CH 1 and 2 Key Concepts

Question 1

First Welfare Theorem

Answer 1

• First welfare theorem: Under certain conditions, every competitive equilibrium allocation is Pareto optimal, or efficient
• Efficiency of an allocation is the market’s role
• Justice/equity is the government’s role: operate redistribution/regulation to each the desired Pareto efficient allocation

Question 2

GDP and growth rate

Answer 2

(GDP): Monetary measure of the market value of all the final goods and services produced in a given region or country over a given period of time. The growth rate is defined as: Gt = GDPt - GDPt-1 / GDPt-1
-GDP increased with population (as more was produced) but GDP per capita (=GDP divided by population) did not grow in any significant way

• More population = HIGH GDP
• As long as population increases, GDP increases
• Problem: Once most growth is driven by population, once you divide gdp/pop, you will always end up with the same number (= gdp per capita)