Econ SAQ Prep Flashcards
(284 cards)
1
Q
Define price elasticity of demand and explain its significance for setting indirect taxes.
A
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. If PED > 1 (elastic), a price increase leads to a proportionally larger fall in demand, making indirect taxes less effective for raising revenue. If PED < 1 (inelastic), taxes raise more revenue with smaller quantity effects.
Understanding PED is crucial for governments when determining tax rates to achieve desired revenue without significantly affecting consumer behavior.
2
Q
What is the Phillips Curve and what does it imply about the trade-off between inflation and unemployment?
A
The Phillips Curve suggests an inverse short-run relationship between inflation and unemployment — lower unemployment may come with higher inflation. However, in the long run, expectations adjust, and the curve becomes vertical at the natural rate of unemployment.
This concept highlights the challenges policymakers face in managing economic stability.
3
Q
Explain the concept of externalities and provide an example of a policy to correct them.
A
Externalities are costs or benefits to third parties not reflected in market prices. For negative externalities (like pollution), governments can impose taxes (Pigouvian tax) or regulation to internalise the external cost.
Correcting externalities is essential for achieving efficient market outcomes.
4
Q
What is multicollinearity in a regression model, and why is it a problem?
A
Multicollinearity occurs when independent variables are highly correlated, making it hard to isolate individual variable effects. This inflates standard errors and makes coefficient estimates unreliable.
Addressing multicollinearity is important for accurate statistical inference.
5
Q
Define automatic stabilisers and give an example.
A
Automatic stabilisers are fiscal mechanisms that reduce the impact of economic fluctuations without new government action, e.g., progressive taxes and unemployment benefits, which rise during downturns, supporting demand.
These stabilisers help smooth economic cycles by automatically adjusting government spending and revenue.
6
Q
What is purchasing power parity (PPP) and how is it used?
A
Theory and a type of exchange rate used to compare the economic output and living costs between countries. It adjusts for differences in prices and costs of goods and services between countries, providing a more accurate comparison of their economic output than using nominal exchange rates.
PPP is a crucial concept in international economics for understanding currency valuation.
7
Q
Explain what the Gini coefficient measures.
A
The Gini coefficient measures income inequality on a scale from 0 (perfect equality) to 1 (perfect inequality). A higher Gini indicates more unequal income distribution.
Policymakers often use the Gini coefficient to evaluate the effectiveness of economic policies on income distribution.
8
Q
What is a unit root in a time series, and why does it matter?
A
A unit root indicates non-stationarity in a time series, meaning shocks have permanent effects. It matters because regression on non-stationary data can produce spurious results.
Identifying unit roots is crucial for proper time series analysis and forecasting.
9
Q
Explain the difference between structural and frictional unemployment.
A
Structural unemployment arises from mismatches between skills and job requirements, often due to technological change or globalisation. Frictional unemployment is the short-term period when workers search for new jobs.
Understanding these types of unemployment helps in formulating effective labor market policies.
10
Q
What is crowding out, and when might it occur?
A
Crowding out occurs when increased government borrowing raises interest rates, reducing private investment. It’s more likely when the economy is near full capacity.
This phenomenon can limit the effectiveness of fiscal policy in stimulating economic growth.
11
Q
Define price elasticity of demand.
A
Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
12
Q
Explain the concept of consumer surplus.
A
Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay.
13
Q
What is the difference between average cost and marginal cost?
A
Average cost (AC) is the total cost divided by the number of units produced. Marginal cost (MC) is the additional cost incurred by producing one extra unit of output.
14
Q
Describe the conditions for perfect competition.
A
Perfect competition occurs when many firms sell identical products, there is free entry and exit, all participants have perfect information, and no single buyer or seller has market power.
15
Q
What does a firm’s shutdown point mean in the short run?
A
The shutdown point is the level of output or price at which a firm covers its variable costs but none of its fixed costs.
16
Q
Explain the concept of diminishing marginal returns.
A
Diminishing marginal returns occur when adding additional units of a variable input results in progressively smaller increases in output.
17
Q
How does a negative externality affect market efficiency?
