Topics 1-5 Midsemester Flashcards
What is the formula for % change?
% change = (New - Old) / Old * 100
Investment falls from $400 million to $200 million. By what percentage has investment fallen?
Use % change formula. Investment has fallen by 50%.
Initially investment was 10% of GDP, now it is 5%. How many percentage points has investment’s share of GDP fallen by?
5 percentage points.
Initially investment was 10% of GDP, now it is 5%. Investment’s share of GDP has fallen by 50%, true or false?
True, [(5-10)/10]*100 = -50%
What factors are responsible for growth in property prices?
- Income growth
- Population Growth
- Infrastructure
- Speculation
What are the consequences of the popping of a property bubble?
(1) decreased household spending, especially on durable goods e.g. cars, appliances
(2) Banks’ profitability decreases - more people faulting on loans, mortgages
Can causation be implied by correlation?
Nothing is implied by mere correlation. Correlation does not imply causation.
A wave of private investment should follow a decrease in taxes: positive/normative?
Positive
Roger Federer was the world’s best male tennis player between 2004 and 2008: positive/normative?
Positive
Bernie Sanders would have made a better President than Donald Trump: positive/normative?
Normative
People tend to be physically healthier if they are vegetarians: positive/normative?
Positive
Some people would describe you as unattractive: positive/normative?
Positive
Y stands for
Real GDP
Y* stands for
Potential GDP
Potential GDP
Measurement of what a country’s GDP would be if it were operating at full employment and utilizing all of its resources.
Output depends on 3 inputs. What are these inputs?
(1) labour (2) capital (3) technology
Technology is… (definition)
anything that increases output without increasing inputs
Inventions/discoveries count as an increase in technology
False - knowledge must be put into practice in order to count as an increase in technology
Einstein’s revelation that e=mc**2 was an increase in technology
False - not applied, just a theory
The replacement of hand-weaving by looms in the 19th Century was an increase in technology
True - applied knowledge = increase in technology
Technology does not have diminishing returns - true/false
True. Technology is non-rivalrous and not excludable. One person’s use doesn’t prevent someone else from using it. Technological progress is essential for long-term growth.
Increase in technology equals growth in output not attributable to other sources - true/false
True. Growth is a function of labour, capital and technology. Economists add up labour and capital first, as they’re measurable, and whatever is left over is attributed to technology.
Business cycle
Recession, expansion, boom, slump, peak, trough
Boom
When GDP is above potential GDP: (Y > Y*)
Slump
When GDP is below potential GDP (Y < Y*)
Recession
Sustained decrease in GDP (usually for two quarters or more)
Expansion
Sustained increase in GDP after a recession
Peak
Highest point before a recession
Trough
Lowest point before an expansion
If a real GDP is graphed using a log scale, and the line is straight, what can you conclude about the growth rate of real GDP?
Real GDP has a constant growth rate if log line is straight.
If at a point inside the PPC, what does this indicate about the economy?
It is in a slump and could better combine its inputs to produce more output
It’s not possible to reach a point outside the PPC - true/false
False - short term fluctuations are possible. This is based on the notion of ‘slack’.
Slack
The idea that efficiency does not mean 100% capacity. A bit of slack is good.
Natural unemployment rate
When the economy is at potential GDP
What is the central message of Sam Harris’ TED talk?
Science provides some guiance on what social practices are conducive to human wellbeing.
Sam Harris TED talk: We are more concerned aout the wellbeing of animals than of insects. This is because:
we believe that animals experience a greater range of potential happiness and suffering.
Structural unemployment
arises from a mismatch b/w skills of workers and requirements of available jobs
Cyclical unemployment
i.e. Keynesian unemployment - caused by business cycle
Frictional unemployment
short-term unemployment - in between jobs
Taxi/Uber operators losing their jobs due to driverless taxis - structural/frictional/cyclical?
Structural - mismatch b/w skills of workers and skills needed
Nick has retired from his job at a call centre and is now looking for another job - structural/frictional/cyclical?
