unit 1

Question 1

define GDP

Answer 1

• market value of the output of final goods AND services in the economy in a given period. (output of intermediate goods that are inputs to final production excluded)
• expressed in ‘per capita’
• also referred to as gross domestic income

Question 2

define disposable income

Answer 2

• wages or salaries, profit, rent, interest and transfer payments from the government/others minus any transfers the individual made to others (including taxes paid to the government).
• good measure of living standards because it is the maximum amount of necessary services that the person can buy without having to borrow

Question 3

disposable income does not consider…

Answer 3

• quality of social and physical environment
• leisure time
• goods and services that we do not buy (healthcare, education) if they are provided by a government.
• household labour (mostly women)

Question 4

is average income a good measure of wellbeing?

Answer 4

• no, because people’s (perception of ) disposable income in comparison to other’s in a group affects wellbeing.
• if half of the people live in poverty, but the average income is still high, average wellbeing isn’t high

Question 5

is GDP per capita a better measure of living standard than disposable income?

Answer 5

• yes, because it includes government services that improve wellbeing that are not included in disposable income.

Question 6

define nominal GDP

Answer 6

GDP in CURRENT prices

nominal GDP=∑𝑝𝑖𝑞𝑖

Where pi is the price of good i, qi is the quantity of good i

Question 7

difference between nominal and real GDP

Answer 7

nominal measures GDP in CURRENT prices
real measures GDP in CONSTANT prices

real GDP used to see the actual growth rate of an economy by not including price increases.

eg. If we compare the economy in two different years, and if all the quantities stay the same but the prices increase by, say, 2% from one year to the next, then nominal GDP rises by 2%, but real GDP is unchanged. The economy has not grown.

Question 8

purchasing power parity (PPP)

Answer 8

• statistical correction
• allows comparisons of the amount of goods people can buy in different countries that have different currencies.

Question 9

growth rate formula

Answer 9

growth rate =
(change in income) / (original level of income)

Question 10

define industrial revolution

Answer 10

• technological advances/organizational changes
• eighteenth century Britain
• agrarian and craft-based -> commercial/industrial economy.

Question 11

technology as defined in economics

Answer 11

process using a set of materials and other inputs, including the work of people and machines, to produce an output.

Question 12

define capitalism

Answer 12

• economic system
• three main institutions
  1) firms
  2) private property
  3) markets
• main form of economic organization is the firm
• private owners of capital goods hire labour to produce goods and services to sell on markets with intention to make profit

Question 13

define economic system

Answer 13

A way of organizing the economy that is distinctive in its basic institutions (eg. capitalism)

Question 14

define institution

Answer 14

The laws and informal rules that regulate social interactions among:

• people and people
• people and biosphere

“rules of the game”

Question 15

define centrally planned economic system

Answer 15

government is the institution controlling production, deciding what goods will be distributed and to whom

Question 16

define “capital goods”

Answer 16

• durable and costly NON-LABOUR inputs used in production (eg. machinery, buildings)
• not including some essential inputs that are used in production at zero cost to the user
  (e.g. air, water, knowledge)

Question 17

define “market”, benefits

Answer 17

a means of transferring goods or services from one person to another.

key characteristics:
- reciprocal
- voluntary
- competitive

accomplishes unintended cooperation on a global scale, allowing for specialization

Question 18

define “firm”

Answer 18

A way of organizing production though:

• 1+ individuals own capital goods used in production
• they pay wages/salaries to employees
• they direct the employees in the production of goods and services.
• goods and services are property of the owners.
• owners sell the goods and services on markets with the intention of making a profit.

Key: quickly born, expand, contact, die

Question 19

define labour market

Answer 19

employers offer wages to individuals who may agree to work for them

employers = demand side
employees = supply side

Question 20

how do markets and private property support firms?

Answer 20

PRIVATE PROPERTY
- firm’s inputs and outputs are private property

MARKETS
- firms use markets to sell outputs
- profits depend on markets

Question 21

how does private property influence the success of a market?

Answer 21

buyers will not want to pay for goods unless they can have the right to own them

Question 22

Two major changes that accompanied the emergence of capitalism

Answer 22

1) TECHNOLOGY
- coincided with firms to better organize production
2) SPECIALIZATION

Question 23

define economies of scale

Answer 23

• cost advantages that firms obtain due to their scale of operation
• increase in production efficiency lowers costs

Question 24

on specialization: why do we become better at producing things when we each focus on a limited range of activities?

Answer 24

1) learning by doing
2) difference in ability
3) economies of scale

Question 25

connection between capitalism and specialization

Answer 25

capitalism enhanced opportunities for specialization by expanding economic importance of markets and firms.

Question 26

define absolute vs comparative advantage

Answer 26

ABSOLUTE:
(for a person or country), inputs used to produce the good are less than some other person or country.

COMPARATIVE:
(for a person or country) 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.

example: Greta produces more apples and wheat than Carlos, but comparatively, Carlo’s apples to wheat production ratio is better than Greta’s

Question 27

define developmental state

Answer 27

government that takes a leading role in promoting the process of economic development

Question 28

reasons why capitalism may not work as desired

Answer 28

1) private property not secure
2) markets not competitive
3) nepotism in firms

Question 29

features that make a dynamic capitalist economy

Answer 29

1) Private incentives for cost-reducing innovation (derived from market competition and secure private property)
2) Firms led by those with proven ability to produce goods at low cost
3) Public policy supporting these conditions
4) A stable society, biophysical environment and resource base lolll

Question 30

labour force

Answer 30

sum of employed workers and workers
that are actively seeking for a job but are not employed.

Question 31

unemployment rate

Answer 31

unemployment rate = unemployed/labor force

Question 32

Discouraged Workers

Answer 32

when unemployment is high, some of those
without jobs give up looking for work and therefore are no longer counted as unemployed.

Question 33

participation rate (in labour force)

Answer 33

ratio of the labor force to the total population of working-age persons.