A
A negative externality imposes costs on third parties not reflected in the market price, leading to overproduction and allocative inefficiency.
18
Q
What are the key features of a natural monopoly?
A
A natural monopoly exists when a single firm can supply the entire market at a lower average cost than multiple competing firms due to significant economies of scale.
19
Q
Explain the difference between normal goods and inferior goods.
A
Normal goods experience an increase in demand when consumer incomes rise, while inferior goods experience a decrease in demand as incomes rise.
20
Q
What is the role of asymmetric information in market failure?
A
Asymmetric information occurs when one party in a transaction has more or better information than the other, leading to inefficient market outcomes.
21
Q
What is the multiplier effect in macroeconomics?
A
The multiplier effect refers to the process by which an initial increase in spending leads to a larger overall increase in national income.
22
Q
How does an increase in interest rates affect aggregate demand?
A
Higher interest rates reduce consumption and investment, lowering aggregate demand.
23
Q
What is meant by cyclical unemployment?
A
Cyclical unemployment is caused by downturns in the business cycle, leading to job losses.
24
Q
Define fiscal policy.
A
Fiscal policy refers to the use of government spending and taxation to influence aggregate demand in the economy.
25
Explain the difference between nominal and real GDP.
Nominal GDP measures the total value of output using current prices, while real GDP adjusts for changes in price levels.
26
What is comparative advantage?
Comparative advantage occurs when a country can produce a good at a lower opportunity cost than another country.
27
How does quantitative easing work?
Quantitative easing (QE) is a form of monetary policy where a central bank buys government bonds to inject money into the economy.
28
What is the difference between current account deficit and surplus?
A current account deficit means a country imports more than it exports; a surplus indicates the opposite.
29
Define inflation targeting.
Inflation targeting is a monetary policy strategy where a central bank sets an explicit inflation rate as its primary goal.
30
What is GDP and how is it measured?
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country over a given period.
31
Explain the difference between nominal GDP and real GDP.
Nominal GDP measures the value of output using current prices, while real GDP adjusts for inflation by valuing output at constant prices.
32
What is the Phillips curve and what does it show?
The Phillips curve illustrates an inverse relationship between inflation and unemployment in the short run.
33
What is fiscal policy?
Fiscal policy refers to the use of government spending and taxation to influence the level of economic activity.
34
Define monetary policy and give an example.
Monetary policy involves controlling the money supply and interest rates, usually by a central bank.
35
What is the difference between a budget deficit and national debt?
A budget deficit occurs when a government’s annual spending exceeds its revenue. National debt is the accumulated total of past budget deficits.
36
What is the difference between absolute advantage and comparative advantage?
Absolute advantage refers to producing a good more efficiently than another; comparative advantage refers to producing a good at a lower opportunity cost.
37
What is protectionism, and what are common protectionist tools?
Protectionism is the use of trade barriers to shield domestic industries from foreign competition. Common tools include tariffs and quotas.
38
What does the term ‘balance of payments’ mean?
The balance of payments is a record of all economic transactions between residents of a country and the rest of the world.
39
Explain the concept of purchasing power parity (PPP).
Purchasing power parity (PPP) is an exchange rate theory stating that currencies should adjust so that identical goods cost the same across countries.
40
What is inflation and how is it measured?
Inflation is the general rise in the price level of goods and services over time, measured by indices like the Consumer Price Index (CPI).
41
What are the main causes of inflation?
The main causes are demand-pull inflation, cost-push inflation, and built-in inflation.
42
What is unemployment and how is it measured?
Unemployment refers to the proportion of the labour force that is willing and able to work but cannot find a job.
43
Define structural unemployment.
Structural unemployment occurs when there is a mismatch between workers’ skills and the requirements of available jobs.
44
What is cyclical unemployment?
Cyclical unemployment arises from downturns in the economic cycle, increasing during recessions.
45
What is the difference between a tariff and a quota?
A tariff is a tax on imported goods; a quota is a physical limit on the quantity of goods that can be imported.
46
What is a public good and why do markets underprovide them?
