EC 102 Midterm 1 Review
Inflation calculation between two years
(Later CPI - Earlier CPI / Earlier CPI) * 100
Consumer Price Index (CPI)
(Price basket in current period/ price basket in base period) * 100 (Cost/ Base year cost) * 100
% change in Real GDP
(RGDP (later) - RGDP (earlier)/ RGDP (earlier)) * 100
Human capital
** GET INFO***
Knowledge capital
*** GET INFO ***
Factors that influence natural rate of unemployment: Labor Unions
*** GET MORE INFO***
Labor force participation rate calculation
Labor force participation rate = (labor force/ adult population) * 100
In his article, "Unlocking Growth in Africa," Ken Rogoff names four things he sees as essential to the African development process. Which of the following is not one of them?
Large infusions of foreign development assistance
If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?
Larger: The value of all goods and services sold would include intermediate goods
What about diminishing marginal product of capital?
Low K stock --> High MP(k) --> High returns to investment --> Higher domestic saving and higher investment by foreigners
Which of the following best describes the idea of convergence?
Low-income countries will grow faster than rich countries and inevitably catch up
BLS Employment Survey: Not in Labor Force
Didn't work in the last week or actively looked for job in the last month
BLS Employment Survey: Unemployed means.....
Didn't work in the last week, but did look for a jobo ver the last month
Consider the per-worker production function. Equal increases in the quantity of capital per hour worked lead to ___ increases in output per hour worked (Image is graph of Y/L and K/L - PS 3 Q3)
Diminishing
Three sources of technological change: Increases in human capital
EX: Education, training, experience
What is the labor force?
Employed + Unemployed
Three sources of technological change: Better machinery and equipment
Ex: Computers, software, machine tools, electronics
Based on his article, 'Institutions Matter, but Not for Everything," which of the following is not one of the alternatives mentioned for a poor, isolated region?
Exploitation of the region's natural resources
What makes up the natural rate of unemployment?
Frictional + Structural unemployment
GDP Deflator
GDP Deflator = (Nominal GDP / Real GDP) * 100
Which of the following is an example of cyclical unemployment?
In an economic downturn, a manufacturing plant reduces production and temporarily lays off worker
Suppose you were borrowing money to buy a car. Consider the following situations. Situation 1: Suppose the interest rate on your car loan is 17.00 percent and the inflation rate is 16.00 percent. Calculate the real interest rate. Situation 2: Suppose the interest rate on your car loan is 7.00 percent and the inflation rate is 4.00 percent. Calculate the real interest rate. 1) Situation 1 will be .... Situation 2 because the ..... is lower 2) Now suppose you are JPMorgan Chase, and you are making car loans. Which situation above would you now prefer? JPMorgan Chase would prefer...
Situation 1: 1.00% ( r = i - pi) Situation 2: 3.00% (r = i - pi) 1) Better than; real interest rate 2) Situation 2
Types of unemployment: Structural
Skills don't match the skills in demand by employers in a particular region
What do returns from these investments from abroad do?
Some of the returns flow back to the foreign countries that supplies the funds
Costs of Inflation: Distributional effects
Some workers' incomes will not keep up with inflation
As discussed in the chapter "Why Poor Countries are Poor" from Harford's book, The Undercover Economist, which of the following is a good summary of Mancur Olson's theory of dictatorships in poor countries?
Stable dictatorships cause less economic harm than unstable dictatorships
"Foreign aid is vital to enable poor countries to overcome the natural handicaps of geography, climate and disease that they face." This statement is most consistent with which approach to economic development?
The Environmental Approach
Suppose that a simple economy produces only the following four goods and services: shoes, hamburgers, shirts, and cotton. Further, assume that all of the cotton is used in the production of shirts. Use the information in the following table to calculate Nominal Gross Domestic Product (Nominal GDP) for 2021. Product Quantity Price --------- --------- ------ Shoes. 100. $60.00 Burgers. 100. $2.00 Shirts. 50. $25.00 Cotton. 1800. $0.60
The Nominal GDP for the year 2021 is $7,450 ( P * Q --> cotton not included since it''s used in shirts)
Three sources of technological change: Better organization and management of production
"Just-in-time" system
In 2013, the population of Great Britain was around 64 million. According to the World Bank, the country's GDP (expressed in US dollars) in 2013 was about $2.5 trillion. This implies that Britain's 2013 per capita GDP was about...
$39,000 (GDP/ population)
Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?
$70,288 (( $ amount ) * (later CPI / earlier CPI))
What are some main ideas in "The poor and the rich"?
