ECS 3200 Midterm/Final Review

Which transactions in the economy are included in GDP? Which are left out?

excludes: home production, off the book transactions, illegal activity, intermediate goods, used good purchases/resales, financial transaction, money transfers

includes: market value, all final goods and services, producted in a country during a given time period

What are the two approaches of calculating GDP? Do they give the same GDP?

Total expenditures: sum all expenditures on domestically produced final goods and services

Total income: sum all income generated by producing domestic final goods and services

Yes.

What are the differences between GNP and GDP?

GNP: the total income earned by a nation’s permanent residents

* includes income that americans earn abroad
* does not count income that foreigners earn in the U.S

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National income= wages+ rental income+interest earnings+corporate profits

Why do we use real GDP to compare the economic output rather than the nominal GDP?

nominal gdp is measured in the “current prices” and real gdp is measured in “the constant prices”

real gdp: the total value of all final goods and services produced w/in a country during a given year, using the prices of a base year

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real gdp= (nominal gdp/price index) \* base year price index

Why do we use Purchasing Power Parity adjusted real GDP per capita to compare across different countries? What problems with the real GDP per capita in US $ measure that led to the introduction of PPP adjustment?

purchasing power parity: an alternative way of comparing nominal GDP between countries, adjusting currencies based on prices of basket of goods they could buy in those countries rather than currency exchange rates.

* uses prices prevail in the U.S to adjust for the difference in cost of living between different countries
* PPP-adjusted GDP ranking looks different than the nominal GDP ranking because GDP of countries w/ cheaper cost of living will be adjusted higher and the low-cost of living countries’ GDP will be

What are the drawbacks of using GDP per capita as the well-being measurement?

GDP only measures the total output we produce w/o indicating about how we produce these outputs. GDP does not consider working conditions, safety of workplace, # of worked hours, vacation, etc.

What is the price index? How is it used to calculate the inflation rate?

inflation= Pt- Pt-1/Pt-1 \*100

\- The overall price level in the economy \n - Uses the GDP deflator and Consumer price index

Two price indices are considered in this class: CPI and the GDP deflator. Explain the differences between the two measures of the price level.

GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. GDP Deflator = Nominal GDP/ Real GDP X 100. CPI is a measure of the overall cost of the goods and services bought by a typical consumer.

How unemployment is measured and how the unemployment rate is calculated.

The unemployment rare is the percentage of the labor force that is unemployed. It is (Number of unemployed / Labor Force) x 100. Unemployment is measured 1. The bureau of Labor Statistics surveys 60,000 households every month. The BLS places each adult (16 or older) into one of three categories: employed, unemployed or not in the labor force.

Who are the discouraged workers? How do they affect the true level of unemployment?

They are people who have been out of work for a long time and giving up in looking for a job. They are counted as "not in the labor force" as a result, they he will no longer appear in the statistics computed in the chart.

How do we compute a country’s openness? What does it imply?

Openness is used to measure the degree of free trade or trade liberalization, we can simply compute the share of import volumes and export volumes to the size of the economy. High openness indicates that the country tends to rely more on international trade. \n \n Openness = (X+M)/GDP

What is trade surplus? What is trade deficit?

X= goods and services produced at home and sell abroad \n M= goods and services produced abroad and purchased at home \n \n Trade deficit= NX < 0 (or X < M) \n Trade Surplus= NX > 0 (or X >M)

What is the saving-investment identity: for a closed vs. open economy?

Closed Economy \n 1. GDP=C+ I+G \n 2. GDP=C+S+T \n 3. I+G=S+T \n 4. I=S+(T-G) \n Investment = Private Savings + Public Saving \n Open Economy \n 1. GDP=C+ I+G+(X-M) \n 2. GDP=C+S+T \n 3. I+G+(X-M)=S+T \n 4. I=S+(T-G)+(M-X)

What is the global poverty line? What are the trends of global poverty in each region of the world?

Absolute poverty= $1.25/day. In the past two decades, the number of people living below the $1.25 and $2.0 poverty line has fallen.

What is the Lorenz curve? What does it represent? What can you tell about the shape of the Lorenz curve?

The Lorenz curve plots the cumulative share of income versus the percent of households considered in the cumulative share. The 45° line shows what the Lorenz curve would look like if there were perfect equality \n (the line of perfect equality); it is a useful reference because the distance between the \n Lorenz curve and 45° line is a measure of inequality:

How Gini coefficient is calculated? What does it represent?

The Gini coefficient is a measure of inequality based on the distance between the Lorenz curve and the 45 degree line. = (Area A)/ (Area A + Area B).

