ECO 202 Chapter 5-8 Study Guide
In a closed economy, without the government, the consumption expenditure equals $5,000 and the investment expenditure equals $2,000. Refer to the scenario above. What is the national income of the economy?
$7,000
Catch-up growth is the An example of catch-up growth is Sustained growth is the An example of sustained growth is
(1) process by which relatively poorer nations increase their incomes by taking advantage of the knowledge and technologies already invented in other technologically advanced nations. (2) South Korea, which by 1970 had become poorer relative to the United States, but over the last 40 years grew faster than the United States, closing the gap that had opened up previously. (3) process where GDP per capita grows at a positive and relatively steady rate for long periods of time. (4) the United States, which demonstrated sustained growth between 1820 and 2007.
What are the disadvantages of using Big Macs to measure purchasing power parity?
Big Macs represent only a very small fraction of people's consumption The Big Mac index simply compares a bundle consisting of only one good
Initial phases of the growth process are often accompanied by increasing income inequality within a country. Using concepts developed in the chapter, explain why this might be the case
Creative destruction creates economic winners and losers
Which of the following countries will be better off in the long run?
Country A with $1 comma 0001,000 annual GDP per capita and a 66 percent annual growth rate.
Every five years, the Bureau of Economic Analysis (BEA) revises past GDP figures and the methodology involved in computing national income. In June 2013, the BEA decided to increase the weighting given to the creation of intellectual property in the national income accounts. This means that the intellectual property involved in the creation of books, movies, photographs, and even greeting cards will be included in GDP. Moreover, the initial cost of producing intellectual property will be treated as a capital investment and future flows of revenue from the book or TV show will be added later on. What are the possible difficulties that the BEA could face with this new approach? The BEA plans to retrospectively revise U.S. GDP data using this new methodology. Given that the debt-to-GDP ratio is a measure of a country's debt in relation to its GDP, how will this ratio be affected by the BEA's revisions? If GDP is revised downward as a result of the revision, the debt-to-GDP ratio will_______; on the other hand, if GDP is revised upward or there is no change, then the ratio will _____ Do you think the new revisions will make the GDP figures more representative of the value of economic activity in the country?
Deciding how broadly or narrowly to define the concept of intellectual property, Identifying the qualifying expenditures that lead to the creation of the intellectual property increase, decrease or not change Definitely yes, since intangible assets such as intellectual property have made increasingly valuable contributions to living standards over the years. Thus, the new revisions will more accurately represent the economy's output.
The market value of the final goods and services produced within the borders of a country is __________ Suppose the production of U.S.-owned factors operating abroad exceeds the production of foreign-owned factors operating in the United States For the United States, ___________
GDP GNP is larger than GDP
GDP is estimated using expenditure-based accounting by using the equation
GDP = C+I+G+X−M.
Which of the three hypotheses developed in the chapter would be most likely to view foreign aid as essential for economic development? Explain
Geography hypothesis, because climate cannot be changed.
In 1968, Paul Ehrlich, a Stanford University professor, claimed that overpopulation would lead to famines and starvation in the 1970s and 1980s. In his book The Population Bomb, he said that unless population growth was curbed, millions around the world would die. However, as we now know, this did not happen. What do you think was the flaw in Ehrlich's argument?
He did not account for the role that technology can play in increasing the food supply
Which of the following statements correctly highlights a difference between countries with extractive economic institutions and countries with inclusive economic institutions?
Innovation is more likely in countries with inclusive economic institutions, than in countries with extractive economic institutions.
What factors explain the dramatic increases in life expectancy that we saw in most countries in the twentieth century?
Innovations in disease control, including the use of DDT against malaria. The establishment of simple but effective medical and public health practices. Scientific breakthroughs leading to the development of antibiotics and vaccines.
The great disparity in economic prosperity between North and South Korea can best be explained by the
Institutions hypothesis
What is an accounting identity? The accounting identity that is used to estimate the gross domestic product of a country is given by
It is a statement that by definition must be true. It is an equality that must be true regardless of the value of its variables. Production equivalent≡ Expenditure equivalent≡ Income
About two-thirds of income payments goes to labor and one-third goes to capital. Why has this proportion remained more or less constant over the years?
Labor's contribution to total production has remained stable at approximately twice the contribution of capital
What important factors do GDP estimates leave out?
Leisure. Home production. The production of illegal professions. Capital depreciation.
Before 1800, a pattern developed showing that increases in aggregate income led to an expanding population, which in turn reduced income per capita and put downward pressure on the population. This pattern is known as the The Malthusian cycle
Malthusian cycle was common prior to the Industrial Revolution
China's economy is one of the fastest-growing economies in the world. Growth in China is primarily driven by investment and exports. You are discussing the sustainability of China's growth model with your friend. He says that according to the aggregate production function, China needs to continue to increase its physical capital stock to ensure sustainable growth. Do you agree? If increasing the stock of physical capital does not lead to sustained growth for China, what should China do to ensure the sustainability of its growth model?
