Untitled Flashcards Set

Detailed Mid Term Study Guide

Structure of the Exam

• Four Questions: Choose any three questions.

• Each question is multi-part focusing on a single topic.

Chapter 3: Comparative Advantage

Questions:

1. How do you determine comparative advantage between two players?

   • Answer: 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.

2. Why do specialization and exchange benefit both players?

   • Answer: 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.

Chapter 10: Gross Domestic Product (GDP)

Questions:

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

   • Answer: 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.

2. What does the formula look like for GDP calculation?

   • Answer: The formula for GDP is:GDP = C + I + G + (X - M)Where:

     • C = Consumption

     • I = Investment

     • G = Government Spending

     • X = Exports

     • M = Imports

3. Why is GDP important?

   • Answer: 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.

4. What is the difference between real GDP and nominal GDP?

   • Answer: Nominal GDP measures a country's economic output using current prices, while real GDP adjusts for inflation to reflect the true value of goods and services. Real GDP is preferred for comparing economic performance over time.

5. How do you calculate inflation using the GDP deflator?

   • Answer: The GDP deflator is calculated as:GDP Deflator = (Nominal GDP / Real GDP) × 100.The change in the GDP deflator over time gives the inflation rate.

6. Why is GDP an imperfect measure of economic welfare?

   • Answer: GDP does not account for the distribution of income among residents of a country, environmental factors, unpaid work, and other qualitative factors that contribute to the overall well-being of a population.

Chapter 11: Consumer Price Index (CPI)

Questions:

1. How is inflation calculated using CPI?

   • Answer: Inflation can be calculated by comparing the CPI of two periods:Inflation Rate = ((CPI in Current Year - CPI in Previous Year) / CPI in Previous Year) × 100.

2. What is CPI?

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

3. What are the problems with CPI, such as substitution bias, introduction of new goods, and unmeasured quality changes?

   • Answer:

   • Substitution Bias: Consumers may switch to cheaper alternatives when prices rise, which CPI does not account for.

   • Introduction of New Goods: New products are not immediately included in the CPI basket, failing to reflect the full range of purchasing options.

   • Unmeasured Quality Changes: Improvements in quality are sometimes not adequately captured, leading to overestimations of inflation.

4. Why do CPI and GDP deflator yield slightly different inflation measures?

   • Answer: The CPI focuses on a basket of consumer goods, while the GDP deflator reflects prices of all goods produced domestically. They measure different scopes, leading to variance in inflation rates.

5. What is the difference between real and nominal interest rates?

   • Answer: Nominal interest rates are the stated rates without adjustment for inflation, while real interest rates are adjusted for inflation and reflect the true cost of borrowing. One should focus more on real interest rates for understanding the true purchasing power of investment returns.

Chapter 12: Economic Growth Drivers

Questions:

1. What are the drivers of economic growth and why is it important?

   • Answer: Key drivers include technological advancement, human capital development, physical capital investment, and institutional frameworks. Economic growth is vital as it can reduce poverty, improve living standards, and increase both individual and national wealth.

2. What is the catch-up effect?

   • Answer: The catch-up effect refers to the phenomenon where poorer economies grow at faster rates than richer ones as they adopt technologies and practices already in use elsewhere, leading to a reduction in income disparities.

3. Where might we see diminishing returns to capital?

   • Answer: Diminishing returns to capital can be observed in an economy when each additional unit of capital (e.g., machinery) contributes less to output than previous units due to already high levels of capital in use.

4. What policies can the government follow to drive economic growth?

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

Chapter 13: Savings and Financial System

Questions:

1. How do you derive public and private savings?

   • Answer:

   • Public Savings: Government revenue minus government spending.

   • Private Savings: Household income minus consumption and taxes.

2. What is the important role of the financial system?

   • Answer: The financial system facilitates savings and investments by providing a framework for gathering funds from savers and allocating them to borrowers for productive uses, which promotes economic growth.

3. What is crowding out?

   • Answer: Crowding out occurs when increased public sector spending leads to a reduction in private sector spending or investment due to higher interest rates or reduced availability of resources.

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

   • Answer: The bonds market involves debt instruments where investors lend money to borrowers (such as corporations or governments) in exchange for interest payments. The stock market deals with equity securities, allowing investors to purchase ownership stakes in companies and benefit from profits.

5. What are the benefits of mutual funds?

   • Answer: Mutual funds offer diversification, professional management, and liquidity while helping investors access a variety of asset classes with lower individual investment amounts.

6. Understand the market for loanable funds.

   • Answer: The market for loanable funds is where savers supply funds for loans to borrowers, determining the equilibrium interest rate based on the interaction of supply and demand for money.

7. What policies can stimulate savings and/or investment?

   • Answer: Policies may include tax incentives for savings accounts, subsidies for investment in business development, and fostering an environment of economic stability to encourage both domestic and foreign investment.