibrium

Optimization is trying to choose the best convenient option, given the available information. In other words, people make choices that are motivated by calculations of benefits and costs. Equilibrium is the special situation in which everyone is simultaneously optimizing, so nobody would benefit personally by changing his or her own behavior. Empiricism is analysis that uses data. Economists use data to test theories and to determine what is causing things to happen in the world.

Positive correlation, Negative Correlation, Zero correlatioin

Positive correlation implies that two variables tend to movie in the same direction. Ex. People with high income more likely to get married than those don't. Negative correlation implies that two variable tend to move opposite direction. Ex. Less likely to be unemployed with high education. Zero. correlation when variables are not related. Numbers of friends you have likely has no relation in address or street.

The statement that the United States has a budget deficit that is in excess of $15 trillion is a _________________ statement since it describes what people ____________ . The statement that the United States has too many illegal immigrants is a _______________ statement since it describes what people . The ethical implications of a hotly debated government policy would best be considered a​ _________. A. normative​ question, since it deals with an objective issue based on factual evidence. B. positive​ question, since it deals with an objective issue based on factual evidence. C. positive​ question, since it deals with a subjective issue based on personal preferences. D. normative​ question, since it deals with a subjective issue based on personal preferences.

Positive. Actually do Normative. Ought to do D.

Real vs Nominal Calculation?

Real GDP is the total value of production (final goods and services), using market prices from one specific base year to determine the value of each unit that is produced. Nominal GDP is the total value of production, using the current market prices to determine the value of each unit is produced. Nominal GDP caluclation = (10 fords) x (30,000/ford) + 5 Chevrolets x 20,000/Chevrolet = $400,000

Saving vs Investment Saving rate

Saving = I + X - M Saving = Investment Saving rate = Saving/GDP = Investment/GDP

In general people with more education earn higher salaries. Economists have offered two explanations of this relationship. The human capital argument says that high schools and colleges teach people valuable​ skills, and employers are willing to pay higher salaries to attract people with those skills. The signaling argument says that college graduates earn more because a college degree is a signal to employers that a job applicant is​ diligent, intelligent, and persevering. The ___________________________ implies that a college student who drops out of school one month before graduation should earn much less than a student who graduates. The _________________________ implies that a college student who drops out of school one month before graduation should earn almost the same as a student who graduates.

Signaling argument Human capital argument

The demand cruve shift when these 5 factors changes: Movement along the demand curve

Tastes and preferences Income and wealth Availability and prices of related goods Number and scale of buyers Buyer's belief about the future - If a good's own price changes and its demand curve hasn't shift.

CPI

The 100 times the ratio of cost of buying a basket of consumer goods using 2013 prices divided by the cost of buying the same basket of consumer goods using base-year prices. CPI (2013) = Cost of buying a particular basket of consumer goods using 2013 prices / cost of buying a particular basket of consumer goods using base year prices x 100

Opportunity Costs

The best alternative use of a resource.

Willingness to accept

The lowest price that a producer is willing to receive to sell an extra unit of a good.

Gross Domestic Product (GDP) How do they measure it?

The market value of the final goods and services produced within the borders of a country during a particular period of time. They measured it by 4 equivalent ways: production, expenditure, income, and factors of production. Production: Firms on the left produce goods and service. Expenditure: Households on the right pay to buy those goods and services. Income: Firms pay households to use household's physical capital and labor. Factors: Physical capital and labor are factors of production, which are put to use by firms.

Inflation Rate

The rate of increases in prices.. It is calculated as the year over year percentage increase in a price index. Inflation rate 2013 = (Price Index in 2013) - Price index in 2012 / Price Index in 2012

Suppose that there are only two small countries in the​ world: Ascot, with a population 37,700 ​people, and​ Delwich, with a population of 29,000 people.​ Ascot's GDP is equal to ​$180 million while​ Delwich's GDP is ​$288 million.​ Delwich's GNP has been estimated to be equal to ​$308 million. The revenue earned by firms that operate in Delwich but are headquartered in Ascot is equal to ​$40 million. Given the data above, Ascot's GNP's is ? In Ascot, the per capita GDP is ?