What is the rate of natural increase?

The Gini coefficient is a number between 0 and 1. The higher the number is, the more income being unequally distributed among people in the country.

What is demographic transition?

A model that explains why rapid population growth is a temporary phenomenon. As a country develops, the death rate sharply falls because of better health technologies, improved sanitation, higher education, and expansion of markets and production. The time log allows birth rates to remain high and steady.

Why does the population growth rise at the initial stage of development?

Although the value of r is affected by both birth rate and death rate, the recent history of the \n human population has been affected more by declines in death rates than by increases in birth rates. There is a time lag between the decline of death rate and birth rate. Thus, the population \n growth tends to rise during this time lag.

What is the dependency ratio?

captures the proportions of children and elderly people to working-age people in the population; it implies the burden that working-age population bears in relation to children and the elderly. It also shows the age composition of a population.

According to the World Bank (1993), what are the common characteristics between the High-Performing Asian economies? Briefly explain each characteristic, comparing to the other developing countries.

1\. Rapid and sustained economic growth \n 2. Declining income inequality and reduced poverty \n 3. Declining in agriculture's share, but rising agriculture productivity \n 4. Rapid growth of exports \n 5. Rapid demographic transitions \n 6. High investment and saving rates \n 7. Rapid human capital formation \n 8. Rapid productivity growth

What is the rule of 70?

Used to estimate the length of time it will take to double the standard of living.

number of yrs to double= 70/ annual % growth rate

What is Kuznets inverted-U shape curve.

Inequality might first increase as a nation makes transition from agricultural economy to an industrial economy. As the economy continues to develop, the income inequality declines

How did the HPAE governments increase agricultural productivity?

\- improved infrastructures such as roads, electricity, and irrigation system \n - improved agricultural technology \n - support agricultural R&D \n - Create lending markets to farmers \n - Land reform

According to World Bank report (1993), what did the report conclude about HPAEs’ income inequality? 

According to the world bank, the HPAE’s income inequality was greatly reduced and works in conjuction with GDP growth. Income inequality was reduced due to investment in education.

What is the Malthus’ population growth trap?

Poor economies will never be able to rise above their subsistence level of per capita income unless they can lower their population growth.

\-Large Family \n -High population growth \n -Large Labor Supply \n -Surplus of labor \n -Unemployment and under employment \n -Low productivity and low wages \n -Poverty \n \n (Circular cycle)

In economics, what do we mean by saving? What does investment mean?

Consuming less out of a given amount of resources in the in the present in order to consume more in the future. Saving, therefore, is the decision to defer consumption and to store this deferred consumption in some form of asset. \n \n Investment is the purchase of goods that are not consumed today but are used in the future to create wealth

Define saving: domestic saving, private saving, and public saving?

T= taxes

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Private saving: After tax disposable income by private sector that is left over after consumption. Saving by private sector-- (Y-T-C)

Public saving: The difference between tax revenues received by the gov’t and gov’t purchases. (T-G)--(T). If negative the gov’t runs a budget deficit and if positive the gov’t runs a budget surplus.

How did the HPAE governments increase saving?

\-they keep interest rates on deposits high and stable \n -lower transactions costs to access banks for rural savers \n -limit banking competition and impose many regulations to ensure stability and solvency in the banking system \n -impose high taxes on luxury consumption to discourage spending \n -impose mandatory pension saving \n -government run budget surplus \n \n

How did the HPAE governments increase investment?

(Investment) \n -Create infrastructure that complement to private investment \n -create investment friendly environment

\-repsress interest rates on loans to promote specific industries

adapt appropriate technologies

* invest in improving the quality of workforce to increase productiveness of investment

Give examples of population control policies East Asian countries.

* One-child policy in China
* In indonesia the gov’t emphasized fertility control and distributed contraceptives, imposed taxes if a couple had more than a certain number of children
* in singapore 1960s the gov’t placed a “stop at two” policy to reduce fertility. In 1980s, the gov’t shifts the direction of its policy to “have three or more if you can afford”

What is the total factor productivity?

The productivity of all inputs taken together. TFP is a measure of the output of an industry or economy relative to the size of all of its primary factor inputs

What is an economy’s production function? What factors determine the output in the economy?

A production function relates physical output of a production process to physical inputs or factors of production. \n - Y= F(K,L) \n \n -We begin with a production function, where output Y is a function of inputs K (Physical Capital, such as buildings, computers, etc. ) and L (labor units).