- Adam Smith reckoned that the way to grow was by accumulating capital and also having technological progress - Economy obeys law of diminishing returns: each new bit of capital (with a fixed labor supply) brings a lower return than the one before it - As stock of capital expands, growth slows, and eventually halts - To keep growing, the economy has to benefit from continual infusions of technological progress - Poorer countries should grow faster than rich ones because of diminishing returns --> since poor countries start with less capital, they should reap higher returns from each slice of new investment - If each extra bit of capital doesn't have a lower return than before, growth can continue indefinitely even without technological change - New growth model says that competition is imperfect - Absolute convergence doesn't hold since not all factors are held constant - Higher growth may encourage higher saving and investment - Poor countries can catch up and this is maximized by policies - Correct government policies can permanently raise growth rates - "The world's fastest-growing economies are a small subgroup of exceptional performers among the poor countries" - Problem isn't a lack of resources, but the inability to use existing resources well
When the economy is at full employment...
- All remaining unemployment is either frictional or structural - The unemployment rate is greater than zero - The natural rate of unemployment prevails
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation?
- Borrowers gain from a lower real interest rate - Lenders lose from a lower real interest rate
What are some main ideas in "Why Poor Countries Are Poor"?
- Cameroon is one of the most corrupt countries in the world - It's poor and it's getting poorer - Education, factories, infrastructure, and technical know-how are abundant in rich countries, and severely lacking in poor ones - Poor countries shoes catch up quickly - Rich countries don't gain much from further investment --> called diminishing returns - Many poor countries are not growing faster than rich ones, instead growing slower, so new theory that takes into account "increasing returns" says that sometimes the more you have, the faster you grow - "In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education" - Should be possible for poor countries to grow richer as long as they can make a number of complementary investments all at once like factories, roads, electricity, and ports, to allow goods to be manufactured and exported - Much of government activity appears to be designed expressly to steal money from the people of Cameroon - "A dictator who lays claim to a land is a preferable leader than one who moves around constantly in search of new victims to plunder" - In Cameroon, the corruption is not only unfair, it is also hugely wasteful, and the costs are enormous - Governments in rich countries usually perform basic bureaucratic tasks quickly and cheaply, but governments in poor countries draw out the processes in hopes of pocketing some extra cash themselves - Cameroon's tragedy is that there is nothing to hold self-interest in check - "Development is thwarted because the rules and laws of the society do not encourage projects or businesses, which would be to the common good" - "The small amount of education and technology and infrastructure that Cameroon does not have could be much better used if the society was organized to reward good, productive ideas. But it is not"
What determines productivity and its growth rate?
- Capital - Technological change
Indicate which of the following is an explanation for the productivity slowdown of 1974-1995.
- Deterioration of the U.S. educational system - Premature obsolescence of capital due to high energy prices - A shift from a goods-based economy to a service-based economy
What are the three approaches to development?
- Environmental Approach (Jeff Sachs) - International Trade Approach - Institutional Approach
Use the data in the following table to calculate the GDP deflator for each year (values are in billions of dollars, enter your response rounded to two decimal places -- remember to multiply by 100). Year NGDP. RGDP GDP Def. ----- ------- ------ ---------- 2017 $19480. $18079. 107.75 2018 $20527. $18607 110.32 2019 $21373. $19033. 112.29 2020 $20894. $18385. 113.65 2021 $22996. $19427. 118.37 Which span of years saw the largest percentage increase in the price level, as measured by change in the GDP deflator?
- For calculation it's ((NGDP/RGDP) * 100) - 2020 to 2021
Investment from Abroad: How can we raise K/L, and hence productivity, wage, and living standard (what can the government encourage)?
- Foreign direct investment - Foreign portfolio investment
What about the environmental approach?
- Geography - Climate - Endemic disease - Inaccessibility of trade routes (landlocked countries) - Lack of natural resources - Policy implications
Why do economic growth rates matter?
- High growth rates coincide with improved living standards - When country sustains high growth rates, life expectancy at birth increases - High levels of sustained economic growth reduce infant mortality
The Per Worker production function and Diminishing returns
- If workers have little K, giving them more increases their productivity by a lot - If workers already have a lot of K, giving them more increases productivity fairly little - Technological change helps economies overcome diminishing marginal returns of capital (per-workre production function shifts up with the change) --> only sustainable way to foster economic growth
Factors that influence natural rate of unemployment: Efficiency Wages
- Increases productivity of workers ****GET MORE INFO**
What about the institutional approach?
- Legal system - Political system - Monetary stability - Corruption
The following table gives nominal and real GDP for an economy for two years. Year 1. Year 2 ------- ------- Nominal GDP 1210.0 1540.0 Real GDP 1100.0 1320.0 1. Based on the table, in Year 2, the value of the GDP deflator is... 2. The inflation rate between Year 1 and Year 2 is...
