Econ002 Hw 1 Study Guide

Consider what has happened to the income per person in the world over the past two hundred years - a significant increase. Given the macroeconomic principles, what do you think has happened to education levels in the world? a) Increased b) Decreased c) Unchanged d) Unclear e) None of the above

a) Increased This question deals with macroeconomic principle #3. Since a country's income tends to determine its standard of living and since its standard of living includes its education levels, we know an increase in income will mean that education levels have tended to increase as well. Across the globe, that is exactly what has happened over the past two hundred years. For example, only about 20% of the world was literate back in 1820. But today literacy rates are close to 100% everywhere except in Africa (at 64%) and a few other places like Afghanistan. So, the answer is the following: Increases.

Which of the following would be included in the GDP of the US? a) The income earned by an American named David who provides computer repair services in Seattle b) The expenditures made by an American named Ani who provides consulting services in Tokyo c) The income earned by an English citizen who provides legal services in Paris d) The value of output produced by a German citizen who provides financial services in Berlin e) None of the above

a) The income earned by an American named David who provides computer repair services in Seattle

What was the point of the video of Professor Hans Gosling showing how GDP and life expectancy changed over time? a) To demonstrate the economic principle that incomes can help determine a country's quality of life b) To explain how Sweden topped the medal total at the 1948 Olympic Games c) To confirm what we know that things have gotten worse over time d) To show how trade has not been a good thing for most countries' economies e) To show how economics is boring no matter what graphics are used

a) To demonstrate the economic principle that incomes can help determine a country's quality of life

The government can sometimes improve on market outcomes. a) True b) False

a) True

For a given year, the nominal GDP is NOT always higher than the real GDP. For example, if the real GDP in 2020 for a country is $500,000,000, we know the nominal GDP in 2020 for that country can be less than $500,000,000. a) True b) False

a) True Recall that the difference between nominal GDP and real GDP is that real GDP is not affected by changes in prices as it measures the value of goods and services by using prices in a base year. In contrast, nominal GDP is affected by changes in prices as it measures the value of goods and services by using prices in the current year. This difference means nominal GDP is generally higher than the real GDP because of inflation - that is, prices usually increase over time and so are usually higher than the prices of the base year. But it is possible that instead of inflation there is deflation where prices fall so the prices are lower than the prices of the base year. For example, suppose the base year is 2018 and from 2018 to 2021 the prices of goods and services fall; then, nominal GDP in 2021 would be smaller than the real GDP in 2021. As a result, the nominal GDP can be lower than the real GDP. So, the answer is...False.

Consider the market for gas in the US. Suppose there is a decrease in the demand at a given price. The effect is that the demand curve shifts right. a) True b) False

b) False

Trade refers only to the exchange of goods and services between countries. a)True b) False

b) False

For a country, if we add up the consumption, investment and government spending, the total is always less than or equal to 100% of GDP. a) True b) False

b) False Recall the components of GDP. Besides its components of consumption (C), investment (I) and government spending (G), recall that there is one more - net exports (NX). Specifically, the country's net exports can be negative due to the country running a trade deficit. Recall from the lecture slides the situation of the US where NX is a negative percentage of GDP because our country runs trade deficits. So, the US' consumption, investment and government spending combined can exceed 100% of GDP.So, the answer is...False.

For the previous problem, what percent of Melanie-opolis' 2021 GDP is consumption? a) 30% b) 55% c) 62.5% d) 68% e) Not enough information

c) 62.5% Recall that consumption refers to any spending by households (people) in Melanie-opolis. In this problem, the consumption is $150,000,000. So, the percent of 2021 that is consumption is (150,000,000/240,000,000) x 100 = 62.5%

Which of the following accurately describes the video called "I, Pencil"? a) Its main point about the pencil cannot be applied to other goods like pens or cell phones b) It seeks to advocate Communism c) It attempts to show how markets (rather than governments) are much better at distributing resources d) It tries to show how the government can sometimes improve on market outcomes e) It attempts to convince you how simple it is to make a pencil

c) It attempts to show how markets (rather than governments) are much better at distributing resources