Frictional - in between jobs
Alex and Richie both get laid off during a recession - structural/frictional/cyclical?
Cyclical - laid off due to recession, Keynesian
What are the shortcomings of GDP?
Doesn’t take into account (1) home production; or (2) underground economy
Home production
Mowing your lawn instead of hiring someone to mow it for you. Home production does not affect GDP, whereas hiring someone adds to GDP.
What is the Underground economy and how large is it?
Buying and selling of goods and services that is concealed from govt to avoid taxes/regulations or because illegal. Size estimated to be 14% in Australia.
Production approach
adds up the value added in the production of goods and services by each entity in the economy
Spending approach
Y = C + I + G + NX
Income approach
Labour income (wages, salaries, etc) + capital income (rentals, interest, profits) + net indirect taxes (e.g. GST)
Events which reduce wellbeing can increase GDP - true/false
True - a car crash may indirectly increase GDP due to surgery required.
A textile mill in Australia owned by a Chinese firm - is this included in GDP production approach?
Yes - GDP takes into account production that occurs in Australia, nationality of owner of factory irrelevant.
A textile mill in China owned by Australians - is this included in the GDP production approach?
No - mill located in China, value added by it is included in China’s GDP not ours.
Aus Business buys a final good - C, G, I, NX?
Investment
Aus Household buys a final good - C, G, I, NX?
Consumption
Aus Gvt buys a final good - C, G, I, NX?
Government spending
Foreign household buys an Australian product - C, G, I, NX?
NX increase
Aus Business manufactures a good but doesn’t sell it - C, G, I, NX?
Investment - inventory investment increases
Aus Business sells a good it produced to Aus household - C, G, I, NX?
Consumption increase, investment decreases because inventories are run down
Clive Palmer buys shares in a company
Financial investment is not a form of ‘Investment’ for this course
What is the difference between GDP and Net Domestic Product (NDP)?
NDP = GDP - depreciation. Depreciation is the decrease in an asset’s value due to wear and tear (e.g. car, machinery etc.)
Classical vs Keynesian?
Classical is more long-term, Keynesian is more short-term
Neoclassical production function
Y = f(L, K, Te)
i.e. GDP is a function of Labour (L), capital (K) and technology (Te).
For the USA to be richer than Indonesia, it must… (consider the production function)
It must have more of one/all of L/capita, K/capita, or Te
What is the rule of 72?
Number of years to double = 72/annual growth rate.
Ant economy vs Grasshopper economy
Investment results in more output per capita, so eventually ant economy will always overtake grasshopper economy.
Ant economy
Low consumption
High Investment
Ants don’t each much and store everything.
Grasshopper economy
High consumption
Low investment
Grasshoppers eat a lot and don’t store much..
Downsides of ant economy?
Trade-off today is that wellbeing today/living standards today are lower.
Less money being used for consumption leads to lower living standards.
A recession occurs when…
GDP falls
A growth recession is…
a slowdown
Booms are…
when the economy is producing above its trend level
A typical PPC … (describe shape)
is downward sloping and bowed outwards
Natural rate of unemployment = trend rate of unemployment, true/false?
True
GDP fluctuations in mature economies are caused mostly by sudden changes in…
Private investment
A domestic firm imports $20 worth of ground coffee beans. It re-packages it, sells it for $100 to a supermarket, which sells it to households for $300. GDP rises by…
$280
In the Keynesian circular flow model, I, G and NX are…
injections
Net domestic product = GDP minus…?
Depreciation
A malthusian equilibrium is…
where output per person equals subsistence per person
Neo-Malthusian concerns about a growing population arise because of the risk that the _____ and the ____ may collapse.
environment; ecology
A country’s economic development is most positively correlated with…
the rule of law
What tends to increase trend growth?
(1) The protection of property rights; (2) Increased education; (3) Openness to international trade
The Human Development Index includes indicators of… (3 things)
(1) Material living standards; (2) Health; (3) Education
A country’s economic development is best measured by…
the Human Development Index
