Principles of Macroeconomics

Question 1

what are institutions?

Answer 1

the laws and informal rules that regulate social interactions among
people and between people and the biosphere, sometimes also termed the rules of the game

Question 2

what are economic systems?

Answer 2

a way of organising the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning

Question 3

what is capitalism?

Answer 3

an economic system in which the main form of economic organisation is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit.

Question 4

what is private property?

Answer 4

when the person possessing it has
the right to exclude others from it, to benefit from the use of it, and to exchange it with others.

Question 5

what are markets?

Answer 5

a way that people exchange goods and services by means of directly
reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit

Question 6

why did capitalism lead to a growth in living standards?

Answer 6

-impact on technology
-specialisation

Question 7

what does specialisation do?

Answer 7

increases productivity of labour because we become better at producing things when we each focus on a limited range of activities

Question 8

what does a production function give?

Answer 8

maximum output for a given set of inputs

Question 9

what are the key ideas of Malthus’ model?

Answer 9

1. Population expands if living standards increase
2. But the law of diminishing average product of labour implies that as more people work on the land, their income will inevitably fall

Question 10

what are the 3 conditions required to stay in Malthus’ trap?

Answer 10

• Diminishing average product of labour
• Rising population in response to increases in wages
• An absence of improvements in technology to offset the diminishing average product of labour

Question 11

what is gross domestic product?

Answer 11

the market
value of all final goods and services
produced within a country in a given
year.

Question 12

what is national accounts?

Answer 12

system used to measure overall output and expenditure in a country.

Question 13

what are green arrows?

Answer 13

show the flow of real resources

Question 14

what are purple arrows?

Answer 14

show the flow of money

Question 15

what does circular flow show?

Answer 15

1. The market value of total output must
   be equal to total spending.
2. Total spending must equal total
   income.

Question 16

what are the limitations to GDP?

Answer 16

1. Prices are not values.
2. Nonmarket activities —
   including household
   production — are excluded.
3. The shadow economy is
   missing.
4. Environmental degradation
   isn’t counted.
5. Leisure doesn’t count.
6. GDP ignores distribution.

Question 17

what does GDP only measure?

Answer 17

goods and services that
are sold in markets

Question 18

what is the shadow economy?

Answer 18

the economic activity purposefully conducted out of view of the government, and, thus, excluded from GDP

Question 19

what is nominal GDP?

Answer 19

adds up the market value of total production in a year using
the current prices prevailing in that year

Question 20

what is real GDP?

Answer 20

excludes the effects of price changes, so it isolates economic
growth that’s due to changes in the quantity of output produced

Question 21

what does real GDP allow us to do?

Answer 21

isolate growth in production that has
taken place

Question 22

what is the consumer price index (CPI) ?

Answer 22

measures the overall cost of the goods and services bought by a typical consumer

Question 23

what is the GDP deflator?

Answer 23

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Question 24

what does the GDP deflator reflect?

Answer 24

the prices of all goods and services produced domestically

Question 25

what does the CPI reflect?

Answer 25

the prices of all goods and
services bought by consumers.

Question 26

what does the GDP deflator tell us?

Answer 26

the rise in nominal GDP that is attributable to a rise in prices
rather than a rise in the quantities produced

Question 27

what is indexation?

Answer 27

When some money amount is automatically corrected for inflation by law
or contract,