1) 116.7 (NGDP / RGDP * 100) 2) 6.1% ( (= GDP Deflator later year - GDP Deflator earlier year / earlier year ) * 100)
An economy that does not experience increases in technological progress....
Can experience economic growth by increasing capital, however, this will eventually stagnate and the economy will not continue to grow
What are some main ideas in "China's Economic Woes....."?
- Major economies face pressure from inflation and the impact of the Ukraine War - A resurgence of Covid-19 cases in the past month (written Aug 2022) has triggered fresh lockdowns in Chinese cities - The property market is still trying to find a bottom, with home sales tumbling for the 14th consecutive month - "Many economists expect business investment and consumer spending to remain depressed, as China's stimulus is largely focused around infrastructure spending and the country remains reluctant to budge from its zero-Covid policy, which has amplified uncertainties for companies and hurt consumer confidence" - The country's strategy of resorting to sudden lockdowns to contain Covid-29 continues to hinder growth - Unlike in the past, exports will provide less of a lifeline during a weaker economy since decades-high inflation and tightened monetary policy in the U.S. and other developed economies have crimped consumer spending - China's faltering real-estate market continues to drag on its economy as average home prices in dozens of cities have fallen since September of last year with no clear sign of recovery - A prolonged property slowdown raises the risk that the weakness in the sector may spill over the broader economy, hurting job growth and denting household consumption
Key terms for GDP: - Market - Final - Within a country
- Market: bought and sold in a market - Final: last time it will be sold; intermediate- a good that will be incorporated into some other good before sold (so NOT the last time it will be sold) - Within a country: don't care about nationality of producer so long as it's produced in that specific country to be counted in GDP
Government policy can help increase the accumulation of knowledge capital in three ways:
- Protecting intellectual property with patents and copyrights - Subsidizing research and development - Subsidizing education
How does real GDP deal with the problem inflation causes with nominal GDP?
- Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. - Real GDP separates price changes from quantity changes. -By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced.
The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic growth, the economic growth model focuses on the causes of increases in long-run labor productivity. What are the key factors that determine labor productivity?
- Technological change - Quantity of capital per hour worked
How does convergence work?
- Technology transfer - Poorer countries attract more capital
Factors that influence natural rate of unemployment: Government policies
- Training programs - Unemployment compensation - Labor Market Policies Minimum Wage Laws
What about the international trade approach?
- Two dimensions of integration into the world economy - Trade in goods and services (import-substituting industrialization) - Capital inflows (financial capital, GDI) - In favor of globalization
What are some main ideas in "Unlocking Growth in Africa"?
- UN's Millennium Development Goals (MDGs) --> benchmarks for core human welfare --> span issues ranging from health and education to the welfare of women - "Growth will come mainly from improving institutions and governance and from reducing corruption and conflict" - Most Africans want to know that future generations are moving toward achieving the living standards enjoyed by other industrial countries - Important that aid is in the form of grants and not loans because the later will hurt more than it will help - Accelerating growth is a much more complex process than simply accumulating physical capital --> institutions and governance matter just as much if not more - Even if the loans weren't squandered through government consumption and corruption, the growth that was anticipated never materialized because of war, disease, and famine, and more factors under the government's control - Progress towards some of the MDGs is hard to measure, and it's hard to see the MDGs providing a framework for long-term growth - Since domestic debt markets are ill developed throughout most of Africa, governments tend to finance large depicts by ramming debts into banks, which have no option to accept it because of financial repression - African countries need more flexible exchange rate and price systems - IMF --> World Bank program for the heavily indebted poor countries (most of which are in Africa) - It's important for African countries to improve the flexibility of their product and labor markets - Macroeconomic problems will be far less if aid comes in the form of grants - In the long run, growth is needed to raise standards of living in Africa
Why is productivity so important?
- When a nation's workers are very productive, real GDP is large and incomes are high - When productivity grows rapidly, so do living standards
The Per Worker production function
- Y/L (production) is on the y axis --> output per hour worked - K/L (capital) is on the x axis --> Capital per hour worked - Curve is concave down (increasing at a decreasing rate
The Great Depression was the worst economic disaster in U.S. history in terms of declines in real GDP and increases in the unemployment rate. Use the data in the following table to calculate the percentage decline in real GDP between 1929 and 1933. For GDP Deflator 2012 = 100. Year NGDP (B of $) GDP Def. ----- ---------------- ---------- 1929. $104.6. 9.4 1933 $57.2 7.0 Real GDP Changed by __% over the 4 year period between 1929 and 1933. Include a minus sign if necessary.
