Exam 1 Flashcards
Scarcity
The limited nature of societies resources
Efficiency
When society gets the most from its scarce resources
Opportunity cost
Any item is whatever must be given up to obtain it
Market failure
When the market fails to allocate resources efficiently
Business cycle
Irregular and unpredictable fluctuations in econ activity as measured by production of goods and seevices or number of people employed
How people make desicions
People face tradeoffs, the cost of something is what you give up to get it, rational people think at the margin, people respond to incentives
How people interact
Trade can make everyone better off, markets are a good way to organize econ activity, government can improve market outcomes
How the economy as a whole works
Standards of living depends on the ability to produce, prices rise when gov prints too much money, short run trade off between inflation and unemployment
Factors of production
Resources the economy uses to produce goods and services
Absolute advantage
The ability to produce a good using fever inputs than another producer
Comparitive advantage
The ability to produce a good at a lower opp cost than another person
Trade if
What you get is bigger than what you give up
Willingness to pay
Max amount the buyer will pay for a good
Pw>Pd
The country has comp advantage in the good. Export
Pd>Pw
No comp advantage. Import
Calculate GDP
C+I+G+NX
GDP deflator
Nominal/real x100
GDP excludes
The quality of the government, leisure, nonmarket activity
Compute index for CPI
Cost of basket current year/base year x100
Compute inflation rate for CPI
CPI this year-CPI last year/CPI last year x100
Problems with CPI
Sub biasis, new goods=dollar more valuable, hard to measure quantity change,
CPI vs. GDP deflator
Imports only included in CPI, capital goods only included in GDP, basket is fixed CPI, GFP currently produced goods and services
Dollar amounts different times
Amount year t x price level today/price level year t
real interest rate
Nominal-inflation rate
Productivity
Average quantity of goods and services produced per unit of labor input
Production function
Y/L=AF(1,K/L,H/L,N/L
Constant returns to scale
Changing all inputs by the same percent causes output to change by the same percent
Catch up effect
Poor countries tend to grow more rapidly than rich ones
Inward oreinted policies
Raising standard of living by avoiding interaction with other countries
Outward oreinted policies
Promote integration with world economy
Foreign direct investment
Owned and operated by a foreign entity
Foreign portfolio investment
Investments financed with foreign money but operated by domestic residents
Raise growth rates and standard of living
Saving and investing, investment from abroad, education, health, free trade, research and development, population growth, natural resources
Economist make assumptions for the purpose of
Focusing their thinking
A model is
A simplification of reality
Figuring out opp cost of good
Opp cost of x =x/other good
GDP measures
Income and expenditures
Nations standard of living is best measured by
Real GDP per person
PPP equation
E=p*/p
