ECN MODULE 3 FINAL EXAM
8. Discuss what is meant by capital deepening in the context of physical capital and human capital. Using historical evidence, what seems to be the "recipe for economic growth". (7.3)
Capital deepening means an increase in the amount of capital per worker. In the context of human capital, it means the form of higher education or skills or years of experience. In the context of physical capital, investing in technology to increase productivity in quality and quantity. The recipe for economic growth is investing in labor productivity with investments in human capital, technology, and physical capital.
12. Discuss what is meant by cyclical unemployment (relate this to the business cycle) as a way of describing why there is short-run unemployment. Why might wages by "sticky" downwards (explain what this means), and thus unemployment may not fall as fast as we might expect if there is a surplus of labor in the labor market? (8.3)
Cyclical unemployment is unemployment that is caused by the economy when it moves from expansion to recession or from recession to expansion. When an economy slows down a business, the business is not able to sell products and consumers are not buying which results in level of production reducing which leads to having to let workers go (cyclical unemployment). Wages might be "sticky" downwards meaning the tendency for a price to move up easily but difficult to move down. Sticky downwards happens due to a numerous of reasons such as reducing minimum wage for low- skilled workers is ILLEGAL, wage cuts violating union workers contracts, Implicit contracts, the efficiency wage theory, adverse selection of wage cut arguments, insider-outsider model, and the relative wage coordination argument.
6. Discuss what is meant by the period of modern economic growth, making sure to address the role of the Industrial Revolution. How does a predictable and fair rule of law and enforceable contractual rights contribute to economic growth? (7.1)
During the time of the industrial revolution, the benefits of economic growth were shared unevenly. The prices did drop due to industrial competition which raised the standard of living for average American workers but due to immigrants increasing population growth, it led to job insecurity. Employees would commonly work 60 hours per week with no pensions or injury compensations. The unfair conditions and uncertainty in labor markets led to the development of unions. The American Federation of Labor focused on advocating for pay, hours, and safety. Unions argued that without a more equal economic system, America would become less free instead of more free. More than 150 years ago, modern corporations began to form and drive way from inequality in the market industries. Economic growth depends on rule of law, protection of property rights, and contractual rights by a country's government to ensure that markets can work proficiently. A world without a legal system that implements contracts, there would be a risk of people not making payments. This would cause difficulty in transacting business and would slow down our economic growth.
9. What is meant by economic convergence between rich and poor countries. Summarize the arguments for why we are likely to see further convergence in the decades ahead, and arguments that convergence is neither inevitable nor likely. (7.4)
Economic convergence is a pattern in which low and middle income economy based countries grow faster than countries with high income based economies. The first argument that supports convergence is based on diminishing marginal returns. That even though deepening human and physical capital will increase the GDP per capita, the law of diminishing returns suggests that as an economy continues to raise human and physical capital, then the marginal gains to economic growth will diminish. The second argument that favors convergence is that low income based countries may find it easier to improve their technologies compared to high income countries. High income based countries must invent new technologies whereas low income based countries can find ways to apply existing technology that has already been invented. The third argument that supports convergence is that optimist argues that many countries observed from those that have grown more quickly and have learned from it. Once the people of a country enjoy the benefits of a higher standard of living, then they may be more likely to build and support the market-friendly institutions that will help provide a standard of living. The first argument that convergence is neither inevitable nor likely is the development of new technology can provide a way for an economy to avoid the diminishing marginal returns of capital deepening. The second argument that convergence is neither inevitable nor likely is when it comes to adapting to new inventions of technology, a society's performance is not guaranteed but is the result of whether the country's economic, educational, and public policy institutions are supportive. For example, if low income based countries have many opportunities to copy and adapt technology but if they lack the appropriate and supportive economic aspects, the theoretical possibility that backwardness might have certain advantages.
14. Describe how economist measure the inflation rate using a basket of goods and services. Include the role of index numbers and base years in your answer (9.1)
Economist measure the inflation rate using a basket of goods and services by this equation: Inflation = (Price Index in current year - Price Index in base year) / Price Index in Base year x 100.
7. List and describe the determinants of economic growth, both in terms of GDP and GDP per capita. How are these related to labor productivity? (7.2)
Economists measure economic growth by an increase in real GDP per capita and real GDP occurring over some time period. The determinants of economic growth in terms of GDP are the workforce, human capital, physical capital, and technology. The determinants in GDP per capita are human capital per person, physical capital per person, and technology per person. These are related to labor productivity because all factors that are a part of GDP and GDP per capita all play a role in how much a worker is productive.
5. Discuss the limitations of using GDP as a measure of the standard of living of individuals between countries. (6.5)
GDP is used to measure the standard of living of individuals between countries but does contain limitations such as GDP measuring what is spent on environmental protection, healthcare, and education but it does not include actual level of environmental cleanliness, health, and learning. GDP cannot explain or fully capture the broad idea of standard living.
1. Describe what gross domestic product (GDP) is measuring. Identify the four (or five) demand components of GDP, and for the US roughly what percentage does each category make up for the modern US economy. (6.1)
Gross domestic product is used to help measure the nation's overall economy. GDP measures the value of all final goods and services produced in a full year. The five demand components of GDP are consumption, investment, government, imports and exports. According to the Factbook on the CIA.GOV website our US economy in 2017, the consumption percentage was 68.4%, Investment was 17.2%, government percentage was 17.3%, import was -15%, export was 12.1%.
17. Describe why high and persistent inflation is seen as undesirable. (9.4)
High and persistent inflation is seen as undesirable because it redistributes the value of money. Inflation causes blurs price signals. That makes price signals viewed with uncertainty. Inflation also causes difficulty in making long term decisions for individuals in households and business planning. It causes problems in original plans which is unfortunate.