-26.6% ( First get real GDP by diving NGDP by GDP deflator, then take those numbers and do (RGDP later - RGDP earlier / RGDP earlier) * 100)
The monthly market basket for consumers consists of pizza, t-shirts, and rent. The table below shows market basket quantities and prices for the base year (Year 1) and in the following year. Product Base Yr Q $ in Y1 $ in Y2 --------- ----------- ------ ------ Pizza. 10. $2.50 $3.13 T-Shirts. 2. $20.00 $18.00 Rent. 1. $400.00 $440.00 In Year 1, the CPI for the economy is _______ In Year 2, the CPI for this economy is______
1) 100.0 ( P * Q, sum them up, then divide by the total, and multiply by 100) 2) 109.1 ( P * Q, sum them up, then divide by total of the BASE YEAR then multiply by 100)
Calculate the growth rate of real GDP for each year from 2017 to 2021: Year RGDP (B$) Growth rate ----- ------------ ------------- 2017. 18079. 2018. 18607. --1-- 2019. 19033 --2-- 2020. 18385 --3-- 2021. 19427 --4-- Solve for --
1) 2.92% 2) 2.29% 3) -3.40% 4) 5.67% Calculate by doing (RGDP later - RGDP earlier/ RGDP earlier) * 100
Calculate the missing values in the table below by using the provided data collected in the household survey for August 2022. Category. Value ----------- ------- Working- age pop. -1- Employed 158732 Unemployed. -2- Unemployment rate. 3.7% Labor force -3- Labor force partic. rate 62.4% Solve for --
1) 264152 2) 6099 3) 164831
Complete the following table (GO TO PS 1 Q 19!!!!!)
1) The CPI in 2014 equals 140.43 2) The CPI in 2016 equals 128.72
GO TO PS 1 Q 21 TO LOOK AT TABLE !!!!!!
1) The inflation rate between Year 1 and Year 2 is 8.78.7% 2) The inflation rate between Year 2 and Year 3 is 7.3
Consider the per-worker production function graph. (image is PS 3 Q16) (1) If there is an increase in capital per hour worked, holding technology constant, then.... (2) If there is an increase in technology, holding constant the quantity of capital per hour worked, then....
1) There is a movement from A to B 2) There is a movement from A to C
Calculate the annual rate of inflation for 2020 as measured by the CPI ( GO TO PS1 Q 10!!!!!)
1) Using the information in the table, the CPI for 2019, with 2010 as the base year, is 104.7 2) The inflation rate for 2020 as measured by the consumer price index (CPI) is 4.49%
1) What advice for finding a job would you give someone who lost his or her job because of machine learning? 2) According to the BLS, in what category of unemployment would that person belong? If someone lost his or her job because of machine learning, that person would be considered.....
1) You should tell the worker that he or she needs to learn new skills or move to another city to find a job. 2) structurally unemployed
An article in the Wall Street Journal contained the following observation: "Every month, millions of workers leave the job market because of retirement, to care for children or aging parents, to pursue more education, or out of discouragement. Millions of others jump in after graduating." Source: Josh Zumbrun, "Labor-Market Dropouts Stay on the Sidelines," Wall Street Journal, December 28, 2014. The millions of workers leaving the job market for the reasons given are.....(1) Even if they don't find a job right away, people entering the job market after graduating from high school or college will....(2)
1) not counted as unemployed in the BLS data because they are no longer actively looking for work. 2) be counted as part of the labor force by the BLS if they are actively looking for work.
1) The natural rate of unemployment is... 2) When the economy is at full employment, unemployment is equal to.....
1) the sum of structural unemployment and frictional unemployment 2) the natural rate of unemployment.
What is the rule of 70? 1) The rule of 70... 2) If real GDP per capita grows at a rate of 4.4% per year, it will take __ years to double
1).. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double. 2) 15.9 years
Price indexes can be used to compare prices across different periods. Suppose that a year of tuition for college at public institutions averaged a cost of $1,908 in 1989 and that the CPI index was 119 in 1989. 1. If the CPI index was 211 in 2009, then the cost of tuition in 2009, as the result of inflation, would equal.... Suppose that the actual average cost of tuition in 2009 was $6,368. 2. Relative to the expected cost computed above, the cost of tuition increased by ..... the amount of inflation.
1. $3383 (($ amount) * (late CPI/ earlier CPI)) 2. More than
Indicate whether each of the following is a final good, an intermediate good, or neither. 1. Coffee beans purchased by a coffee shop 2. One share of Google stock 3. A new pick-up truck purchased by a consumer 4. A new home purchased by a family
1. Intermediate good 2. Neither 3. Final good 4. Final good
Indicate whether each of the following transactions represents the purchase of a final good. 1. The purchase of wheat from a wheat farmer by a bakery. 2. The purchase of a new fleet of police cars by the local government. 3. The purchase of French win by a U.S. consumer. 4. The purchase of a new plane by American Airlines.
