Topic 1, Introduction

Question 1

what are the main tenets of traditional economics?

Answer 1

1. consumers have infinite wants, but limited resources to satisfy those desires. therefore, traditional economics focuses on the most efficient, least-cost allocation of scarce resources;
2. optimal growth;
3. perfect markets, in which you get market clearance;
4. consumers know what is best for them and make rational decisions;
5. prices adjust automatically;
6. individuals make decisions at the margin.

Question 2

define human development.

Answer 2

income-based measures and economic growth/development are not necessarily sufficient ways to ensure legitimate development. indeed, development should also focus on individual freedoms, such as access to healthcare, education, and political civil rights.

Question 3

why should we try to measure economic development?

Answer 3

we need to be able to assess and evaluate how a policy is impacting the community (does the policy actually work?). by measuring economic development, we can set more tangible and appropriate goals.

Question 4

what is the gross domestic product (GDP)?

Answer 4

it considers the market value of all goods and services produced within a country in a given period of time.

Question 5

what is the gross national product (GNP)?

Answer 5

it measures the market value of all goods and services produced by permanent residents of a nation within a given period of time.

Question 6

what are the three aspects considered by the human development index?

Answer 6

HDI considers the weighted average of life-expectancy, the education index (which is basically the expected years of schooling), and the GNP per capita.

Question 7

what are the limitations of the human development index?

Answer 7

• can fail to acknowledge inequality
• can fail to consider regional differences
• can fail to take into account important economic sectors (e.g.: unpaid labour)

Question 8

what is purchasing power parity?

Answer 8

PPP computes exchange rates between currencies of different countries so that the same basket of goods in any two different countries has the same dollar value.

Question 9

what is a very, if not the most, important advantage of purchasing power parity?

Answer 9

it makes cross-countries comparisons easier, by tackling the problem of relative prices.

Question 10

if exchange rate price > PPP, is the currency under or over valued?

Answer 10

the currency is under valued.

Question 11

if exchange rate price < PPP, is the currency under or over valued?

Answer 11

the currency is over valued.

Question 12

what are the limitations of GDP/GNP?

Answer 12

• it does not consider income inequality
• it does not consider non-market transactions
• it does not show if the economic growth is sustainable or not