Introduction Flashcards
4.1 Jones
What is the wealth disparity between countries (US, Argentina, China, poorest countries)
The United States is roughly 3 times richer than Argentina, 4 times richer than China, and more than 50 times richer than the poorest countries.
What is a model in economics?
A model is a mathematical representation of a hypothetical world used to study economic phenomena, often using simple equations to shed light on some of the most fundamental questions in economics.
Why is the supply-and-demand framework familiar and important in economics?
It helps us understand why water is cheap, diamonds are expensive, why computer chip prices fall over time, and why college tuition rises faster than inflation.
What analogy is used to describe building economic models?
Building an economic model is like constructing a world with Lego Mindstorm robots, determining actions and resources, then observing the outcomes.
How do economic models apply to the real world?
Economic models consist of equations and variables with real-world interpretations that can help us understand economic phenomena like price and quantity of goods.
How do we validate economic models, and what do they aim to explain?
We test if a model’s predictions are consistent with real-world facts to explain phenomena, such as why Americans are wealthier than Ethiopians.
circular flow of income diagram
This diagram represents the flows of money and of goods and services in the economy. In the markets for goods and services, households purchase goods and services from firms, generating a flow of money to the firms and a flow of goods and services to the households. The money flows back to households as firms purchase factors of production from the households in factor markets.
GDP formula
Value Added ≡
Value of output sold minus cost of intermediate
inputs purchased by the firm (used up in production)
Compute value added firm-by-firm, then add up across firms.
factor markets
markets in which firms buy the resources they need to produce goods and services.
The circular-flow diagram ignores a number of real-world complications in the interests of simplicity. A few examples:
What are the two sources of economic growth?
The two sources of economic growth are an increase in factors of production and improved technology.
What does the circular-flow diagram illustrate?
The circular-flow diagram illustrates transactions within the economy as flows of goods and services, factors of production, and money between households and firms. These transactions occur in markets for goods and services and factor markets, ultimately determining the economy’s income distribution.