1. Is not the purchase of a final good 2. Is the purchase of a final good 3. Is the purchase of a final good 4. Is the purchase of a final good
Suppose the economy's consumer price index (CPI) in 2008 was 184 and the CPI in 2009 was 196. The inflation rate over the period from 2008-2009 was equal to... (Part 2)
6.5% (CPI later - CPI earlier / CPI earlier)
Growth rate calculation
= % change in Y = (Real GDP(later year) - Real GDP (Earlier year) / Real GDP (Earlier year)
What is foreign direct investment?
A capital investment (ex: factory) that is owned and operated by a foreign entity
What is foreign portfolio investment?
A capital investment financed with foreign money, but operated by domestic resident
New growth theory
A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system
Nominal GDP
A year's GDP measured at the prices in that year
Real GDP
A year's GDP measured at the prices in the base year
Key to economic growth
Accumulation of knowledge capital
"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline." (Part 1)
Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall
"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined." (Part 2)
Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined
An efficiency wage is...
An above-market wage paid by a firm to maximize worker productivity
Other costs of Inflation:
Arbitrary redistributions and tax distoritons
Unexpectedly high inflation....
Benefits borrowers, hurts creditors
What are the four major components of expenditures in GDP?
Consumption, Investment, Government Purchases, and Net Exports
Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck mechanic?
Cyclically unemployed
Physical capital is subject to...
Decreasing returns
Growth rate of per capita GDP calculation
Growth rate of per capita GDP = % change Y - % change in population
Which of the following is not a factor in why we would expect convergence to occur?
High marginal product of capital in rich countries
Unexpectedly low inflation....
Hurts borrowers, benefits creditors
According to the Economist article "The poor and the rich," which of the following are implications of the neoclassical growth model? I. Growth ultimately depends on technological progress II. Exports are the key to growth III. Rich countries will grow more slowly than poor countries IV. Technological innovation can depend on imperfect competition
I and III
Which of the following is not a source of technological change?
Increases in the labor force
Knowledge capital is subject to...
Increasing returns
Inflation calculation
Inflation = (P in later year - P in earlier year / P in earlier year) * 100
The experience of Cameroon, discussed in the chapter "Why Poor Countries are Poor," in the Harford book, tends to support which of the approaches to growth and development?
Institutional approach
The graph shows the relationship between country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth are true: (image is PS 3 Q 14)
Korea, Taiwan, and Hong Kong had the lowest incomes in 1960 and grew the fastest between 1960 and 2017
What caused the productivity slowdown from 1973 - 1994?
No universally agreed answer: - Rising oil prices and new environmental requirements made existing machines prematurely obsolete - Deterioration of the U.S. educational system - Productivity didn't really slows down. It only appeared to slow down due to measurement problems
According to Ray Fisman of Boston University and Michael Luca of the Harvard Business School, Amazon's voluntary decision to raise its minimum hourly wage to $15 per hour when the federal minimum wage is $7.25 may be good for "both Amazon's employees and its bottom line." Source: Ray Fisman and Michael Luca, "How Amazonss Higher Wages Could Increase Productivity," Harvard Business Review, October 10, 2018. Wouldn't paying higher wages to its employees reduce Amazon's profits? Why would they have adopted such a policy?
No, the higher wage would not decrease profits if it motivates workers to work harder and be more productive
The following appeared in a newspaper article: "Inflation in the Lehigh Valley during the first quarter of [the year] was less than half the national rate...So, unlike much of the nation, the fear here is deflation-when prices sink so low that the CPI drops below zero." Source: Dan Shope, "Valley's Inflation Rate Slides," (Allentown, PA) Morning Call, July 9, 1996. Part 2. Do you agree with the reporter's definition of deflation?
No. Deflation is defined as a negative inflation rate
The following appeared in a newspaper article: "Inflation in the Lehigh Valley during the first quarter of [the year] was less than half the national rate...So, unlike much of the nation, the fear here is deflation-when prices sink so low that the CPI drops below zero." Source: Dan Shope, "Valley's Inflation Rate Slides," (Allentown, PA) Morning Call, July 9, 1996. - Do you agree with the reporter's definition of deflation? (Duplicate)
No. Deflation is defined as a negative inflation rate.
Suppose a house is built and sold in the year 2010. If the house is resold in the year 2021, is the value of the house included in Gross Domestic Product (GDP) for 2021? (Part 1)
No. GDP for 2021 includes only production that occurs during 2021
Types of unemployment: Frictional
People between jobs / left their jobs
Labor force participation rate
Percentage of adult population that is in the labor force
Unemployment rate
Percentage of labor force that is unemployed
Convergence
Poor countries will grow faster than rich countries, and eventually catch up in terms of per capita GDP
Refer to the graph on the right. According to the concept of convergence, which of the following is CORRECT? (Image is from PS 3 Q17)
Poorer countries should grow more quickly and will be at point A (top left part of the graph where the straight line is sloping down)
Many poor countries may experience slow growth due to any of the following reasons except....