A public good is non-excludable and non-rivalrous, like street lighting. Markets underprovide them due to the free-rider problem.
47
Explain the concept of externalities.
Externalities are costs or benefits of economic activities that affect third parties not involved in the transaction.
48
What is the difference between progressive and regressive taxation?
A progressive tax takes a higher percentage from high earners, while a regressive tax takes a larger percentage from low earners.
49
What is market failure?
Market failure occurs when the allocation of goods and services by a free market is inefficient or leads to undesirable outcomes.
50
What is moral hazard in economics?
Moral hazard occurs when one party takes more risks because another party bears the cost of those risks, often due to asymmetric information.
## Footnote
For example, insured individuals acting less carefully because they are protected by insurance.
51
Define adverse selection and give an example.
Adverse selection happens when buyers or sellers have information the other side lacks, leading to poor market outcomes.
## Footnote
Example: unhealthy people are more likely to buy health insurance, raising costs for insurers.
52
What is the difference between nominal and real interest rates?
The nominal interest rate is the stated rate without adjusting for inflation; the real interest rate accounts for inflation, showing the true purchasing power of returns.
53
What is meant by a liquidity trap?
A liquidity trap occurs when interest rates are very low and savings rates are high, making monetary policy ineffective.
54
Explain the concept of the natural rate of unemployment.
The natural rate of unemployment is the level of unemployment consistent with stable inflation, reflecting frictional and structural unemployment.
55
What is meant by the Lorenz curve?
The Lorenz curve is a graphical representation of income or wealth distribution, showing the proportion of total income earned by cumulative percentages of the population.
56
What is the difference between gross and net investment?
Gross investment includes total spending on new capital; net investment subtracts depreciation, showing the actual increase in capital stock.
57
Define the terms ‘open economy’ and ‘closed economy’.
An open economy engages in international trade and financial flows; a closed economy has no foreign trade or capital movement.
58
What is the accelerator effect in investment?
The accelerator effect suggests that investment levels depend on the rate of change of demand or output.
59
Explain the term ‘terms of trade’.
Terms of trade refer to the ratio of a country’s export prices to its import prices.
60
What is a current account in the balance of payments?
The current account records a country’s trade in goods and services, income from abroad, and net transfers.
61
Define capital account in the balance of payments.
The capital account records cross-border capital transfers and the acquisition or disposal of non-produced, non-financial assets.
62
What is a financial account in the balance of payments?
The financial account tracks investment flows, including direct investment, portfolio investment, and changes in foreign reserves.
63
What is Pareto efficiency?
Pareto efficiency occurs when no one can be made better off without making someone else worse off.
64
What is meant by ‘derived demand’?
Derived demand is demand for a factor of production or intermediate good that arises from demand for the final product.
65
What is the difference between equity and equality in economics?
Equality refers to everyone having the same income or wealth; equity concerns fairness and recognizes that unequal outcomes may still be fair.
66
What is hysteresis in unemployment?
Hysteresis refers to the long-lasting impact of past unemployment on the current natural rate of unemployment.
67
Define the output gap.
The output gap is the difference between actual GDP and potential GDP.
68
What is the Harrod-Domar growth model?
The Harrod-Domar model suggests that economic growth depends on the savings rate and the capital-output ratio.
69
What is the crowding-in effect?
Crowding-in occurs when government spending stimulates private sector investment.
70
What is meant by the marginal propensity to consume (MPC)?
The MPC is the proportion of additional income that a consumer spends rather than saves.
71
What is stagflation and why is it problematic for policymakers?
Stagflation is the combination of stagnant growth and high inflation, making it difficult for policymakers.
72
What is the difference between cost-push and demand-pull inflation?
Cost-push inflation is caused by rising production costs; demand-pull inflation results from excessive demand.
73
What is the principle of diminishing marginal utility?
It states that as a person consumes more units of a good, the additional satisfaction gained from each additional unit decreases.
74
What does it mean when a currency is overvalued?
An overvalued currency has a higher exchange rate than its purchasing power suggests.
75
What is meant by hot money flows?
