ECON 207 Review questions

docx

School

University of Waterloo *

*We aren’t endorsed by this school

Course

207

Subject

Economics

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by MinisterLeopard6082

Let' all try to write down EVERYTHING we can think of Review Questions: Introduction 1. What is meant by material standard of living? - Not just goods and services, but also environmental quality, health, mortality rates, leisure time (all these sorts of things, except for psychological or sociological factors) - Living standard is the overall well being of a nation. Material living standards is the economic wellbeing of individuals as affected by actual per capita consumption of goods and services and incomes per year. - Material living standard: consumption of goods and services, economic well being. Are you sure about this? “Material” standard of living might only refer to things like cost of living, support from the government in terms of pensions, etc. ^ I think this is correct based on https://ca.answers.yahoo.com/question/index? qid=20130603031957AAwxilD and it makes sense based on the meaning of ‘material’ 2. What is the magnitude of income differences between the richest and poorest countries? - Richest countries could be 40x richer than poorest countries (nominal) - Around 13x using PPP 3. Explain (in a mechanical sense) how the first group of developed economies became rich? - Small growth rates over very long periods of time - Average of 1.8% per year, while hardly noticeable from one year to the next, when compounded over say 139 years, the effects are dramatic 4. Is it correct to say that for most of human history there was no economic growth? - Yes and no because it was in one hundredths of a percentage. From 1500-1700 it was 0.04%/year. 0.07% between 1700-1820. Even during China’s dominance between 1500- 1820, growth was around 0.14%. (living standards weren’t constant either, they experienced fluctuations like famine, war and plague for periods that spanned over hundreds of years. There was growth, it was slow, not non-existent. 5. Why do small differences in growth rates matter? - Because a small difference is still a difference, and if one country has a higher growth rate than another, it will eventually surpass it in living standards - Small differences can change the slope of growth, even only slightly so that a country growing by a rate only smaller than another country, and if those countries have similar GDPs, over a long period of time, the difference will be bigger. The effect in a single year is modest, but (rule of 70) over a long period of time, even a country growing by a difference of 0.1 more, will double faster and probably enjoy a better standard of living. - http://www.forbes.com/sites/brinklindsey/2011/03/28/why-the-growth-rate-matters/ #520fe52b6cee 6. Explain what is meant by rational choice?

1. Everything people do is fundamentally rational, and people weigh the costs and benefits of actions. Measured as a series, not an individual action - The theory that individuals always make the logical and prudent choices. These decisions provide people with the greatest benefit or satisfaction — given the choices available — and are also in their highest self-interest. 7. Suppose someone cares about the welfare of others. Does that invalidate the notion of rational choice? No. They may chose helping someone else over helping themselves, and it may bring them more benefit to do so, in which case they would be acting rationally 8. Suppose someone has to make a decision without having all of the relevant information. Does that invalidate the notion of rational choice? - No. As long as the individual chooses the most rational option with their available information, they are acting rationally. - To add to this, it may also be rational for the individual to not waste their time and gather perfect information; more optimal to use their current information to make a decision (Optional) 9. If you’ve taken Econ 301, or 290: given an example of a decision problem that violates the “usual” assumptions. Write down the optimization problem corresponding to your example. 10. Explain what equilibrium is? - every agent in the market has a utility function, and the equilibrium price simultaneously solves all of them - A system is said to be in equilibrium if each person is making the best possible decision for themselves, based on whatever the rest of the group is doing - A state in which all economic forces are in balance It is state of bliss which every individual firm, industry or factor wants to attain and once reached, would not like to leave. 11. Why do economists use equilibrium concepts? - To find a state in which all economic forces are in balance, which can increase efficiency. For example, the equilibrium price at which supply equals demand is the most efficient since the amount of goods supplied is the amount of goods demanded. So there is no surplus or shortage of either supplied or demanded goods. 12. Give an example of an equilibrium model used in economics. Explain how the setting uses the concept of equilibrium. - Supply & demand 13. Explain the difference between observational and experimental data. - Observational data is taken without influencing the study objects, experimental data is collected to observe the effects of some change 14. What is a correlation?

