dp econ exam review 2

Question 1

What is the difference with absolute and comparative advantage.

What are some benefits of trade and comparative advantage? What are some limitations?

How do you calculate comparative advantage?

Answer 1

absolute : when you can produce more units of a good vs another country hence you should produce that good

comparative: when the opportunity cost of producing a product is lower than anther country’s, you should produce that good

benefits/cons to trade:
- more variation of goods/products
- development and innovation (if one country gets products from another country it can’t produce, it can use it to create new innovations)
- benefit/ruin political relationships
- production can be cheaper if you produce at comparative advantage
- better allocation of resources

cons of comparative advantage:
- compares only between 2 products when in reality, there are multiple products being produced in a country
- transport costs can be so expensive that producing at comparative advantage isn’t worth it
- overspecialization can lead to overreliance on a certain good/service
- negative externalities

Calculations: in the goodnotes page

Question 2

difference with depreciation/appreciation and devaluation/revaluation

Answer 2

depreciation: in floating exchange rate where the value of a currency decreases according to market forces

appreciation: floating exchange rate where value of currency increases

floating exchange rate: where the market determines the value of the currency

Devaluation: decrease in value of currency in managed/fixed exchange rate

Revaluation is the opposite of devaluation

Managed exchange rate: when usually market forces determine the currency’s value but the central bank does step in to adjust it when needed

fixed exchange rate: the value of a currency is pegged to the value of a different currency

Question 3

What are monopolies? What are advantages/disadvantages of them?

What are some real life examples?

Answer 3

Monopolies: when there is only one firm that is in participates in the production of a certain good/service

Benefits: can lead to natural monopolies ( produces public goods like electricity where the infrastructure costs are high and they need a lot of land for infrastructure like power plants. It is less wasteful hence more benefitial to have only one firm making electrcity.
–> this can lead to economies of scales where the more a firm produces, the less the production cost is hence its prices decrease (better for consumers)

Cons:
–> can control the prices (take advantage of it)
–> can neglect the quality of their products due to lack of competition
–> high barriers to entry

Question 4

What is the gini coefficient/lorenz curve

What is the hdi, how is it measured

Answer 4

• draw the diagram. Don’t forget that the greater area of the lorenz curve or gini index, the worse inequality is. Line of equality is straight and is at 1. Draw it in a box. Label it cummulative percentage of income with 100 percent on both axises.

Gini coefficient measure the how inqual a country is

HDI measures the development of a country (0-1 ; 0=low development and 1 is high development)

HDI looks at education, income and healthcare

Question 5

What is the business cycle

Answer 5

illustrates the short term fluctuations and the long term overall cycle of the economy

(peak, contraction, expansion, and trough

Question 6

Circular flow of income

Answer 6

Firms, households

households give firms FOP and firms give households factors of payments like dividens)

Firms give goods and services to households and households give expenditure of goods/services to firms

Leakages:
taxes to gov
savings to financial institutions like banks
imports to foreign countries

Injection:
gov spending
investment
exports