Hot money refers to short-term capital movements across borders in search of the highest returns.
76
Define fiscal drag and its impact on taxpayers.
Fiscal drag occurs when inflation pushes taxpayers into higher tax brackets.
77
What is the role of supply-side policies in economic growth?
Supply-side policies aim to increase the productive capacity of the economy.
78
What is a current account on the balance of payments?
The current account records trade in goods and services, income flows, and current transfers.
79
What is heteroskedasticity in a regression model?
Heteroskedasticity occurs when the variance of the error terms is not constant across observations.
80
What is the purpose of the Durbin-Watson test?
The Durbin-Watson test checks for autocorrelation in the residuals of a regression model.
81
Define the concept of endogeneity in regression analysis.
Endogeneity occurs when an explanatory variable is correlated with the error term.
82
What is the difference between fixed effects and random effects models?
Fixed effects models control for unobserved individual-specific effects; random effects assume these effects are random.
83
Explain the purpose of an instrumental variable (IV).
An IV is used to address endogeneity by providing a variable correlated with the endogenous regressor.
84
What does multicollinearity affect in a regression model?
Multicollinearity inflates the variance of coefficient estimates.
85
What is the difference between R-squared and adjusted R-squared?
R-squared measures the proportion of variance explained by the model; adjusted R-squared adjusts for the number of predictors.
86
What is the Hausman test used for?
The Hausman test helps determine whether a fixed effects or random effects model is more appropriate.
87
What does the Gauss-Markov theorem state?
The Gauss-Markov theorem states that under the classical OLS assumptions, the OLS estimator is the Best Linear Unbiased Estimator (BLUE).
88
What is stationarity in time series data, and why does it matter?
Stationarity means a time series has constant mean and variance over time; it matters because non-stationary data can lead to spurious regression results.
89
What is cointegration in time series analysis?
Cointegration occurs when two or more non-stationary series are linked by a long-term equilibrium relationship.
90
What is the difference between AR(1) and MA(1) models?
An AR(1) model expresses the current value as a function of its past value; an MA(1) model expresses the current value as a function of past error terms.
91
What does the Breusch-Pagan test detect?
The Breusch-Pagan test checks for heteroskedasticity.
92
What is the difference between Type I and Type II errors in hypothesis testing?
A Type I error occurs when a true null hypothesis is rejected; a Type II error occurs when a false null hypothesis is not rejected.
93
What is omitted variable bias?
Omitted variable bias arises when a relevant variable is left out of a model.
94
What is the purpose of a likelihood ratio test?
A likelihood ratio test compares two nested models to see if the more complex model significantly improves fit.
95
What is the difference between cross-sectional and panel data?
Cross-sectional data observes multiple units at a single point in time; panel data observes multiple units over multiple time periods.
96
What is the White test used for?
The White test is a general test for heteroskedasticity and model misspecification.
97
What is Granger causality?
Granger causality tests whether past values of one time series help predict another time series.
98
What is a variance inflation factor (VIF), and what does it indicate?
VIF measures how much the variance of a regression coefficient is inflated due to multicollinearity.
99
How might you test if advertising spending affects sales over time?
Use a distributed lag model or autoregressive distributed lag (ARDL) model.
100
How would you investigate if a new training programme improves employee productivity?
Apply a difference-in-differences (DiD) approach comparing productivity before and after the programme.
101
How would you assess if raising the minimum wage affects employment levels?
Use panel data regression across regions over time.
102
How can you evaluate the effect of education on earnings?
Use an instrumental variable (IV) approach.
103
How can you detect whether monetary policy shocks affect GDP?
Apply a vector autoregression (VAR) model including GDP, interest rates, and inflation.
104
How would you test whether a new drug reduces patient recovery time?
Conduct a randomised controlled trial (RCT).
105
How would you model the relationship between oil prices and stock market returns?
Use time series regression with tests for stationarity and possible cointegration.
106
How would you estimate the price elasticity of demand for electricity?
Run a log-log regression of electricity consumption on price and income.
107
How can you assess whether public health campaigns reduce smoking rates?