- a mutual relationship or connection between two or more things. 15. Suppose you observe that firms with larger advertising budgets have higher revenue. Can you conclude from this that increases in the advertising budget cause increases in revenue? Explain. No, you shouldn’t make this conclusion because correlation does not equal causation. For example, higher revenues could cause an increase in advertising or there could be a third variable which increases both advertising and revenue. 16. Suppose we see that increases in the money supply occur at the same time as increases in real output. Can you conclude from this that increases in the money supply cause increases in real output? Explain. - No but - The increase in money supply can potentially be a causation from the increase in output. Consumption output (C+G+I+NX) can increase being the first variable, second variable could be the inflation from increase in consumption, the higher inflation would lead to increase in money supply as there would be a higher demand for it. This could be used as an example of X and Y causing Z. 17. Give an example of a case where failing to model individual decision problems could be problematic. A model display an aggregate nation’s wealth might provide a average GDP per capita but without individual models problems could arise as the deviation from the aggregate might be high and within the average there could be a vast dispersion of individual levels of income (quality of life, health, education level) 18. Given an example of an observation that can be explained by multiple theories. Supply and Demand is an observation within many models, so an observation can have S&D but also be a monopoly model. Ex. monopoly controls supply to derive a higher price from the demand line. Provision of public goods most often take into effect externalities as well. Ex. providing subsidized housing might be a negative externality to the average real estate price in surrounding neighborhood. 19. For your example in question 18, give some implication or interpretation that differs depending on which theory you use to interpret the data. V 20. Explain Pareto Efficiency. Pareto efficiency is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. 21. What is a second best problem?

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

The second best problem is that there are no general results about how to judge two outcomes where neither satisfy first best outcomes. If you have one condition that is unchangeable and is not at first best conditions, you shouldn’t try to implement first best conditions to come to some second best outcome of first best minus one. Generally when it has been done through policy, it hasn’t always worked, and there’s no way to know if it will. Moving one thing to pareto efficiency doesn’t do anything for other markets that are inefficient. The constrained variable must be used to find second best variables, and instead policy should try to move towards them instead of first best variables. So, if you have some ideal situation, taking into account some variables that make up that situation, the variables must take on a certain value that corresponds to the ideal, right? Like I'll be happiest when I have x,y,z. But what when one of those things can never get to an ideal level? Then you're not in the ideal, and there's no way you can be.. So you need to take the constrained variable and calculate a new ideal around it. This is called a second best scenario. - Here’s another description of this: It’s an economics concept that if two or more requirements for achieving a most desirable economic situation cannot be satisfied, a concerted attempt to satisfy the requirements that can be met is not necessarily the second best option and may not be beneficial. 22. Give the intuition behind the theory of the second best. Assume a system with multiple variables. Take the most desirable state the whole system could assume and the associated values that all of the variables must assume to produce this state: call this condition, the first-best state of the system and call the associated values of the variables, the first-best values. Now assume that one variable will not (or cannot) assume the value necessary for the first-best state of the whole system: call this the constrained variable. Holding the constrained variable constant, consider the most desirable state the whole system could then assume and the associated values that all the non constrained variables must assume to produce this state: call this the second-best state of the system. There are systems in which achieving the second-best state will require that at least one variable other than the constrained variable must assume a value other than the first-best value: call these value(s) the second-best value(s). If there is introduced into a general equilibrium system a constraint which prevents the attainment of one of the Paretian conditions, the other Paretian conditions, though still attainable, are in general, not desirable. 23. Give an example of a second best problem. Consider a mining monopoly that's also a polluter: mining leads to tailings being dumped in the river and deadly dust in the worker's’ lungs. Suppose in addition that there is nothing at all that can be done about the pollution without also reducing production. However, the government is able to break up the monopoly.

