Global Business Exam 2

What are economic indicators?

They are measures that provide information about key aspects of the economy.

List common economic indicators.

Standard of living, GDP, poverty, labor markets, unemployment rate, labor force participation rate, and income inequality.

What is GDP?

The market value of all finished goods and services produced within a country in a year.

Why is total GDP not always a good comparison across countries?

Because total GDP can be large simply due to population size.

What is GDP per capita?

Total GDP divided by the population; it gives the average income per person.

What does GDP per capita measure?

It’s used as an indicator of living standards.

Example: Compare GDP per capita (PPP, 2021 Int$).

Singapore: $127,543

U.S.: $74,578

India: $9,172

Haiti: $2,956

What is the poverty rate?

The percentage of people whose income falls below the poverty line.

What are national poverty lines?

Country-specific income thresholds where basic needs can’t be met.

What are international poverty lines (World Bank, 2025)?

$3/day = extreme poverty

$4.20/day = lower-middle income

$8.30/day = upper-middle income

Why use international poverty lines?

To compare poverty across countries and over time.

What is the unemployment rate?

The percentage of people unemployed but actively looking for work.

What is the labor force participation rate?

The percentage of working-age people who are working or seeking work.

What do labor indicators show? (Workforce and unemployment)

How much labor is idle and how active the workforce is.

What is income inequality?

The gap between household incomes.

How is income inequality measured?

1. Gini coefficient

2. Income quintiles

What is Gini coefficient

0 = perfect equality, 1 = perfect inequality

What is Income quintiles

Shares of income for top 20% vs. bottom 20%.

Can one indicator tell us everything?

No. Multiple indicators together provide a full picture.

What can indicators show us?

How countries develop over time and how they compare globally.

Why do economic outcomes differ across countries?

Because of differences in institutions.

What are institutions?

Rules of the game, formal and informal systems that shape economic activity.

Examples of institutions?

Property rights, honest government, political stability, legal systems, and open markets.

What is the great economic problem?

Scarcity — unlimited wants but limited resources.

What are scarce resources?

Labor, capital, natural resources, and entrepreneurial ability.

What are trade-offs?

Choosing one thing means giving up another.

What is opportunity cost?

The next best alternative you give up to get something.

What are Explicit costs

Out-of-pocket costs (tuition).

Implicit

Foregone opportunities (lost wages).

What is an economic system?

The way society allocates scarce resources and goods/services.

What questions must economic systems answer?

What to produce?

How much to produce?

Who produces it?

Where to sell it?

At what price?

What are the two main types of economic systems?

Market economies and planned economies

How are resources allocated in a market system?

Through the decentralized decisions of individuals.

Who owns the means of production?

Private individuals.

What is spontaneous order?

Order that emerges naturally through voluntary, mutually beneficial transactions.

What guides decision-making in a market economy?

Prices and incentives

What do prices do?

Summarize information about the value of resources and guide decisions.

How do prices allocate resources?

They direct resources to their most valued uses through bidding and voluntary exchange.

How do prices distribute goods?

Goods go to consumers who value them most, reflected in willingness to pay.

How do incentives affect behavior?

When prices or rewards change, people and businesses change behavior.

What is creative destruction?

The process where innovation replaces old industries with new ones.

What are the government’s two main roles?

Rule maker/referee.

Fixing market failures.

What are examples of market failures?

• Positive externalities (education, vaccines).

• Negative externalities (pollution, smoking).

What’s one criticism of market economies?

They can lead to unequal outcomes even if efficient.

What trade-off exists?

Between efficiency and equality.

Who allocates resources in planned economies?

Central planners or government officials.

What is socialism?

A system where the government owns and controls all means of production.

What is the main argument for planned economies?

To benefit society as a whole, not just private capitalists.

PROBLEMS WITH PLANNED ECONOMIES

What are the two major problems?

Information problem.

Incentive problem.

What is the information problem?

Knowledge is dispersed and can’t be fully known or quickly communicated to central planners.

What is the incentive problem?

Governments lack profit motivation, so they are less responsive to change.

What are consequences of weak incentives?

Little innovation, slow adaptation, and inefficiency.

Example of failed central planning?

China’s Great Leap Forward, inefficient resource allocation, reduced living standards.

Cuba, limited innovation due to state ownership.