Exam

Question 1

What is grad domestic product (GDP)?

Answer 1

the market value of all final goods and services produced in an economy during a period of time

Question 2

4 categories of GDP expenditure

Answer 2

• consumption
• investment
• government purchases
• net exports

Question 3

GDP = _ + _ + _ + _ - _

Answer 3

C + I + G + X - M

Question 4

GDP isn’t a good measure of economic well-being…

Answer 4

• Doesn’t include household production (G & S people produce for themselves)
• Doesn’t include underground economy (concealed buying/selling - poorer 50%)
• Doesn’t have info on distribution of GDP & income
• Doesn’t include value of leisure
• Doesn’t account for pollution/negative effect of production
• No adjusted for crime/social problems

Question 5

GDP is measured using..

Answer 5

market values, not quantities & only includes the market value of final goods and services (new) in current production

Question 6

labour force

Answer 6

total number of people who have jobs plus the number of people who don’t have jobs but are actively looking for a job

Question 7

unemployment rate =

Answer 7

(number of employed/labour force) x 100

Question 8

people are measured as being employed…

Answer 8

if they have worked 1 hour per week, which means unemployment doesn’t account for under-employment

Question 9

discouraged workers (not included in unemployment)

Answer 9

people available for work who have not looked for a job during the previous four weeks because they believe no jobs are available for them

Question 10

costs of unemployment

Answer 10

• causes GDP to be below its potential
• loss of human capital and retraining costs arise for the economy & individual
• reduces business profits
• governments receive less income tax + more unemployment benefits
• individual; poverty, loss of self-esteem etc

Question 11

traditional economics

Answer 11

• assumes that consumers will choose to buy the combination of goods and services that make them as well off as possible from among all the combinations that their budgets allow them to buy

Question 12

behavioural economics

Answer 12

• study of situations in which people act in ways that are not economically rational

Question 13

when making decisions, consumers tend to make 3 mistakes..

Answer 13

1. ignore non-monetary opportunity costs
2. fail to ignore sunk costs
3. unrealistic about future behaviour

Question 14

externality

Answer 14

• a cost or benefit that arises from production or consumption and falls on someone other than the producer or the consumer
• arise due to lack of clearly defined property rights

Question 15

negative externality

Answer 15

external cost - pollution (too much produced/consumed)

Question 16

positive externality

Answer 16

external benefit - education (too little produced/consumed)

Question 17

Common resource

Answer 17

an extreme case of externalities where no one can be denied access to the resource, but one person’s use of the resource reduces the possible use to others (e.g. overfishing/logging)

Question 18

Public good

Answer 18

• good/service which an additional consumer does not ‘use up’ or prevent another’s use of it and no one can be excluded from consuming that good/service
  (e. g. national defence, footpaths and street lighting)

Question 19

asymmetric information

Answer 19

one party to an economic transaction may have less information than the other party

Question 20

public good (market failure)

Answer 20

no one can be excluded - impossible to charge - therefore private sector won’t provide them

Question 21

common good (market failure)

Answer 21

government regulation is necessary

Question 22

adverse selection

Answer 22

situation in which one party to a transaction takes advantage of knowing more than the other party to a transaction (before it takes place)

Question 23

adverse selection egs

Answer 23

• used car dealers (assure they aren’t buying a lemon)
• buyers of insurance will always know likelihood of event being insured against
• insurance companies cover their costs only if they set the prices of policies at levels that reflect how many claims for payment the people they have insured are likely to submit

Question 24

moral hazard

Answer 24

the tendency of people who have insurance to change their actions because of the insurance or, more broadly, actions taken by one party to a transaction that are difference from what the other party expected at the time of transaction

Question 25

moral hazard egs

Answer 25

a firm that has taken out fire insurance may be less careful about avoiding fire hazards
insurance companies use excess payments to reduce MH

Question 26

adverse selection in credit markets

Answer 26

• lenders have less info on the credit worthiness or borrowers than the borrowers do