The problem here is that increasing competition in this market is likely to increase production (since competitors have such a hard time restricting production compared to a monopoly). Because pollution is highly associated with production, pollution will most likely increase. Thus, it is not clear that eliminating the monopoly increases efficiency. Gains from trade in coal will increase, but externalities from pollution will increase as well, possibly outweighing the gains from trade. A political problem. We would like to have the best legal system. But sometimes the best legal policies are not possible and the best policy may be impractical. Because.. in legal theory, one common reason that the best policy might not be adopted is politics. Given the political forces that operate, the best campaign finance system may be to ideal when considering the constraints faced from opposing forces. In such cases, we consider constraints and consider what sorts of policies are feasible.. 24. Outline some of the implications of the theory of the second best. economists need to study the details of the situation before jumping to the theory-based conclusion that an improvement in market perfection in one area implies a global improvement in efficiency Review Questions: GDP 1. Outline some issues associated with aggregating disparate data series into one summary number. - The numbers take into account so much information that when we perceive them, they can only be abstract concepts. Because people have a feel for prices and markets in general, this ok, but for the purpose of measuring what it's meant to measure, it really only creates a conceptual notion for us that we kind of understand. - They don’t translate over time. We can measure the numbers but they don’t really give us an idea of exactly what the figure means in the context of a different time period because we haven’t lived in that time period. - When we look at this number and try to think of the level we believe it to be at, we can really only get a sense of the number around us, and the number in terms of the people we interact with the most. We interact with economically similar people - Useful to have one number to work with but dangerous not to look at disaggregated data because you lose all the details . 2. Define GDP. - GDP (Gross Domestic Product) is the market value of all final goods and services produced in an economy over a period of time. It is the most commonly used measure of economic activity. Measures the notion of production and of what goods and services are being produced by an economy. And using final market good prices, we can get an idea what is included and what isn’t included. GDP stretches the notion of production because it tries to assign a value notion to the figure. 3. Give an example where GDP and GNP might differ.

-GDP refers to and measures the domestic levels of production, whereas GNP measures the levels of production of any person or corporation of a country. For example, the American GNP measures the production levels of any American or American-owned entity, regardless of where the actual production process is taking place, and defines the economy in terms of the citizens. - the things included and not included are the same, they are subject to the same aggregation problems. - just for kicks GNI is the income earned by the citizens of a country GNP can be either higher or lower than GDP, depending on whether or not a country has a positive or negative result from net foreign inflows and outflows. Read more: http://www.investorwords.com/article/gdp-vs-gnp.html#ixzz4XSnXhPIY Read more: What is the functional difference between GDP and GNP? | Investopedia http://www.investopedia.com/ask/answers/030415/what-functional-difference-between-gdp- and-gnp.asp#ixzz4XHTtNqI5 4. Explain the role prices play in the construction of GDP. - GDP uses prices to combine disparate goods. We use prices because they’re already there and they come from the market. - They represent a rate of exchange but are not any sort of indicators of efficiency or utility. 5. Does the use of market prices mean that GDP is a measure of welfare? Explain. - GDP is not a measure of welfare because GDP measures production using prices that are rates of exchange. Anything that does not have prices are problematic to measure. - GDP does nothing to explain how income is distributed across the citizens of a country. - Volunteer work benefits society, but isn't counted - GDP doesn't measure non-market activity that many developing countries depend on, so GDP may make a worse estimation than what is actually the case. 6. What goods and services are included in GDP? - Goods that end up with customers (final goods) are counted in GDP. Physical capital is included in GDP. - Physical capital: Intermediate goods like machines that get used up in production (amortization), some value of the machine is used up in each good but the machine itself isn’t added to the production figure at all 7. Explain why GDP can be used as a measure of income. - Since GDP is a measure of production and a measure of production is a measure of income so GDP can also be used to quantify spending and income. Because of the circular flow of goods and services, we work and produce and so we get an income,