From 2020 to 2021, suppose the country of "Eunice-zil" embarks on a major program of deforestation to use the lumber for exports. As a result, exports increase a lot. However, there is also a considerable increase in pollution. According to what was stated in the lecture slides, what is the effect of the pollution increase on the country's GDP? a) Increase b) Decrease c) No effect d) Unclear e) None of the above

c) No effect Recall from the PowerPoint slides that a major flaw of GDP is what it excludes. One major exclusion is bads - things that reduce people's satisfaction. One major example of a bad is pollution.So, the pollution increase by itself would not affect GDP. So, the answer is...No effect.

Again, consider the market for video games in the US. It is primarily played by younger people. But suppose the number of young people is shrinking as people have fewer children. What is the effect of this demographic change on the price and quantity of video games? a) Price rises; quantity falls b) Price rises; quantity rises c) Price falls; quantity falls d) Price rises; quantity is unchanged e) Price is unchanged; quantity is unchanged

c) Price falls; quantity falls

Which of the following is the best definition of economics? a) It is the study of being boring on an individual and national scale b) The study of how to allocate an unlimited amount of resources c) The study of decision-making of how to allocate scarce resources by individual persons and firms d) The study of decision-making of how to allocate scarce resources e) The study of decision-making of how to allocate scarce resources at the national level

d) The study of decision-making of how to allocate scarce resources As provided in the video introducing the course, the definition of economics is "The study of decision-making of how to allocate scarce resources". Please note that "The study of decision-making of how to allocate scarce resources at the national level" refers to a major branch of economics known as macroeconomics. Also, "The study of decision-making of how to allocate scarce resources by individual persons and firms" refers to the other major branch of economics known as microeconomics.

Suppose we have the country of Melanie-opolis. Further suppose that we have the following: 1. People in Melanie-opolis spend $150,000,000 on food and cars produced in the country of Melanie-opolis in 2021. 2. Firms in Melanie-opolis spend $40,000,000 on equipment produced in the country of Melanie-opolis in 2021. 3. Government in Melanie-opolis spends $20,000,000 on uniforms produced in the country of Cynthia-ville in 2021. 4. People in Cynthia-ville spend $50,000,000 on goods produced in the country of Melanie-opolis in 2021. 5. People in Melanie-opolis also spend $30,000,000 on purchases of existing bonds (that were originally produced in 2018). Based on this information, what is the GDP for Melanie-opolis for 2021? a) $100,000,000 b) $150,000,000 c) $200,000,000 d) $220,000,000 e) $240,000,000

e) $240,000,000 The first two amounts of spending are included in the GDP for 2021 - being consumption and investment respectively. The third amount is not part of GDP because imports are production from abroad which is not relevant to the domestic production measured in GDP. The fourth amount of spending is relevant as it is exports in 2021. The fifth amount of spending is not relevant as it is on goods produced in 2018; also, bonds are not relevant to GDP anyway as bonds are not the production of goods and services. So, the answer is GDP = $150,000,000 + $40,000,000 + $50,000,000 = $240,000,000.

Which of the following is NOT a use for GDP? a) To undertake comparisons across countries b) To calculate a country's income growth c) To calculate income per capita d) To calculate one measure of inflation e) All of the above are uses of GDP

e) All of the above are uses of GDP

Which of the following is FALSE about GDP? a) GDP is considered one of the most important stats of an economy b) GDP can be used informally to determine whether there is a recession c) When a country's economic statistics are presented, GDP is usually the first statistic d) GDP was initially created to measure how good the New Deal was in combatting the Great Depression e) GDP is always lower than the GNP