No, because diminishing marginal product of capital means that growth will not be sustained. improve its technology
Does an increase in GDP per capita of a nation imply that all its citizens have become richer?
No, because the average income per capita of a nation is not the same as the income of each individual in that nation.
In 2011, China revised its poverty line upward to 2,300 yuan per year, or 6.3 yuan per day. At the prevailing exchange rate, this was equal to a little less than a single U.S. dollar. Some commentators felt that China's poverty line fell short of the World Bank's poverty line of $1.25 per day, in 2005 purchasing power parity (PPP) U.S. dollars. Would you agree?
No, since the Chinese poverty measure is not slated in 2005 PPP U.S. dollars
Amidst discussions on budget cuts to rein in the U.S. fiscal deficit, some commentators were of the opinion that foreign aid spending should be reduced. Others felt that reducing foreign aid would adversely affect the recipient countries. How effective has foreign aid been in reducing poverty?
Not very effective, because the aid has not been directed at activities that increase sustained growth
Which one of the following is not in the circular flow diagram as one of the three systems of GDP measurement?
Taxes are shown as a flow from the private sector to the public sector.
First Japan, then Korea, and now China have managed to grow very rapidly without devoting many resources to research and development (R&D). Given the importance noted in the text of technological advance as an engine of growth, this seems to be a contradiction. How could rapid growth in these countries (and others as well) have been achieved without a substantial R&D commitment on their part?
Technology developed in other more advanced countries can be adopted and adapted by poor countries to serve local industry in local circumstances
Which factors explain economic growth in the United States over the past few decades? Which factor is the most important contributor to growth in the United States?
Technology (A).. Human capital (H). Physical capital (K) Technology
Which of the following statements is true?
The gap between the GDP per capita of the United States and China has decreased over the last 40 years
What are the two components of technology?
The knowledge of how to produce new products A more efficient means of production
Why is it essential to differentiate between real and nominal growth rates of GDP?
The nominal growth rate combines the effect of price changes along with changes in the production of goods and services and thus gives a less clear indication of the impact on living standards. It is the real growth rate that is meaningful since it indicates the change in the production of goods and services, a very significant source of improved living standards.
What did Malthus predict about economic growth? Did his predictions come true?
The number of children per family would adjust so that income would remain close to a subsistence level. No, because he failed to account for the demographic transition and the impact of the Industrial Revolution
What is meant by capital depreciation? Why might one consider the value of depreciation in estimates of national income?
The reduction in the value of physical capital due to obsolescence or wear and tear including depreciation gives a more complete picture of economic production. Failing to do so overstates what society can consume (in the broadest sense of the term)
What is the key difference between the Consumer Price Index (CPI) and the GDP deflator?
The two indexes measure price changes for different "baskets" of products.
Suppose you move out of a rented apartment and into your own house. How would this be treated in the income-based accounting method of estimating GDP?
There would be no change, since renting an apartment and home ownership are both included in capital income.
One part of Nogales lies in the United States, in Arizona, and the other part lies in Sonora, Mexico. Life in Nogales, Mexico is very different from life in Nogales, Arizona. The average income in Nogales, Mexico is about one-third the average income in Nogales, Arizona. Education levels, life expectancy, and health conditions are better in Nogales, Arizona than in Nogales, Mexico. Unlike Nogales in Arizona, Nogales in Mexico has only recently adopted political reforms, bringing it closer to functioning as a democracy. Crime rates are also lower in Nogales, Arizona than in Nogales, Mexico. Since both cities are located so close to each other, they share similar geographical conditions and climate. The inhabitants of both cities also share a common ancestry and enjoy the same type of food and music. Based on this information, Nogales, Arizona is likely more prosperous than Nogales, Mexico because _
U.S. citizens can take part in elections that allow them to elect their government democratically
After the Second World War, Germany was divided into two parts, East Germany and West Germany. East Germany was controlled by the former Soviet Union while West Germany was controlled by the other Allied governments: the United States, the United Kingdom, and France. The war had destroyed most of Germany's economy. The Soviet Union as well as the Allied occupation forces sought to rebuild the economies of their respective parts. Before the fall of the Berlin Wall reunited East and West Germany in 1990, West Germany's economy grew at an annual average growth rate of 4.4 percent, which was about 3 times higher than East Germany's rate. Draw the parallel between the natural experiment discussed in the chapter and the case of East and West Germany. Based on the information given in the question and your own research, why do you think two otherwise similar areas had such divergent growth rates? East and West Germany likely had different growth rates because
West Germany's economic institutions were market oriented
How do increases in technology affect the aggregate production function?