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

which we spend on goods and services, and the money spent goes to pay our incomes. Because money flows back and forth between firms and households. - The income approach to measuring gdp : Labor Income (W), Rental Income (R), Interest Income (i), Profits (PR) - NI = W + R + i + PR 8. List some things that are not counted in GDP. Can only measure the good and services we actually have data on Again, the problem comes up of how do you weigh these things… SOLUTION : look that the data separately and watch how they move with GDP, and to what degree there might be a relationship increases in GDP, and increases in all the things we consider to measure well-being - underground economy - Either illegal production, or small scale deliberately hidden production - Don't know the scale but around 13% for developed countries - goods and services not traded in markets - Home production (if i shovel my driveway versus is someone else shovels my driveway example = same outcome, but one isn't counted) - The set of goods and services that people chose to produce for themselves is always changing and we don’t have the data on it. - The number has gone down over time as women entered the work forces and started doing things like : going out to eat, using day care services, using washing machines, etc. - Industrialized economies tend to use the market to cover a larger share of their own production - Not the case that home production is left out for poorer countries - Problematic and hard to measure - leisure / non work time - In theory, you could calculate it and improve it, but in theory, it’s never done.. - What you can do it's just look at both sets of data - quality of daily and working life - The outcome of political and economic systems, so it is produced, but you never include it. - environmental quality and resource depletion(e.g. Clean air, open space, stocks of natural resources) - health ( life expectancy, morbidity) - Health expenditures do the opposite… 9. Why is underground economic activity not included in GDP? - Because it isn’t reported to the statistical agencies that measure GDP. At best they can make an estimate 10. Explain how statistical agencies try to incorporate “home production” in GDP.

- Usual approach is to merge survey data (time use, farm output) and data market prices to impute a market value. 11. Suppose that Canada’s GDP increased as a result of Canadians working longer hours. i) Would Canadians be better off? Discuss. - Not necessarily, because they’d have to give up leisure time. It depends which is more important to the individual ii) Would production in Canada have risen? Discuss. - Yes, because production = spending = income. If income is increasing, production is also increasing Basically here is an example of GDP increasing, while quality of life decreases 12. Suppose that Canada’s GDP fell as a result of new workplace safety regulations. i) Would Canadians be worse off? Discuss. - No.. they’re safer which is a good thing ii) Would production in Canada have fallen? Discuss. - Probably, if there is some sort of cost associated with the new regulations Basically here is an example of GDP decreasing, while quality of life increases 13. Explain how Canada’s GDP might rise as a result of the relaxation of environmental regulations. Would such a change make Canadians better or worse off? Discuss. - Same thing as above. Maybe some sort of environmental regulation prevents a resources from being exploited, but without the regulation, it is free to be bought and used to increase profits. The deterioration of the environment makes everyone worse off, but it seems that the loosening of regulations, and depletion of resources looks like growth. 14. Information concerning the health of the population need not be included in GDP because health care expenditures are included. Discuss. - NO NO NO. Thought I’d expand on this a bit more rather than leaving this as NO… The issue with information concerning health is that it is difficult to find a measure/weight to add value to GDP. Sure, health care expenditures are a start, but there are other aspects we need to take into account. Life expectancy and mortality rates help us begin to understand health of a country. Usually health care expenditures signify a lack of health.. 15. Explain how public goods are weighted in GDP. Does this mean that public goods are under or overvalued? Many Public Goods do not have market prices (for the consumer). What is included in GDP is the value of the inputs into each public good. Overvalued as it includes intermediate goods, and

