Week 1

Question 1

Name the 11 Big Ideas according to the authors

Answer 1

1. Incentives Matter
2. Good Institutions Align Self-Interest with the Social Interest
3. Trade-offs are Everywhere
4. Thinking on the Margin
5. The Power of Trade
6. The Importance of Wealth and Economic Growth
7. Institutions Matter
8. Economic Booms and Busts cannot be avoided but can be moderated
9. Prices Rise when the government prints too much money
10. Central Banking is a hard job
11. Economics is Fun

Question 2

Define Incentives

Answer 2

Incentives are rewards and penalties that motivate behaviour

Question 3

Name couple important Incentives

Answer 3

Fame, Power, Reputation, Sex and love

Question 4

What happens when self-interest aligns with the broader public interest?

Answer 4

We get good outcomes

Question 5

What happens according to Adam Smith when markets work well?

Answer 5

When markets work well, those who pursue their own interests end up promoting the social interest as if led by an “invisible hand”.

Question 6

How can Governments help when markets don’t properly align self-interest with social interest?

Answer 6

The government can improve the situation by changing incentives with taxes, subsidies, or other regulations.@

Question 7

Define a Trade-Off:

Answer 7

A trade-off can be described as a balance that is achieved between two desirable but incompatible features: a compromise.

Question 8

Define ‘Thinking on the Margin’

Answer 8

Thinking on the margin is just making choices by thinking in terms of marginal benefits and marginal costs; the benefits and costs of a little but more (or little bit less)

Question 9

What’s the real power of trade?

Answer 9

The real power of trade is the power to increase production through specialization.

Question 10

Define economies of scale?

Answer 10

Costs are reduced because of mass production of goods

Question 11

Describe the theory of comparative advantage:

Answer 11

The theory of comparative advantage says that when people or nations specialize in goods in which they have low opportunity costs, they an trade to mutually advance.

Question 12

What must a country understand to become a wealthier country?

Answer 12

One has to understand economic growth, which is one of the most important tasks of economics.

Question 13

Name some important institutions for supporting good incentives:

Answer 13

• Property rights
• political stability
• honest government
• a dependable legal system

Question 14

What makes a country rich?

Answer 14

Wealthy countries have lots of physical and human capital per worker and they produce things in a relatively efficient manner, using the latest technological knowledge.

Question 15

Define Inflation:

Answer 15

Inflation is an increase in the general level of prices and is one of the most common problems in macroeconomics

Question 16

What are the three principal benefits of trade?

Answer 16

1. Trade makes people better off when preferences differ.
2. Trade increases productivity through specialization and the division of knowledge.
3. Trade increases productivity through comparative advantage.

Question 17

How does trade create value?

Answer 17

Trade creates value by moving goods from people who value them less to people who value them more.

Question 18

Economic growth in the modern era is primarily due to the creation of…

Answer 18

…new knowledge

Question 19

Define absolute advantage

Answer 19

The ability to produce the same good using fewer inputs than another producer

Question 20

Define a production possibilities frontier (PPF)

Answer 20

A PPF shows all the combinations of goods that a country can produce given its productivity and supply of inputs. A PPF illustrates trade-offs

Question 21

Define comparative advantage

Answer 21

A country has a comparative advantage in producing goods for which it has the lowest opportunity costs

Question 22

The theory of comparative advantage explains trade patterns and tells us something remarkable: a country or person will always be…

Answer 22

…the low-cost seller of some good

Question 23

What’s Adam Smith’s view on Trade?

Answer 23

People will never attempt to produce something at home that will cost them more than when they just buy it

Question 24

Does everyone benefit from increased trade?

Answer 24

No:

Workers in the sector with increased demand will see their wages rise

Workers in the sector with decreased demand will see their wages fall.

Overall, however, trade increases total wealth

Question 25

Define ‘opportunity cost’

Answer 25

The opportunity cost of a choice is the value of the opportunities lost