Rapid inflow of capital from abroad
Consider the following simple economy that produces only three goods: 2009 (Base Year) Product. Quantity. Price ---------- ---------- -------- Denim Pants. 80 $40 Wine 90. $11 Textbooks. 15 $90 2017 Product. Quantity. Price ---------- ---------- -------- Denim Pants. 100 $50 Wine 80 $10 Textbooks. 20 $100
Real GDP in 2017 equals $6680 (RGDP = P(1,2009) * Q(1,2017) + P(2,2009) * Q(2,2017).......
Which of the following is the best measure of the standard of living of the typical person in a country?
Real GDP per person
Table 24-1 Year Peaches Pecans 2005 $11 per bushel - Peaches $6 per bushel - Pecans 2006 $9 per bushel - Peaches $10 per bushel - Pecans
Refer to this for the next following questions
Growth rate
The annual percentage change in real GDP
Costs of inflation: Menu costs
The costs of changing prices for menus (reduced with more internet usage)
Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country in a year
Costs of inflation: "Shoe-leather costs"
The resources wasted when inflation encourages people to reduce their money holding - includes the time and transactions costs of more frequent bank withdrawls
Currently, the Bureau of Labor Statistics does not include homemakers in its employment and labor force totals. What would happen to the unemployment rate and the labor force participation rate if homemakers were included in these numbers?
The unemployment rate would decrease and the labor force participation rate would increase.
Shortly before the fall of the Soviet Union, the economist Gur Ofer of the Hebrew University of Jerusalem, wrote this: "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." Source: Gur Ofer, "Soviet Economic Growth, 1928-1985," Journal of Economic Literature, December 1987, p. 1,784. This turned out to be a very poor growth strategy because...
There were diminishing returns to capital
Unemployment rate calculation
Unemployment rate = (Number of unemployed / labor force) * 100
Types of unemployment: Cyclical
Unemployment that varies with the business cycle (it's involuntary) - higher during recessions - lower during expansions
Value of past amount of money in a later year calculation
Value in later year dollars = (Value in earlier year dollars ( CPI later/ CPI Earlier)
Potential GDP
What GDP would be if all factors of production are utilized at normal rates (40 hour weeks)
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities
BLS Employment Survey: Employed means...
Worked, even part time, in the last week
Which equation represents the relationship between GDP and the four major expenditure components?
Y = C + I + G + NX
Rule of 70
Years it takes for an economy to double --> 70/ yearly growth rate
Would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2021? (Part 2)
Yes. GDP for 2021 includes the market value of final goods and services. This includes real estate services
Suppose that the inflation rate turns out to be much lower than most people expected. In that case...
a borrower will lose from the situation while a lender will gain
Consider the effect of each of the following on the unemployment rate: a. The minimum wage law... b. The effect of labor unions on overall unemployment is ___ since only a ____ percentage of the labor force outside the government is unionized c. An efficiency wage...
a) Has only a small effect on the unemployment rate since only a small part of the labor force earns the minimum wage b) small ; small c) Increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied
Refer to the diagram to answer the following: (image is from PS 3 Q7 and depicts per worker production function with capital and technological changes) a) The movement from point A to point B represents: b) The movement from point B to point C represents: c) The movement from point A to point C represents:
a) More capital per hour worked b) Technological change c) Technological change and more capital per hour work
Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, what was the inflation rate from 2005 to 2006? a. 20 percent b. 16.7 percent c. 10 percent d. 8 percent
a. 20 percent
If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from a. 23.3 years to 17.5 years. b. 23.3 years to 20.6 years. c. 11.2 years to 10.8 years. d. 28.0 years to 21.0 years.
a. 23.3 years to 17.5 years.
If GDP is growing at 5%, and population is growing at 2%, what is the (approximate) growth rate of per capita GDP? a. 3% b. 5% c. 7% d. 2.5%
a. 3%
Which of the following does not help explain why low-income countries might be expected to converge to the levels of per capita GDP enjoyed by richer countries? a. Increasing returns to scale. b. Technology transfer. c. Diminishing returns to capital. d. Higher returns to investment in poor countries.
a. Increasing returns to scale
Which of the following statements about GDP is correct? a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices. b. Nominal GDP values production at constant prices, whereas real GDP values production at current prices. c. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process. d. Nominal GDP is always higher than real GDP.
a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices.
