Untitled Flashcards Set

How do you determine comparative advantage between two players?

Calculate the opportunity cost for each player in producing a good. The player with the lower opportunity cost for a good has a comparative advantage in that good.

Why do specialization and exchange benefit both players?

Specialization allows players to focus on producing goods they have a comparative advantage in, leading to increased overall efficiency and total production. Exchange permits them to trade surplus goods, allowing both players to benefit from a greater variety of goods than they could produce alone.

What is GDP? What is included and what is not?

GDP is the total market value of all final goods and services produced within a country in a given time period. It includes consumption, investment, government spending, net exports (exports - imports). It does not include intermediate goods, financial transactions, or illegal goods.

What does the formula look like for GDP calculation?

GDP = C + I + G + (X - M) where C = Consumption, I = Investment, G = Government Spending, X = Exports, M = Imports.

Why is GDP important?

GDP is crucial because it serves as a comprehensive measure of a country’s overall economic activity, helps to gauge the health of the economy, and is used for economic planning and policy-making.

What is the difference between real GDP and nominal GDP?

Nominal GDP measures economic output using current prices, while real GDP adjusts for inflation to reflect the true value of goods and services.

How do you calculate inflation using the GDP deflator?

GDP Deflator = (Nominal GDP / Real GDP) × 100. The change in the GDP deflator over time gives the inflation rate.

Why is GDP an imperfect measure of economic welfare?

GDP does not account for the distribution of income among residents, environmental factors, unpaid work, and other qualitative factors contributing to overall well-being.

How is inflation calculated using CPI?

Inflation Rate = ((CPI in Current Year - CPI in Previous Year) / CPI in Previous Year) × 100.

What is CPI?

CPI is a measure that examines the average change over time in prices paid by urban consumers for a market basket of consumer goods and services.

What are the problems with CPI?

Substitution Bias: Consumers switch to cheaper alternatives; Introduction of New Goods: New products are not immediately included; Unmeasured Quality Changes: Improvements in quality are not adequately captured.

Why do CPI and GDP deflator yield different inflation measures?

CPI focuses on consumer goods, while GDP deflator reflects prices of all goods produced domestically, leading to different scopes and variance in rates.

What is the difference between real and nominal interest rates?

Nominal interest rates are not adjusted for inflation, while real interest rates are adjusted to reflect the true cost of borrowing.

What are the drivers of economic growth?

Key drivers include technological advancement, human capital development, physical capital investment, and institutional frameworks. Economic growth is important for reducing poverty and improving living standards.

What is the catch-up effect?

The catch-up effect is the phenomenon where poorer economies grow faster than richer ones as they adopt existing technologies, reducing income disparities.

Where might we see diminishing returns to capital?

Diminishing returns to capital can be observed when each additional unit of capital contributes less to output due to already high levels of capital in use.

What policies can the government follow to drive economic growth?

Policies include investing in education, supporting research and development, tax incentives for businesses, improving infrastructure, and ensuring stable political and legal systems.

How do you derive public and private savings?

Public Savings: Government revenue minus government spending; Private Savings: Household income minus consumption and taxes.

What is the important role of the financial system?

The financial system facilitates savings and investments and allocates funds from savers to borrowers, promoting economic growth.

What is crowding out?

Crowding out occurs when increased public sector spending reduces private sector spending or investment due to higher interest rates.

What is the difference between the bonds market and the stock market?

The bonds market involves debt instruments for lending, while the stock market deals with equity securities, allowing ownership stakes in companies.

What are the benefits of mutual funds?

Mutual funds offer diversification, professional management, and liquidity, giving investors access to various asset classes.

Understand the market for loanable funds.

The market for loanable funds is where savers supply funds for loans to borrowers, determining the equilibrium interest rate based on supply and demand.

What policies can stimulate savings and/or investment?

Policies include tax incentives for savings accounts, subsidies for investment, and fostering economic stability to encourage investment.