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Study Questions Explained

by: Joshua Robinson

Study Questions Explained Econ 110

Marketplace > Kansas State University > Economcs > Econ 110 > Study Questions Explained
Joshua Robinson
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About this Document

These questions are from a homework assignment. I broke down the answer in explanation
principles of Macroeconomics
Dr. Al-Hamdi
Class Notes
Macroeconomics Economics ECON 110




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This 6 page Class Notes was uploaded by Joshua Robinson on Sunday April 10, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 53 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.


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Date Created: 04/10/16
1. Which of the following statistics is usually regarded as the best single measure of a  society’s economic well­being? 1. Gross Domestic Product  The GDP represents the total income of everyone in the economy.  It measures two things at once. 1. The total income of everyone in the economy 2. The total expenditure on the economy's output of goods and  services b. For an economy as a whole,  1. Income must equal expenditure.  Why? There are transactions between two parties: a buyer and a seller b. Which of the following is a way to compute GDP? 1. Add up the market values of all final goods and services   There are two different ways to compute it: 1. Adding up the total expenditure by households  2. Adding up the total income paid by firms  b. The value of the housing services provided by the economy's owner­occupied houses is 1. included in GDP, and the estimated rental values of the houses are used to place a  value on these housing services. b. Grapes are considered intermediate goods if, 1. If the purchaser uses them to make wine and sell to others, but not if the purchaser eats them.   Intermediate goods are sold by one company to another in order for the  buying company to use that good for the purpose of resale or producing  other goods.  b. A U.S.­owned automobile factory uses $100,000 worth of parts purchased from foreign  countries along with U.S. inputs to produce 30 cars worth $20,000 each. Twenty of these  cars are sold and 10 are left in inventory. How much did these actions add to GDP? 1. 500,000  You take the amount of cars the U.S is able to produce (30) multiply it by  their market value ($20,000) and then subtract the amount they spent  ($100,000). b. Sheri, a U.S. citizen, works only in Germany. The value she adds to production in  Germany is included 1. in German GDP, but is not included in U.S. GDP.  Sheir, is now a Nazi. Nazi’s are not included in any form of GDP.  Kidding. Sheri is only contributing to Germany’s GDP since her service  has no relation to the U.S. b. The consumption component of GDP includes spending on 1. durable goods, nondurable goods, and services.  Durable goods ­ automobiles and appliances  Nondurable goods ­ food and clothing  Services ­ haircuts and medical care b. For the purpose of calculating GDP, investment is spending on 1. capital equipment, inventories, and structures, including household purchases of  new housing. Chapter 12 Economic Growth  Real GDP per person o Living standard o Vary widely from country to country  Growth Rate o How rapidly real GDP per person grew in the typical year  Because of Differences in growth less Productivity  Quantity of goods and services o Quantity of goods and services o Produced from each unit of labor input  Why productivity is so important o Key determinant of living standards o Growth in productivity is the key determinant of growth in living standards o An economy’s income is the economy's output  Determinant of productivity o Physical capital per worker  Stock of equipment and structures  Used to produce goods and services o Human capital per worker  Knowledge and skills that workers acquire through education, training,  and experience  o Natural resources per worker  Inputs into the production of goods and services  Provided by nature, such as land, rivers, and mineral deposits o Technological knowledge  Society's understanding of the best ways to produce goods and services Saving and Investment  Standard of living → productivity → 1. Physical Capital 2. Human? Capital 3. Natural  Resources. 4. Technology  Raise future producitivy o Invest more current resources in the production of capital o Trade­off  Devote fewer resources to produce goods and services for current  consumption   Higher saving rates o Fewer resources ­ used to make consummption goods o More resources ­ to make capital goods o Capital stock increases o Rising productivity o More rapid growth in GDP Education  Education o Investment in human capital o Gap between wages of educated and uneducated workers o Opportunity cost: wages forgone o Conveys positive externalitites o Public education ­ large subsidies to human­capital investment  Problem for poor countries: Brain drain  Health and Nutrition  Human capital o Education o Expenditures that lead to a healthier population  Healthier workers o More productive  Wages o Reflect a worker's productivity   Right investments in the health of the population o Increase productivity o Raise living standards  Historical Trends: long­run economic growth o Improved health ­ from better nutrition o Taller workers ­ higher wages ­ better productivity   Vicious circle in poor countries o Poor countries are poor  Because their populations are not healthy o Populations are not healthy  Because they are poor and cannot afford better healthcare and nutrition  Property Rights, Political Stability  To foster economic growth o Protect property rights  Ability of people to exercise authority over the resources they own  Courts ­ enforce property rights o Promote political stability   Property Rights o Prerequisite for the price system to work   Lack of property rights o Major problem o Contracts are hard to enforce o Fraud goes unpunished o Corruption  Impedes the coordinating power of markets Chapter 11: Measuring the Cost of Living The Consumer Price Index  Consumer Price Index (CPI) o Measure of the overall level of prices o Measure of the overall cost of goods and services  Bought by a typical consumer o Bureau of Labor Statistics   1. Fix the Basket o Which prices are most important to the typical consumer o Different weight  2. Find the prices o At each point in time  3. Compute the basket’s cost o Same basket of goods o Isolate the effects of prices changes  4. Choose a Base year and calculate CPI  5. Use CPI to calculate inflation rate  Inflation Rate o Percentage change in the price index  From the preceding period  If we import crude oil the GDP   Salary in 2015 = salary in 1931*(CPI  2015/ CPI 1931) o 80,000*(235.5/15.2) o $1,236,842  Nominal interest rate: as stated without taking inflation into account.   The Measures of Price Changes: o CPI  o GDP Deflator  Real Interest Rate: An interest rate that takes inflation into account  Real interest Rate = Nominal Interest rate ­ Inflation rate   GDP Deflator = Current prices/ ____ year prices 


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