What is the economic growth?

an increase in the amount of goods and services produced per head of the population over a period of time. \n \n Depends on \n 1. Factor Accumulation \n (increase in capital stock (k) ) \n 2. Productivity Growth \n (increase in the amount of output produced by a given number of machines or workers)

What do the diminishing returns to capital mean? How to show that on the production function graph?

 an extra investment in capital does not payoff as much as it did before. This implies that the wealthier a country is, the less effect an increase in k will have. \n \n - At the beginning of production: an increase in capital per worker will increase the output per worker at an increasing rate \n \n - towards the end of production function, an increase in the capital per worker will increase the output per worker at a decreasing rate

What is the capital accumulation equation?

Change in capital stock = Investment (i) - depreciation (dk)

In the Solow model, what will happen to the change in capital stock, if new investment exceeds the depreciation of existing capital?

The change will be positive, the capital stock per capita will increase

What is the condition for the steady-state equilibrium?

A steady state economy seeks to find an equilibrium between production growth and population growth. The economy aims for the efficient use of natural resources, but also seeks fair distribution of the wealth generated from the development of those resources.

In the Solow model, how does the saving rate affect the steady-state level of output per capita?

\- an increase in saving rate will move the economy from the initial steady-state level of output to the higher steady-state level. During the transition, we will see output per worker grow.

In the Solow model, how does the saving rate affect the steady-state growth rate of output per capita?

will result in temporary growth

In the Solow model, how does the rate of population growth affect the steady-state level of output per capita?

decrease in level per output per capita

Would high saving and investment lead to economic growth? If so, is this growth rate sustainable?

Yes, it would not be sustainable at a certain point they will experience diminishing returns

What are the underlying assumptions for convergence hypothesis? What does the hypothesis imply about the poor and rich countries? How do economists test the hypothesis?

\-Economies will move up their income ladder toward the same average income level \n -Assumes two countries have the same saving rate, population growth and depreciation rate. \n \n If all else equal, poor countries have the potential to grow more rapidly than rich countries \n - as countries become richer, growth rates tend to slow down. \n - Since poor countries have the potential to grow faster than rich countries, they can catch up and close the gap in relative income

How does technological progress affect the steady-state level of output per worker and the level of capital per worker overtime?

it would increase both of these factors

How does technological progress affect the steady-state growth rate of output per worker?

they would increase

From the growth accounting, what factor(s) play an important role in HPAEs’ economic growth?

The growth rate of the labor force \n - The growth rate of capital stock - rate of capital accumulation \n -Labor's share of total income - share of total income that is allocated to workers \n -The share of capital in total income -Share of total income that is allocated to capital's owners \n - Solow residual or technological progress

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What is Solow residual?

Or "technological progress" or "The growth in Total Factor Productivity (TFP)" - the measure of the efficiency, technology, and other influences on productivity

What does it mean if East Asian countries have high TFP growth? What does it mean if East Asia has very low TFP growth?

High- means that they have strong technological change over time \n Low - opposite of high

What did Paul Krugman and Alwyn Young conclude about Singapore's TFP growth?

Krugman meant that Singapore’s economic miracle were made by long-lasting changes that could only occur once. These changes permitted Singapore to adjust their lifestyle that benefitted the population rather than adopting changes that they may have observed from other countries. These adaptations directly addressed Singapore’s issues

In which part about HPAEs’ economic growth that Paul Krugman disagreed with the World Bank (1993) report?

Paul Krugman believed that the economic growth was one-shot, there is little evidence of technological progress and the economy mainly mobilized because of more capital and labor inputs into production. As a result, once the diminishing returns to factors of production set in, the rapid out growth will end.

How did Radelet, Sachs, and Lee (1997) try to test the convergence hypothesis? What did they find?

test for convergence, the test which factors contribute to economic growth. \n \n They found: \n 1. Found a negative relationship between y0 and gy which supports the convergence hypothesis \n 2. Education: weak positive link between education and economic growth \n 3. Natural resources abundant: strong negative link between resource richness and economic growth \n 4. Landlocked: negative link between being landlocked and economic growth \n 5. Tropics: strong negative link between being in tropics and economic growth \n 6. Open to international trade: strong positive link between openness and growth \n 7. Government saving: positive link between govt. budget surplus and economic growth \n 8. Quality of govt. institution: positive link between high quality of governance and economic growth \n 9. Population growth: negative link (confirms solow model) \n 10. Growth of working-age pop.: positive link \n 11. Life expectancy: positive link

According to Radelet, Sachs, and Lee (1997) empirical research paper, what are the factors that positively affect the economic growth? What are the factors that negatively related to economic growth?