Economists have proposed which of the following as a possible explanation for the productivity slowdown of the mid-1970s? a. a deterioration of the educational system b. large increases in research and development c. excessive use of fiscal policy d. diminishing marginal returns
a. a deterioration of the educational system
A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes a. a positive contribution both to investment and to GDP. b. a positive contribution both to consumption and to GDP. c. a positive contribution to GDP, but it does not affect investment or consumption. d. a positive contribution to investment, but it does not affect GDP.
a. a positive contribution both to investment and to GDP.
In the country of Mainia, only cranberries and maple syrup are produced. In 2006, 50 units of cranberries are sold at $20 per unit, and 100 units of maple syrup are sold at $10 per unit. The price of cranberries was $10 per unit and the price of maple syrup was $15 per unit in 2005, which is the base year. For 2006, a. nominal GDP is $2,000, real GDP is $2,000, and the GDP deflator is 100. b. nominal GDP is $2,000, real GDP is $2,500, and the GDP deflator is 125. c. nominal GDP is $2,500, real GDP is $2,000, and the GDP deflator is 83.3. d. None of the above is correct.
a. nominal GDP is $2,000, real GDP is $2,000, and the GDP deflator is 100.
Potential GDP is defined as a. the level of GDP produced when all factors of production are utilized at "normal" rates. b. the amount of GDP produced if there is no frictional unemployment. c. the amount of GDP produced if there is no structural unemployment. d. the maximum of GDP that the economy can produce.
a. the level of GDP produced when all factors of production are utilized at "normal" rates.
Indicate which component of GDP will be affected by each of the following transactions involving General Motors. a. You purchase a new Chevrolet Silverado pickup from a GM dealer. b. You purchase a 2017 (preowned) Chevrolet Silverado from a friend. c. GM purchases door handles for the Silverado from an auto parts manufacturer in Indiana. d. GM produces 1,000 Silverados in a factory in Flint, Michigan, and ships them to a car dealer in Shanghai, China. e. GM purchases new machine tools to use in its Flint factory. f. The state of Michigan builds a new highway to help improve access to GM's Flint plant.
a.) Consumption Expenditure b.) Not included in GDP calculation c.) Not included in GDP calculation d.) Net Export Expenditure e.) Investment Expenditure f.) Government Expenditure
A steel company sells some steel to a bicycle company for $100. The bicycle company uses the steel to produce a bicycle, which it sells for $200. Taken together, these two transactions contribute a. $100 to GDP. b. $200 to GDP. c. between $200 and $300 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle. d. $300 to GDP.
b. $200 to GDP
Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, the CPI for 2006 is a. 100. b. 120. c. 200. d. 240.
b. 120
Suppose that in the small country of Sociopolis there are 6 million people in the working age population, that the labor-force participation rate is 70 percent, and that there are 3.8 million people employed. To the nearest tenth, what is the unemployment rate? a. 10.5% b. 9.5% c. 6.7% d. None of the above
b. 9.5%
Refer to Figure 10-1. Technological improvement is illustrated in the per-worker production function in the figure above by a movement from a. C to B b. B to C c. A to C d. D to C
b. B to C
Assuming the real interest rate stays constant, inflation a. decreases the nominal interest rate. b. increases the nominal interest rate. c. redistributes wealth from borrowers to lenders. d. makes real income grow faster than nominal income.
b. increases the nominal interest rate.
By offering more generous unemployment insurance programs, European countries can expect a. to collect less in taxes than in the United States b. longer periods of unemployment for their workers c. shorter periods of unemployment for their workers d. workers to gain new skills quickly in response to fluctuations in the labor market
b. longer periods of unemployment for their workers
According to new growth theory, a. growth in real GDP per capita occurs only if there are increasing returns. b. technological change is influenced by economic incentives. c. economic growth is determined by forces outside the control of the market system. d. centrally-planned economies are the most efficient.
b. technological change is influenced by economic incentives.
What basket of goods is used to construct the CPI? a. a random sample of all goods and services produced in the economy b. the goods and services that are typically bought by consumers as determined by government surveys c. only food, clothing, transportation, entertainment, and education d. the least expensive and the most expensive goods and services in each major category of consumer expenditures
b. the goods and services that are typically bought by consumers as determined by government surveys
When an economy faces diminishing marginal product of capital, a. the slope of the per-worker production function becomes steeper as capital per hour worked increases. b. the slope of the per-worker production function becomes flatter as capital per hour worked increases. c. the per-worker production function shifts to the right. d. the per-worker production function shifts to the left.
b. the slope of the per-worker production function becomes flatter as capital per hour worked increases.
Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job, a. the unemployment rate decreased. b. the unemployment rate increased. c. the working-age population increased. d. the labor force participation rate decreased.
b. the unemployment rate increased.
The country of Aquolina imports $20B worth of goods from other countries. It exports $15B worth of goods. Its GDP is $250B. Its government purchases $30B worth of goods and services each year, and distributes $20B in transfer payments. Aquolina's consumers buy $150B worth of goods and services each year. What is investment in Aquolina? a. $35B b. $55B c. $75B d. Cannot be determined with the information given
c. $75B
The GDP deflator is 320 in one year and 360 in the next year. What was the inflation rate? a. 6.7 percent b. 8 percent c. 12.5 percent d. 40 percent
c. 12.5 percent
Which types of unemployment make up the natural rate of unemployment? a.Frictional and cyclical b.Structural and cyclical c.Frictional and structural d.None of the above
c. Frictional and structural
Which of the following could cause nominal GDP to decrease, but real GDP to increase? a. The price level rises and the quantity of final goods and services produced falls. b. The price level falls and the quantity of final goods and services produced falls. c. The price level falls and the quantity of final goods and services produced rises. d. The price level rises and the quantity of final goods and services produced rises.
c. The price level falls and the quantity of final goods and services produced rises.
Suppose that homemakers are classified as "employed" in the labor force statistics, rather than being counted as "out of the labor force." This would a. decrease the number of persons in the labor force. b. decrease the number of persons in the working-age population. c. increase the measured labor force participation rate. d. increase the measured unemployment rate.
c. increase the measured labor force participation rate.
If the per-worker production function shifts down, a. positive technological change has occurred in the economy b. the per-worker production function becomes steeper c. it now takes more capital per hour worked to get the same amount of real GDP per hour worked d. an economy can increase its real GDP per hour worked without changing the level of capital per hour worked
c. it now takes more capital per hour worked to get the same amount of real GDP per hour worked
Transfer payments are a. included in GDP because they represent income to individuals. b. included in GDP because the income eventually will be spent on consumption. c. not included in GDP because they are not expenditures on currently produced goods or services. d. not included in GDP because taxes will have to be raised to pay for them.
c. not included in GDP because they are not expenditures on currently produced goods or services.
When a firm sells a good or a service, the sale contributes to U.S. GDP, as measured by the expenditure method a. only if the buyer of the good or service is a household. b. only if the buyer of the good or service is a household or another firm. c. only if the good or service was produced within the U.S. d. only if the good or service was sold within the U.S.
c. only if the good or service was produced within the U.S.
GDP is defined as a. the market value of all goods and services produced within a country in a given period of time. b. the market value of all goods and services produced by the citizens of a country, regardless of where they are living in a given period of time. c. the market value of all final goods and services produced within a country in a given period of time. d. the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.
c. the market value of all final goods and services produced within a country in a given period of time.
What index is used to measure the average prices paid by a typical family? An average of the prices of the goods and services purchased by a typical family is the: (Part 1)
consumer price index (CPI)
Refer to Figure 10-1. Diminishing marginal product of capital is illustrated in the per-worker production function in the figure above by a movement from a. D to C b. B to C c. C to D d. A to C
d. A to C
Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real GDP per capita is $9,000. If absolute convergence holds, what would you predict about the growth rates in real GDP per capita across these two countries? a. The growth rate of real GDP per capita will be lower in Alpha than it is in Beta. b. The economic growth model makes no predictions regarding differences in growth rates of real GDP per capita across the two countries. c. The growth rate of real GDP per capita in Alpha and Beta will be the same. d. The growth rate of real GDP per capita will be higher in Alpha than it is in Beta.
d. The growth rate of real GDP per capita will be higher in Alpha than it is in Beta.
Potential GDP... (Part 2)
grows over time
Real interest rate calculation
r = i - pi
Nominal interest rate
i
Nominal rate calculation
i = r + pi
The real interest rate... - Suppose an economy has an inflation rate of 3.2% and a bank makes a loan with an interest rate of 5.5%. In this case, the real interest rate is ...%
is equal to the nominal interest rate minus the inflation rate - 2.3%
At the macro-economy level...
knowledge capital exhibits increasing returns and physical capital exhibits decreasing returns
If prices rise over time, then real GDP will be
larger than nominal GDP in years before the base year
Per capita GDP
per Capita GDP = GDP/ Population
Inflation rate
pi
Real interest rate
r
Menu costs are... The internet has ... the size of menu costs
the costs to firms of changing prices - reduced
Potential GDP is.. (Part 1)
the level of GDP produced when all factors of production are utilized at "normal" rates
If the economy is experiencing deflation....
the nominal interest rate will be lower than the real interest rate
If inflation is expected to increase...
the nominal interest rate will increase