Use a panel data difference-in-differences approach.
108
How would you test if financial literacy affects household savings behaviour?
Use cross-sectional survey data, controlling for income, age, and education.
109
What is the law of comparative advantage?
It states that countries should specialise in producing goods where they have the lowest opportunity cost.
110
What is meant by terms of trade?
Terms of trade measure the relative price of exports to imports.
111
What is a trade surplus?
A trade surplus occurs when a country’s exports exceed its imports.
112
What is a tariff, and how does it affect trade?
A tariff is a tax on imported goods that raises import prices and reduces import volumes.
113
What is the World Trade Organization (WTO)?
The WTO is an international body that sets rules for global trade and resolves disputes.
114
What are non-tariff barriers?
Non-tariff barriers are restrictions on trade that don’t involve tariffs, such as quotas and licensing rules.
115
What is the balance of payments?
It’s a record of all economic transactions between a country and the rest of the world.
116
What is trade liberalisation?
Trade liberalisation refers to the removal or reduction of trade barriers to encourage freer international trade.
117
What is a customs union?
A customs union is a group of countries that agree to remove trade barriers between them.
118
What is trade diversion?
Trade diversion happens when joining a trade bloc causes a country to import from less efficient member countries.
119
Country A can produce 10 tonnes of wheat or 5 cars; Country B can produce 6 tonnes of wheat or 6 cars. Who has the comparative advantage in cars?
Country B, because it gives up only 1 tonne of wheat per car.
120
If the UK imposes a tariff on imported steel, what will likely happen to domestic steel producers?
Domestic steel producers will benefit from reduced foreign competition.
121
What effect does a quota on imported sugar have on domestic sugar prices?
It reduces supply from abroad, raising domestic prices.
122
A country joins a free trade agreement, leading to cheaper imports of clothing. What is one likely domestic impact?
Domestic clothing producers may face more competition and potential job losses.
123
How might currency depreciation affect a country’s trade balance?
It makes exports cheaper and imports more expensive.
124
What effect does a quota on imported sugar have on domestic sugar prices?
It reduces supply from abroad, raising domestic prices and benefiting local producers but harming consumers.
## Footnote
This reflects the impact of trade barriers on market dynamics.
125
What is one likely domestic impact when a country joins a free trade agreement that leads to cheaper imports of clothing?
Domestic clothing producers may face more competition and potential job losses, while consumers benefit from lower prices.
## Footnote
This illustrates the trade-off between consumer benefits and producer protection.
126
How might currency depreciation affect a country’s trade balance?
It makes exports cheaper and imports more expensive, potentially improving the trade balance if demand is elastic.
## Footnote
Elastic demand indicates that consumers will significantly change their purchasing habits based on price changes.
127
What happens to domestic rice producers when a small country opens to trade and imports rice because world prices are lower?
They may suffer losses or exit the market due to competition with cheaper imported rice.
## Footnote
This scenario demonstrates the impact of international competition on local industries.
128
How can export subsidies distort global trade?
They artificially lower the price of a country’s exports, making it harder for foreign producers to compete fairly.
## Footnote
This can lead to trade disputes and calls for protectionism.
129
Why might a country impose an anti-dumping duty on imported goods?
To protect domestic industries from foreign firms selling goods below cost to gain market share (dumping).
## Footnote
Anti-dumping measures aim to create a level playing field in international trade.
130
What does a current account deficit imply about a country's financial flows?
It must be borrowing from abroad or attracting capital inflows to finance the excess of imports over exports.
## Footnote
This situation can indicate potential vulnerabilities in a country's economy.
131
According to Heckscher-Ohlin theory, what happens when two countries with different factor endowments engage in trade?
Each will export goods intensive in the factor they have abundantly, gaining from specialisation.
## Footnote
This theory explains the basis of comparative advantage in international trade.
132
What is the purpose of a cost-benefit analysis (CBA) in economic decision-making?
To compare the total expected costs and benefits of a project or policy, helping decide whether it yields a net gain to society.
## Footnote
CBA is crucial for informed policymaking and resource allocation.