Positive: \n 1. Openness and manufactured exports \n 2. Higher saving and investment \n 3. Strong macroeconomic management

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Negative: \n 1. Longer life expectancy \n 2. Low education levels

What is natural resource curse? How do we explain the phenomenon?

Countries with abundant natural resources tend to perform poorly in economic growth. This study uses the ratio of primary product exports to GDP as the measurement for how much a country relies on its primary commodities that have been cut, dug, or harvested comparing to the size of economic activities. The country focuses so much on their resource industry they neglect other sectors.

1\. A nation finds ample natural resource reserves \n 2. Economic focus begins to target this high-income industry \n 3. Skilled workers from other sectors transfer to the resource sector \n 4. Higher wages make the national currency less competitive \n 5. Other industries, especially the manufacturing sector, begin to suffer

Define domestic saving

Domestic saving (S) : Saving for the whole nation; national saving is the sum of private saving from public saving . National savings=Investment

I=S= (Y-T-C)+(T-G)

In the Solow model, how does the rate of population growth affect the steady-state growth rate of output per capita?

the rate declines

What is market failure? 

a situation when individual best outcome under free market does not yield the society’s optimal outcome.

* The most common causes of the market failure in developing countries are the existence of externalities, public good, and coordination failure.

How can government improves efficiency when market failure exists?

through government intervention, market friendly interventionism, tariffs, trade restrictions

Explain the market-friendly view of HPAEs’ role of government on economic growth. What are the suggested policies under this view?

the market friendly strategies can improve the ability of the private sector to solve coordination problems and overcome other market imperfections. government=watchdog

1. What are policies that gear toward sound fundamentals?

* stable macroeconomy
* high human capital
* healthy financial system
* limit price distortions
* open trade and foreign technologies
* develop rural agricultural sectors

1. What are selective intervention policies?

* export push
* credit market interventions
* selective promotion

1. Why is cooperation between business and governments important in East Asia?

cooperation can create several harmful effects. coordination could lead to creation of cartel in which colluding firms act like a monopoly and raise prices.

What are the differences between market-based competition and contest-based competition?

* contest-based competition allows firms in target industries to compete w/ one another and be assessed by well-defined economic performance criteria (Japan and South Korea)


* market-based intervention limits government interference, government acts as a chaperone to make sure rules are followed. On the other, the contest-based competition is like an organized party at the playground w/ some planning and organized activities for children. Participating is limited and based on invitations.

1. What are the problems in rural development?

How do Asian governments try to alleviate such problems in rural economy? Give examples of agricultural development policies. 

What is Green Revolution?

What is food security?

Why having access to credit market is a major problem in rural development?

What is land reform?

What is village and township enterprises?

How does the buffer stock work?

What is global value chain? How is GVC related to Asia's industrialization?

Why do East Asian governments use industrial policies? What would be justifications for such interventions?

What is ISI? What are weaknesses of ISI policy?

What is infant industry argument?

What is industry targeting?

What is coordination failure?

What are the differences between Chaebol and Keiretsu?

How the Asian-style capitalism differs from the Western-style capitalism?

What is import substitution?

What is export promotion?

How does import tariff work? Who gains and who loses? What happen to domestic price after the tariff? Study areas under the curves. 

How does export subsidy work? Who gains and who loses? What happen to domestic price after the subsidy? Study areas under the curves. 

What is exchange rate? What does it mean when a currency depreciates or appreciates? 

When a home currency depreciates, what will happen to trade balance (imports – exports)?

When a home currency appreciates, what will happen to trade balance?

How can central bank intervene in foreign exchange market to peg the home currency?


1. What should it do if the home currency is undervalued?

How can central bank intervene in foreign exchange market to peg the home currency?


2. What should it do if the home currency is overvalued?

How the speculative attack works? How does it lead to currency crisis?

How to use the Big Mac Index to calculate the PPP-theoretical value of a currency?

What is the law of one price? Under which situations that the LOOP fails?

1. Explain what each exchange rate arrangement is.  Fixed (pegged) vs. Floating (flexible)


1. Dollarization
2. Currency board
3. Conventional peg arrangement
4. Managed floating
5. Free floating

Which exchange rate system do Asian countries adopted? Who adopts Free Floating? Who uses the Currency Board? Who uses the Managed Float?

Why fix the exchange rate? Pros and cons of fixed system.

Why float? Pros and cons of floating.

Who tend to peg? Who tend to float?

What is SDR?

What are the common patterns that countries tend to experience before a financial crisis?

Who are the crisis-ridden countries during the 1997-98 Asian Crisis?

How severe was the effects of the crisis? On exchange rate, on stock market, on economic output, etc.

What are the causes of Asian Crisis?