not the final product value. (wouldn’t this mean they are undervalued because inputs < value of the output for all goods/services?) 16. Explain how externalities complicate the interpretation of GDP. - Unpriced side effects of production and consumption of goods don’t get incorporated in the market price. E.g When trains move on railroad tracks going through a farmland, the movement of the wheels can create sparks and create a fire is a side effect but the parties that are affected by these ( farmers) cannot do much to increase the price on the basis of this side effect. - Another example is of the pollution that’s caused from mining productions. The pollution can increase health costs and also affect things like tourism. These two things affect GDP. 17. Define real GDP. - Real GDP is a macroeconomic measure that holds the prices fixed in some base year and then use those relative prices to aggregate goods and services. - Real GDP gets rid of the problem of inflation that can be seen when comparing different years and their GDPs 18. Outline how real GDP is calculated. - Year 1 q1= 10, q2 = 5, p1= 1, p2 = 5 Year2 q1 = 2 , q2 = 7, p1= 2, p2= 9 Real GDP 1 = q1*p1 + q2*p2 = 10 + 25 = 35 Real GDP2 = 20 + 35 = 55 (2x1=2 + 7x5=35)= 37 Real GDP (Using the price from Year 1 to fix the price) - The formula for real GDP is nominal GDP divided by the deflator, or R = N/D. The deflator is a measurement of inflation since the base year. For example, if prices rose 2.5% since the base year, the deflator is 1.025. If the nominal GDP were 10 million, the real GDP would be 976,000 or 10,000,000/1.025 = 976,000. 19. Invent an example where GDP differences between two countries changes depending on whether you use nominal or PPP exchange rates. Review Questions: Pre 1800 1. Outline the data on per capita incomes from Roman times to the 1500s. - Territorial inconsistencies - Partial rather than systematic data - Estimates of per capita income become uncertain the further back in time we look

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

- Average living standards didn’t go up for a long period of time is supported by anthropological evidence 2. Discuss the different possible interpretations of the data. Does it matter which is correct? Why? Does not matter if the data was correct, it was more used as a base for international comparability 3. Explain the two mechanisms at work in the original Malthusian model. How do they lead to a constant level of per capita income? 1. The relationship between population and per capita income is negative a. You farm the best land until its marginal productivity starts to go down and then you move onto other land b. Marginal productivity is decreasing because the extra workers are farming unproductive land or many people are farming the same land 2. (description of behaviour) limiting factor on population is food production. And as people have lots of kids, the only reason they don't have more, or more don't survive is because of the restriction on income (food) 4. What is the effect of productivity improvements in the Malthusian model? Explain. population growth has a negative impact on standards of living because increases in population diluting any gains in productivity 5. How does the Lucas critique apply to the original Malthusian model? People might decide to have less children even if they have a higher income. 6. Discuss the relevance of the Malthusian model for modern, industrialized economies. - The Malthusian model does not apply today since the richest countries tend to have the lowest population growth rates. Review Questions: Modern growth 1. Outline the data on per capita incomes from the early 1800s to the present. 1000-1500 → really low per capita growth for a long time 1500s → some growth in Europe, colonies (latin America), Japan - Earliest growing countries started to see growth and permanent + ongoing increases in living standards - Starts in a few parts of the world - Africa and Asia (except Japan) did not see growth Modern era 1820 onward

- Growth starts to become common all over the world - But its uneven (1% is different from 5%) - The first industrialized economies are growing faster than they did when the first industrialized - countries are growing vs not growing (first table in lecture slides) Causation vs correlation argument of rising income vs sectoral shift - As societies developed away from agriculture, larger portions of income is used on goods outside of the subsistence level - As a result, the economy outside of agriculture grows - World wars in western countries saw a boosted economy, but where the war actually took place, the market suffered 2. What are the advantages of using a ratio scale? A ratio scale makes it possible to compare at a glance the magnitudes of changes that occur at different ranges. For example, if an investment rises from $1 to $2 during one time period, and later in the graph it rises from $3 to $6, a ratio scale will make it obvious that each rise was of the same magnitude. A linear scale would make it appear that the second rise was proportionally three times as great as the first ri se. -

ECON 207 Review questions

Related Documents