133
How are intangible benefits handled in a cost-benefit analysis?
They are estimated using shadow prices or willingness-to-pay measures to assign them a monetary value.
## Footnote
This approach allows for a more comprehensive evaluation of a project's impacts.
134
What is the net present value (NPV) in cost-benefit analysis?
It’s the present value of total benefits minus total costs, discounting future values to today’s terms.
## Footnote
NPV is a key indicator of a project's financial viability.
135
Why do we discount future costs and benefits in a CBA?
Because people typically value present costs and benefits more than future ones due to time preference.
## Footnote
This reflects the concept of the time value of money.
136
How might you incorporate environmental impacts into a cost-benefit analysis of a construction project?
By estimating the monetary value of environmental damage (e.g., using carbon prices or ecosystem service valuations).
## Footnote
This inclusion helps ensure sustainable decision-making.
137
What is a sensitivity analysis in the context of CBA?
It examines how results change when key assumptions (like discount rates or cost estimates) are varied.
## Footnote
This analysis helps assess the robustness of the CBA findings.
138
Give an example of an opportunity cost considered in a cost-benefit analysis.
If land used for a new airport could instead have been used for housing, the lost housing value is an opportunity cost.
## Footnote
Opportunity costs highlight the trade-offs in resource allocation.
139
What does it mean if a project has a benefit-cost ratio (BCR) greater than 1?
That the project’s benefits exceed its costs, indicating it is potentially worthwhile.
## Footnote
A BCR greater than 1 is a general criterion for project approval.
140
How do distributional concerns affect cost-benefit analysis?
CBA may need to weigh who gains or loses (e.g., poor vs. rich), not just the total net benefit.
## Footnote
This emphasizes the importance of equity in economic evaluations.
141
Why might policymakers reject a project even if its CBA shows a positive NPV?
Because of political, ethical, or distributional concerns that aren’t fully captured in monetary terms.
## Footnote
Non-economic factors often play a crucial role in decision-making.
142
What is economic growth?
The increase in a country’s output of goods and services over time, typically measured by the rise in real GDP.
143
What are the main drivers of long-run economic growth?
* Increases in capital stock
* Labour supply
* Human capital
* Improvements in technology and productivity
144
How does investment contribute to economic growth?
Investment increases the capital stock, enhancing productive capacity and raising output per worker.
145
What is the role of human capital in economic growth?
Higher levels of education and skills improve worker productivity, driving innovation and boosting growth.
146
Explain the difference between short-run and long-run economic growth.
Short-run growth utilizes spare capacity; long-run growth expands the economy’s productive potential.
147
What is the Solow growth model’s main prediction?
Long-term growth depends mainly on technological progress, as capital accumulation faces diminishing returns.
148
How does technological progress impact economic growth?
It raises total factor productivity, allowing more output from the same inputs and sustaining long-term growth.
149
What is catch-up growth or convergence?
The idea that poorer countries can grow faster than richer ones by adopting existing technologies and closing productivity gaps.
150
What are potential downsides or costs of rapid economic growth?
* Environmental degradation
* Increased inequality
* Overuse of natural resources
* Possible inflationary pressures
151
How can government policy support sustained economic growth?
By investing in infrastructure, education, R&D, ensuring stable institutions, and creating a favourable business environment.
152
What is total factor productivity (TFP)?
TFP measures the efficiency with which labour and capital are used together to produce output.
153
How does capital deepening affect economic growth?
It increases the amount of capital per worker, raising productivity and output, but faces diminishing returns without innovation.
154
What is endogenous growth theory?
A theory that explains long-term growth as resulting from internal factors like human capital, innovation, and knowledge spillovers.
155
What are knowledge spillovers and why are they important for growth?
Knowledge spillovers occur when innovations benefit other firms, driving widespread productivity gains and sustaining growth.
156
How can openness to trade influence economic growth?
It allows countries to specialise, access larger markets, import technologies, and benefit from competitive pressures.
157
What role do institutions play in economic growth?
Strong institutions ensure property rights, rule of law, and good governance, encouraging investment and innovation.