With increases in technology, the aggregate production function shifts up, indicating more output is produced from the same amount of inputs.
Is real income per capita more relevant in understanding differences in international living standards than real income per worker?
Yes, as it conveys the conditions of the whole population including children and the elderly
The category of expenditure that accounts for the highest share of GDP in the United States is
consumption
If the level of aggregate expenditure was $16.8 trillion in 2013, the level of aggregate income in the economy during 2013 was
also $16.8 trillion because of the identity between aggregate expenditure and income.
Physical capital is The capital stock of an economy is
any good, including machines and buildings, used for production the value of equipment, structures, and other non-labor inputs used in production
A firm's value added refers to the dollar value of Suppose U.S. drivers purchased $6060 billion of ExxonMobil-produced gasoline during a recent year, with one-half purchased directly from ExxonMobil-owned gas stations and one-half from independent (or third-party) gas stations. Suppose further that ExxonMobil purchased the oil (which it refined into gasoline) from foreign producers for $2222 billion and that it receives 60 percent of the sales revenue that independent stations generate from selling ExxonMobil gasoline. In this case, the value added by ExxonMobil to U.S. GDP is _____ billion
a firm's sales revenue minus the firm's purchases of intermediate products from other firms. 26
Suppose a relatively poor country receives foreign aid to be used for education. However, a large portion of the money is stolen by local government officials. Nevertheless, some of the schools do receive some of the money that was intended for them. Suppose the schools that receive the aid tend to be those in richer areas that have more resources to start with and better connections. In this case, the foreign aid for education is likely to
contribute to greater inequality of resources
The existence of extractive institutions discourages entrepreneurship in an economy by
creating barriers to entry
The culture hypothesis states
cultural beliefs are responsible for differences in prosperity.
You decide to cook your own meal rather than eat in a restaurant. As a result, GDP estimates will
decrease
The geography hypothesis states
ecology is responsible for differences in prosperity.
Political creative destruction refers to The potential process of political creative destruction could lead to extractive institutions because
economic growth destabilizing political regimes. the politically powerful fear losing their privileged positions
Unlike extractive economic institutions, inclusive economic institutions
enforce contracts
The ________ nature of economic growth is one of the major reasons why there are large differences in GDP per capita across countries.
exponential
Real GDP refers to GDP adjusted:
for changes in prices
The saving rate in an economy is defined as the Factors that help households decide whether to consume or save their income are Household saving decisions impact investment in the economy by having
fraction of total income that households save. expectations about taxes, expectations of future income growth, the interest rate a direct impact on investment, as saving is correlated with investment.
The government (G) component of aggregate expenditure includes
infrastructure, such as highways and bridges, military hardware purchases, salaries to teachers, firefighters, and police officers
Suppose that a 10 percent increase in the physical capital stock increases GDP by 10 percent. Now consider an additional 10 percent increase in the physical capital stock. This increase in the physical capital stock will increase GDP by
less than 10 percent
GDP at purchasing power parity (PPP) takes into account variations in PPP attempts to work out how much currency will be needed to buy GDP per capita in PPP is the most useful for comparing
living costs, the same, living standards
The Human Development Index measures The correlation between this index and real income per capita in a country is
living standards across various countries countries with higher real income per capita tend to have higher levels of this index
Economists include the word final in the definition of GDP because we
must avoid the error of double counting. only seek to value the end product in a chain of production.
When current market prices are used to determine the value of each unit that is produced in an economy, the resulting aggregate is known as _______ In order for comparisons of production across time to be meaningful, we must use
nominal GDP real GDP
If the geography hypothesis holds, then:
poorer countries are permanently disadvantaged.
The term efficiency units of labor is the
product of the number of workers and the level of human capital.
The Wall Street Journal and the Heritage Foundation jointly publish "The Freedom Index." This index gives a yearly ranking of world countries based on economic freedom. Factors considered include the status of property rights, the extent of corruption, and the ease of starting and running a business. Consider North Korea and South Korea. Go to http://www.heritage.org/index/ranking. The freedom ranking category of North Korea is ____ and the freedom ranking category of South Korea is _____
repressed, mostly free
The level of economic activity is calculated using the income method by
summing labor income and capital income. adding together the income payments received by the various agents in the economy. tracking the flow of funds from firms to the owners of the factors of production.
The average American is so much richer than the average Indian due to differences in
technology, the capital stock, human capital
Moore's Law states that If Moore's Law is correct, then which variable in the production function will most directly be impacted?
the number of transistors on a chip will double approximately every two years. A
The total efficiency units of labor are The relationship between this concept and human capital is described as: An increase in the average worker's level of human capital will, all else equal, ____________ the total efficiency units of labor in an economy.
the product of the total number of workers and the average human capital of each worker. increase
The institutions hypothesis explains the difference in prosperity among nations is due to
the way societies provide public goods