e) GDP is always lower than the GNP GDP is considered one of the most important stats of an economy. GDP is not formally used to determine a recession but only as a rule of thumb. Instead, it is the job of a statistical agency known as the National Bureau of Economic Research (NBER) to tell us whether a recession has begun or ended. Also, GDP is considered so important so it is one of the first statistics to be mentioned when presenting a country's economic stats. The only answer left is GDP always being lower than GNP. Recall that GDP deals with goods and services produced within a country's borders. GNP measures goods and services produced by a country's nationals. So, there are goods and services that would be part of GNP but not GDP. For example, legal services provided in Berlin by an American - this service would be considered GNP but not GDP. On the other hand, there are goods and services that would be part of GDP but not GNP. For example, a haircut provided in Los Angeles by a British national - this service would be considered GDP but not GNP. As a result, we cannot say that GNP is necessarily larger than GDP or vice versa. Countries like Luxembourg have a higher GDP than GNP while countries like the Philippines have a higher GNP than GDP. In addition, recall that a nominal measure like nominal GDP or GNP does not control for changes in prices while a real measure like real GDP or GNP does. Usually, this means the nominal measure is larger than the real measure because of inflation (an increase in prices). But the nominal measure can be smaller than the real measure if there is deflation (a decrease in prices). So, the answer is the following: GDP is always lower than the GNP.

Which of the following would raise real GDP in 2021? a) Increase in the number of high school dropouts quitting their jobs in 2020 so they can go back to school b) Decrease in the number of hours per week in 2020 so people have more leisure time c) Decrease in income inequality in 2020 d) Increase in the number of people doing their own household chores in 2020 instead of hiring people e) Increase in the number of instructors who break windows on college campuses in 2020 so that repairmen need to be hired to fix the messes

e) Increase in the number of instructors who break windows on college campuses in 2020 so that repairmen need to be hired to fix the messes Like question 16, this question deals with the flaws of GDP. Besides excluding bads, the GDP excludes leisure time, income inequality, and activities not recorded by the government as having value. As a result, most of the potential answers are excluded from GDP. This exclusion also applies to workers going back to being students as they are moving from a job whose production is measured by GDP to an education whose value is not measured by GDP.Among the potential answers, the only activity measured by GDP is the repairmen providing repair services for the windows broken at the hands of college instructors. So, the answer is...Increase in the number of instructors who break windows on college campuses in 2020 so that repairmen need to be hired to fix the messes. Note: This question is meant to show you how the GDP measurement can be flawed - especially if you use it by itself to measure a country's welfare. Each of the first four answer choices involves something we would consider important to people's welfare. But they are excluded. Meanwhile, the activity presented here that actually raises GDP is one that many would consider crazy and a waste of resources (just consider how campus police would react to a college instructor doing this).

Consider the housing market in LA. Suppose there is a massive increase in the amount of affordable housing constructed. What happens to this market? a) Its price and quantity both increase b) Its price and quantity both decrease c) Its price rises while its quantity decreases d) Its price is unchanged while its quantity decreases e) Its price falls while its quantity increases

e) Its price falls while its quantity increases

Which of the following inferences can be made from the macroeconomic principles? a) A country that decides to allow trade with other countries will see a major decline in its population's productivity b) High unemployment is always good for a country c) In the short run, a country's unemployment and inflation will both fall at the same time and rise at the same time d) A country that prints a lot of money will tend to see very low inflation e) None of the above

e) None of the above To answer this question, we can go through each answer choice. For choice a, according to principle 1 (lecture 2, slide 6) trade allows more specialization and so leads to increased productivity - not a decline. For choice b, high unemployment is obviously not always good for a country. For choice c, according to principle 5 (lecture 2, slide 24), there is actually a tradeoff in the short run between unemployment and inflation. That is, when unemployment is high, inflation is low. Also, when unemployment is low, inflation is high. For choice d, according to principle 4 (lecture 2, slide 21), the long run effect of an increase in the money supply is actually to increase prices. So, printing a lot of money will mean high inflation. So, the answer is the following: None of the above.

Which of the following is the best definition of macroeconomics? a) It is the study of being boring on only a national scale b) The study of decision-making of how to allocate scarce resources c) The study of decision-making of how to allocate scarce resources at the individual level d) The study of decision-making of how to allocate scarce resources at the market level e) The study of decision-making of how to allocate scarce resources at the national level

e) The study of decision-making of how to allocate scarce resources at the national level