1) The Wellbeing of Nations Flashcards
What is intuition of FOC?
anymore consumption lowers your utility (you are at equilibrium
What is FOC equal to?
Condition that the marginal benefit = marginal cost
The MRS is equal to the price ratio
How does MRS equal to the price ratio work?
-your preferences align with the market value
What is non association?
If FOC>0 , for c1 , we always increase c1, as no effect for c2
Even in FOC>0 with trade off , how much c1 do you want?
-only c1 as c1 is more valuable
marginal benefit > marginal cost
Problems with GDP as a measure of wellbeing?
1) Omitted variable e.g. Household production
2)Varying prices and real GDP
3)Quality goes up, so utility goes up
4)Government spending
How is an omitted variable such as household production not measured in GDP?
-not included in GDP
-gets to a point where consumption growth does not equal utility growth, so GDP overstates wellbeing as non market activities contribute to utility
-consumption>utility
How is varying prices and real GDP a problem and how do we fix it?
-Turning nominal GDP into a utility measure
-use a price index
How does government spending a problem for GDP?
- only included at cost (adds to GDP) but good/bad spending looks the same
Difference between cardinal and ordinal?
Cardinal- c is measured in units of goods (measure means 6 apples is double 3)
Ordinal- higher utility means better off, regardless of how much (equally valid) (point is you have a preference)
How to calculate price index?
The right price index will be the p such that u(c,o) = y
PPP?
-purchasing power parity
-compare across countries
-adjusts for differences in local prices
How to get cost of living inflation measure?
-log of price index
-how much money you need to get the same amount of utility
Consumer price indices?
-ln(c p’c + g p’g / c p c + g pg)
-overestimates cost of living inflation and suffers from sub bias as you would change consumption habits
-where p’c is the new price