The value of the output produced by the factors of production possessed or owned by a country is known as GNP, whereas the value of output produced within a country's borders is called GDP. The revenue of the Delwich-owned firms operating in Ascot can be found as a residual from the facts known about the delwich economy: GNP = Delwich GDP + Revenue of Delwich-owned firms in Ascot - Revenue of Ascot-owned firms in Delwich 308 = 288 + Revenue of Delwich-owned firms in Ascot - 40 308 - 288 + 40 = Revenue of Delwich-owned firms in Ascot = 60 GNP for Ascot can be computed as: GNP = Ascot GDP + Revenue of Ascot-owned firms in Delwich - Revenue of delwich-owned firms in Ascot GNP = 180 + 40 -60 = 160 If Ascot has a population of 37,700 people, then its per capita GDP is 180,000,000/37,700 or 4775. If Delwich has a population of 29,000 people, then its per capita GNP is 308,000,000/29,000 = 106211

Optimization: Trade-offs and Budget Constraints

Trade-offs when the agent needs to give up one thing to get something else. ex. If you spend an hour on facebook, then you cannot spend that hour doing other things like working. Budget constraint is the set of things that a person can choose to do or buy without breaking their budget. ex. 5 hrs = hours surfing the web + hours working at part time job.

Maria has to choose between driving and taking a train to destination A. Travelling by train will cost her $400 and will take 4 hours. Driving to destination A takes 6 hours, and the required amount of gasoline costs $250. Her opportunity cost of time is $15 per hour. Refer to the scenario above. What is the total cost involved if Maria chooses to travel by train? $60 $400 $420 $460 Refer to the scenario above. If Maria borrows her parents' car and pays for only the gasoline, what is her total cost of driving to destination A? $90 $250 $300 $340

Train = 400 + 15 x 4 = 460 Driving = 250 + 6 x 15 = 340 340

Changing availability and prices of related goods Substitutes Complements

Two goods are substitutes when the fall in price of one leads to a left shift in the demand curve for the other. Two good are complements when the fall in price of one, leads to a right shift in the demand curve for the other.

Adjusting Nominal Variables

Value in 2013 dollars = price index in 2013 / price index in 1909 x value in 1909 dollars ex. 233/9 x 75,000 = 1.9 millions

Which of the following examples best describes the Law of Demand? When the price of watches increases, a local manufacturer starts offering more watches for sale. When the price of bread doubles, John's consumption of bread halves. When a new anti-tobacco commercial is released, the consumption of tobacco products decreases sharply. When John's income doubles, his telephone bill also doubles.

When the price of bread doubles, John's consumption of bread halves.

Value added

Which is the firm's sales revenue minus the firm's purchases of intermediate products from other firms. For example: Consider the Dell computer company. Two decade ago, Dell assembled almost all of it s computers in the United States. These days, Dell buys almost all of its computers from foreign manufacturers. When a customer orders a Dell computer, Dell instructs a foreign producer-usually in Asia and Mexico to assemble the computer. Dell then imports the machine from the foreign factory and sends the machine to its US customer. You can also buy a Dell computer at Bestbuy, Staples, or Walmart. Retailers like Walmart pay Dell about 2/3 of the revenue that Walmart receives from the sale of Dell's computers. So total sales of Dell Computers to retails customers; $15(third party) + 35(direct sale) = 50 Revenue received by Dell: $ 10 (2/3) + 35 = 45 Value added = Revenue received by DEll - purchases of intermediate products 45 - 30(given) = 15

The cause is in what axis? The effect or dependent variable is in what axis?

X Y

Formula of GDP:

Y = C + I + G + X - M (National Income Accounting Identity). Y = total market value of goods and services that are produced in the domestic economy (which is GDP) C = represent consumption of goods and services. I = Investment: expenditures on investment goods by private agents. G = government expenditure: government purchases of goods and services. X = export: the value of goods and services produced in the domestic economy and purchased by economic agents in foreign countries. M = imports: the value of goods and services produced in foreiign counties and purchased by economic agents in the domestic economy. Trade balance = X - M. Trade surplus = when export is greater than import. Trade deficit = when export is less than import.

Understanding the impact of carbon taxes on the energy usage of individual households and firms is studied under: microeconomics. macroeconomics. fiscal economics. financial economics.

microeconomics

Willingness to pay

the highest price that a buyer is willing to pay for an extra unit of a good.

Gross National Product ( GNP ) Formula?

the market value of production generated by the factors of production- both capital and labor-possessed or owned by the residents of a particular nation. GNP = GDP + Production of U.S. owned capital and labor within the border of foreign countries) - (Production of foreign-owned capital and labor within U.S. borders).