MICRO : UNIT 1

Question 1

What is income inequality?

Answer 1

Wealth distribution where the rich have more than the poor and significant differences in income exist between countries.

Question 2

What does the rich/poor ratio measure?

Answer 2

The ratio of income between individuals at the ninetieth and tenth percentile.

Question 3

What is GDP?

Answer 3

Measure of the market value of the output of final goods and services in the economy in a given period.

Question 4

Define disposable income.

Answer 4

Amount received from wages, profits, rent, interest, and transfers minus any transfers made to others.

Question 5

How is GDP per capita calculated?

Answer 5

Total output of a country’s economy divided by the country’s population.

Question 6

What does GNP per capita include?

Answer 6

Output produced abroad attributable to residents minus UK output attributable to residents abroad.

Question 7

What does disposable income signify in terms of living standards?

Answer 7

Maximum amount of goods and services a person can buy without going into debt.

Question 8

What are some limitations of disposable income as a measure of wellbeing?

Answer 8

• Equality of social and physical environment * Amount of free time * Goods and services not purchased (e.g., healthcare, education) * Household-produced goods and services.

Question 9

Why is GDP considered a better measure than disposable income for living standards?

Answer 9

GDP includes government-produced goods and services that contribute to wellbeing but are not included in disposable income.

Question 10

What must be considered when comparing income at different times?

Answer 10

Differences in prices.

Question 11

What must be considered when comparing output between countries at one point in time?

Answer 11

Differences in prices.

Question 12

What is nominal GDP?

Answer 12

The sum of the price times quantity for all goods and services counted.

Question 13

What does ‘Pi’ represent in the nominal GDP formula?

Answer 13

The price of good i.

Question 14

What does ‘Qi’ represent in the nominal GDP formula?

Answer 14

The quantity of good i.

Question 15

How is real GDP defined?

Answer 15

Using base year prices to measure GDP over time.

Question 16

What is the process to see changes in real GDP?

Answer 16

Multiply year 1 quantities by year 0 prices.

Question 17

What formula is used to calculate the growth rate?

Answer 17

Growth rate = Change in income / original level of income

Question 18

What was the GDP per capita in 2000 and 2001 for the example provided?

Answer 18

2000: 31,946; 2001: 32,660

Question 19

How is the growth rate calculated using the GDP per capita example?

Answer 19

(y2001 - y2000) / y2000 = 0.022 = 2.2% growth rate

Question 20

What does a steeper line in a ratio scale chart indicate?

Answer 20

A faster growth rate

Question 21

What significant change occurred in India after gaining independence?

Answer 21

Life expectancy increased from 27 to 65

Question 22

What was China’s GDP per capita compared to Britain’s in the mid-20th century?

Answer 22

1/14 of Britain’s GDP per capita

Question 23

What are the two key takeaways regarding living standards?

Answer 23

• For a very long time, living standards did not grow in any sustained way
• Sustained growth began at different times in different countries

Question 24

What does a GDP per capita doubling every 100 years illustrate?

Answer 24

Linear scale graph shows an upward sloping curve with increasing slope

Question 25

What characterizes a ratio scale graph of GDP per capita growth?

Answer 25

An upward sloping straight line indicating constant growth rate

Question 26

What initiated the Industrial Revolution?

Answer 26

A wave of technological advances and organizational changes in Britain

Question 27

Define technology in the context of production.

Answer 27

A process that takes materials and inputs to create an output

Question 28

What was the technological change in lighting from 40,000 years ago to 1992?

Answer 28

* 40,000 years ago: lamps burning animal/vegetable oils * Early 1800s: tallow candles * Town gas lamps, kerosene lamps, filament bulbs * 1992: Compact fluorescent bulbs 45,000 times more efficient

Question 29

What are some effects of climate change on communities?

Answer 29

* Illnesses in cities from power plants * Rural communities affected by deforestation * Depletion of clean water and fishing stocks

Question 30

What impact does climate change have on the economy?

Answer 30

* Growth in total output * Organization of the economy and what is valued

Question 31

What are the three main characteristics of capitalism?

Answer 31

* Private property * Markets * Firms

Question 32

What does private property allow an individual to do?

Answer 32

* Enjoy possessions as they choose * Exclude others from use * Dispose of them by gift or sale

Question 33

What are capital goods?

Answer 33

Durable and non-labor inputs in production, excluding essential free inputs

Question 34

How are markets defined?

Answer 34

* Connect people who mutually benefit * Exchange goods and services * Involve buying and selling

Question 35

How do markets differ from government transactions?

Answer 35

* They are reciprocated * They are voluntary * Most markets involve competition

Question 36

What are the characteristics of a firm?

Answer 36

* Owned by individuals who possess capital goods * Pay wages and salaries to employees * Direct employees in production * Sell goods/services for profit

Question 37

Who are on the demand and supply sides of the labour market?

Answer 37

Employers are on the demand side; Employees are on the supply side.

Question 38

What are the two essential parts of how firms function in a capitalist system?

Answer 38

* Inputs and outputs are private property * Firms use markets to sell outputs

Question 39

How does capitalism lead to growth in living standards?

Answer 39

* Technology * Specialisation

Question 40

What are the reasons for improvements in production according to Smith?

Answer 40

* Learning by doing * Difference in ability * Economies of scale

Question 41

Define absolute advantage.

Answer 41

A person or a country has to input less than another country to produce this good.

Question 42

Define comparative advantage.

Answer 42

A person or country has comparative advantage in the production of a particular good if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods.

Question 43

What is the relationship between capitalism and increased living standards?

Answer 43

There is a causal relationship, but it is not necessarily causational.

Question 44

What is a developmental state?

Answer 44

A government that takes a leading role in promoting economic development through public investments, subsidies, and education.

Question 45

Name examples of developmental states.

Answer 45

* Japan * South Korea * China

Question 46

What economic conditions can make capitalism dynamic?

Answer 46

* Private property is not secure * Markets are not competitive * Firms are managed by those with connections to government

Question 47

What political conditions can hinder the dynamism of capitalism?

Answer 47

* Allowance of monopolies * Some banks or firms considered too big to fail

Question 48

When is capitalism considered dynamic?

Answer 48

* Private incentive for cost-reducing innovation * Firms led by capable managers * Public policy supporting competitive conditions * A stable society and resource base