ECON 2020 EXAM 2

All ECON 2020 chapters up until exam 2

Scarcity

limited availability of resoures relative to unlimited human wants and needs

How does the limit of land impact production?

Limits agricultural output

How does the limit of land impact consumption?

Affects food supply and cost

How does the limit of land impact trade?

Influences imports and exports

How does the limit of labor impact production?

Constrains productive capacity

How does the limit of labor impact consumption?

Affects worker income

How does the limit of labor impact trade?

Affects global supply chains

How does the limit of capital impact production?

Limits innovation and investment

How does the limit of capital impact consumption?

Affects the availability of goods

How does the limit of capital impact trade?

Influences trade policy

How does the limit of entrepreneurial ability impact production?

Hinders business creation

How does the limit of entrepreneurial ability impact consumption?

Affects the variety of goods

How does the limit of entrepreneurial ability impact trade?

Impacts competitiveness

Trade off

Every choice means giving up something else

Opportunity cost

The cost of the next best alternative

Trade can…

Make everyone better off

Markets are usually…

a good way to organize economic activity.

Governments can sometimes…

improve market outcomes.

Productivity determines…

living standards.

Prices raise when…

the government prints too much money.

Inflation

General increase in goods when too much money is printed

There is a short run trade off between…

inflation and unemployment.

____ allocate resources through voluntary exchange.

Markets

_____ intervene to correct market failure.

Governments

Strengths of markets

Effecient resource allocation, responsive to consumer preferenceWe

Weaknesses of markets

Inequality, market failure

Strengths of governments

Address externalities, promotes fairnessE

Externality

An unintended cost or benefit imposed on a third party not directly involved in an economic transaction, causing market failure

Weaknesses of government

Can be inefficent, prone to political influence

Causes of inflation

Increased money supply, demand-pull inflation, supply-push inflation

Demand-pull inflation

Demand exceeds supplySup

Supply-cost inflation

costs to produce rise and are pushed onto consumers

Inflation effects

Decreased purchasing power, erosion of savings

Unemployment causes

Recessions, tech advancements/automation

Effects of unemployment

Decreased income, lower GDP, social costs

Monetary policy

Interest rates and money supply policy

Fiscal policy

Taxation and government spending policy

Explicit cost

Direct expenses

Implicit cost

Forgone earnings

Opportunity Cost = ___ + ____

explicit cost, implicit cost

Marginal change

Small incremental adjustments

Absolute advantage

Ability to produce using fewer inputs

Comparative advantage

Ability to produce at a lower opportunity cost

Specialization is determined by…

comparative advantage.

The price of trade is…

between the two opportunity costs.

Post Trade Consumption Bundle (equation)

consumption = production + imports - exports

Domestic price

Price without trade (P_d)

World price

Prices set by exporter (P_w)

Export Case (explaination)

home producers can sell abroad at higher world price so the country becomes an exporterE

Export case (equation)

P_d < P_w

Import case (explaination)

Foreign suppliers can undersell domestic producers at a lower world price so the country becomes an importer

Import case (equation)

P_d>P_w

Who wins and loses when P_d < P_w?

domestic producers, domestic consumers

Who wins and loses when P_d > P_w?

domestic consumers, domestic producers

Is this representative of an importer or exporter country?

Exporter

Where is consumer surplus with trade?

A

Where is consumer surplus without trade?

A + B

Consumers ___ with trade in this case.

Lose

Where is producer surplus with trade?

C

Where is producer surplus without trade?

B + C + D

Producers ___ with trade in this case.

gain

Gains from trade

D

Is this representative of importer or exporter country?

Importer

Domestic equilibrium

Determines price and quantity with no trade

Where is government revenue?

EWh

Where is consumer surplus with trade?

A + B + C + D + E + F

Where is consumer surplus without trade?

A + B

Consumers ____ with trade.

gain

Where is producer surplus without trade?

G + C

Where is the deadweight loss?

D + F

Deadweight loss

Loss of total economic surplus, not gained by anyone

GDP

total market value of all final goods and services produced within a countries borders during a given time

GDP equation

y = g + c + i + nx

Real GDP

adjusted for inflationNo

Nominal GDP

not adjusted for inflation

Prices_current * Quantities_current calculates…

nominal GDP

Prices_base * Quantities_current calculates…

real GDP

GDP Deflator

price index that measures level of prices in the economuy relative to the base year

GDP deflator is similar to real GDP but measures the change in _____ by keeping the quantities constant.

price of production

GDP deflator (equation)

100 * (nominal GDP/Real GDP)

Inflation rate from GDP Deflator equation

100 * (GDP Deflator Year 2 - GDP Deflator Year 1)/GDP Deflator Year 1

CPI measures…

the cost of living.

CPI basket

fixed set of goods and services purchased by the typical consumer

CPI equation

(Cost of Basket_current/Cost of Basket_Base)*100

Inflation rate from CPI

100*(CPI_current-CPI_base)/CPI_base

GDP deflator focuses on ____ and CPI focuses on ____

domestic production, consumers

Nominal interest rate

Number you see

Real interest rate

the growth of purchasing poweer

Real interest rate =

nominal - inflation rate

High real interest is better for ___ and low real interest is better for ___.

lenders, borrowers