18. Discuss ways that individuals or institutions can protect themselves from the threat of inflation. (9.5)
Individuals and institutions can protect themselves from the threat of inflation by indexation which is when a price, wage, or interest rate is altered automatically with inflation. An example of indexation are (COLAs) cost of living adjustments which are wage contracts that guaranteed their wages to be kept up with inflation given out by labor unions.
4. Discuss how GDPs between countries that use different currencies can be measured, using both market exchange rates and PPP-equivalent exchange rates. How does examining GDP per capita across countries give us a better sense of a country's relative standard of living? (6.4)
Market exchange rates are based on day-to-day basis depending on supply and demand in foreign exchange markets whereas PPP-equivalent exchange rates provide a longer run measure of the exchange rate.
2. Contrast nominal GDP vs. real GDP. When tracking GDP overtime, why does it make more sense to look at real GDP instead of nominal GDP? (6.2)
Nominal GDP measures the value of all final goods and services produced using current prices. Real GDP measures the value of all final goods and services produced using the prices of a base year. When tracking GDP overtime, it makes more sense to look at real GDP rather than nominal GDP because nominal GDP could be misleading because you do not know if it is because of increased production or higher prices whereas real GDP is not affected by changes in prices.
11. Describe how the US Unemployment rate varies over time (i.e., what seems to be the minimum and maximum value), and how it varies sex, age, as well as race and ethnicity. What are the primary ways that people can find themselves unemployed? (8.2)
The United States unemployment rate tends to fluctuate over time as the economy moves in and out of recessions. Over time the unemployment rate seems to return to the range of 4% and 6%. In recent decades, the two rates of unemployment for men and woman tend to me close but unemployment for men are somewhat higher. In 1972-2016 the unemployment rate for Blacks was typically twice as high than Whites, while Hispanics unemployment rates were found in between. By age, unemployment is highest for younger people. The unemployment rate becomes lower with age. People can find themselves unemployed due to lack of education. More education offers connections in labor market while low-skilled workers get less labor market opportunities which makes them less motivated to find jobs.
3. Identify the major elements of the business cycle, making sure to define what this means. Contrast recessions from depressions. (6.3)
The business cycle is measured by two components which are real GDP over time. The first element of a business cycle is expansion which is an increase in positive economic factors. Second are peaks which are when economic factors are at their highest and cannot go further. This is when the maximum level of growth is established. Third is called a recession which is when all positive economic factors start to fall. This is when the demand for goods and services starts declining. Fourth is called a depression which is when there is a consistent decline in economic growth. Fifth is called a trough which is a negative point in the economy.
15. Discuss what is meant by and included in the consumer price index (CPI), and why it could be difficult to accurately measure the CPI over time. What is meant by core inflation? What are other measures of inflation? (9.2)
The consumer price index (CPI) is a measure of inflation that United States statisticians calculate that is based on the price level from a fixed basket of goods and services that represents the average consumers purchases. The eight major categories included in the CPI are food & beverages, housing, apparel, transportation, medical care, recreation, education, and communication. It could be difficult to accurately measure the CPI over time because of the substitution bias meaning the CPI cannot consider that people can substitute away from goods that have risen in prices. Quality/new goods bias which is when better changes are applied to goods and services resulting to price increases which also makes it difficult to measure CPI. Core inflation is a measure of changes in prices for goods and services that excludes volatile economic variables such as food and energy prices to better understand the trend in prices that effect cost of living. Other measures of Inflation are the producer price index (PPI), International price index, employment cost index, and the GDP deflator.
10. Explain what the unemployment rate is by examining the equation used to determine the number. Give some examples of people who are not counted in the unemployment rate. (8.1)
The equation used to determine the unemployment rate is dividing the number of unemployed people by the total number of people in the labor force, then multiplying by 100. Unemployment = # of unemployed / # of people in labor force x 100. Some examples of people who are not counted in the unemployment rate are babies, people who are retired, people looking after children, people taking a voluntary break before a new job, people who are not interested in having a job.
19. (CLO 1) Using various sources, describe the current state of the US economy (over the last few months or quarters) in terms of the GDP growth rates, the unemployment rate, consumer price index (CPI). Overall, how would you describe the overall state of the economy?
The most recent GDP result I could find is from the fourth quarter of 2022 which was 2.7%. Gross Domestic Product, Fourth Quarter and Year 2022 (Second Estimate) | U.S. Bureau of Economic Analysis (BEA). The recent unemployment rate from January 2023 is at a 3.4%. The consumer price index (CPI) is at a 0.5 According to United States Economy at a Glance (bls.gov
16. Describe the ranges of inflation seen in the US economy over the last 100 years as well as in the last 40 years. Discuss extreme forms of inflation such as deflation or hyperinflation - when can we see this in the data in history and/or in other countries? (9.3)
The ranges of inflation over the last 100 years tend to fluctuate. Taking it back to 1929, the inflation rate was 0.6%, then tends to increase, then goes down. Deflation occurred in the 1920's and 1930's. Hyperinflation seemed to have occurred in the year 1980. That seems to be the pattern over the last 100 years.
13. Describe the two types of unemployment found in the long-run that contribute to the natural rate of unemployment (explain what this means), and why therefore we should not expect that unemployment will ever by 0%. (8.4)
The two types of unemployment found in the long-run that contribute to the natural rate of unemployment are frictional, which is when a worker quits their job to look for another job. It is the individual's decision; it is not due to the economy. Second is structural unemployment which is when the structure of the economy changes and your type of work is no longer needed or disappears. The unemployment rate will never be 0% because frictional and structural types of unemployment will always exist.