158
Why might resource-rich countries experience slower long-term growth?
Dependence on resource exports can lead to neglect of other sectors, rent-seeking, and vulnerability to price shocks.
159
How can demographic changes affect economic growth?
An increasing working-age population can boost growth, while ageing populations may slow it.
160
How do savings rates affect economic growth?
Higher savings provide funds for investment, supporting capital accumulation and growth.
161
What is the role of infrastructure in supporting economic growth?
Good infrastructure reduces transaction costs, improves connectivity, and enhances productivity.
162
Define: price elasticity of demand.
A measure of how much the quantity demanded of a good responds to a change in its price.
163
Define: cross-price elasticity of demand.
A measure of how much the quantity demanded of one good responds to a change in the price of another good.
164
Define: normal good.
A good that consumers demand more of when their incomes increase.
165
Define: Giffen good.
A good for which an increase in price raises the quantity demanded.
166
Define: inferior good.
A good that consumers demand less of when their incomes increase.
167
Define: opportunity cost.
The most desirable alternative given up as the result of a decision.
168
Define: market failure.
A situation where a market left on its own fails to allocate resources efficiently.
169
Define: public goods.
Goods that are non-rivalrous and non-excludable.
170
Define: free rider problem.
When people benefit from a good or service without contributing to its cost.
171
Define: externality.
An economic side effect that generates costs or benefits to others beyond the person deciding how much to produce or consume.
172
Define: regulation.
Government intervention in a market that affects production or consumption.
173
Define: taxes.
Mandatory payments by people and businesses to support government services.
174
Define: asymmetric information.
A situation where one party in a transaction has more or better information than the other.
175
Define: adverse selection.
The problem of incomplete information when choosing among alternatives.
176
Define: moral hazard.
When one party changes behaviour after entering a transaction, increasing risk for the other party.
177
Define: principal-agent problem.
A problem caused by an agent pursuing their own interests rather than those of the principal.
178
Define: economies of scale.
When long-run average total cost falls as output increases.
179
Define: returns to scale.
The rate at which output increases in response to proportional increases in all inputs.
180
Define: economies of scope.
Efficiencies gained by producing a variety of products rather than specialising in one.
181
Define: allocative efficiency.
A state where production matches consumer preferences.
182
Define: Pareto efficiency.
An allocation where no one can be made better off without making someone else worse off.
183
Define: technical (productive) efficiency.
Producing the maximum output from given inputs.
184
Define: isoquant.
A curve showing all combinations of two inputs that produce the same level of output.
185
Define: isocost.
A curve showing all input combinations that yield the same total cost.
186
Define: Coase Theorem.
If private parties can bargain without cost, they can resolve externalities on their own.
187
Define: oligopsony.
A market with only a few buyers for a product.
188
Define: monopsony.
A market with only one buyer for a product.
189
Define: indifference curve.
A curve showing combinations of goods that provide the same level of satisfaction.
190
Define: budget constraint.
The limited income available to spend on goods and services.
191
Define: completeness.
The idea that preferences can rank all possible choices.
192
Define: transitivity.
If a person prefers A to B and B to C, they also prefer A to C.
193
Define: non-satiation.
The assumption that more of a good is always preferred to less.
194
Define: ordinal utility.
A ranking of preferences without measuring exact satisfaction levels.
195
Define: marginal rate of substitution (MRS).
The rate at which a consumer is willing to trade one good for another.
196
Define: cardinal utility.
Utility values that reflect the strength of preferences.
197
Define: Marshallian demand function.
Shows how much of a good will be purchased at given prices and income.
198
Define: Hicksian demand function.
Shows the quantity of goods that minimise expenditure for a given utility level.
199
Define: time inconsistency.
When preferences change over time in ways that conflict with earlier plans.
200
Define: central banking system.
An independent institution managing monetary policy.
201
Define: GDP (Gross Domestic Product).
The total value of goods and services produced within a country.
202
Define: GNI (Gross National Income).
The value of output produced by a country’s residents, including income from abroad.
203
Define: GNP (Gross National Product).
The total value of goods and services produced by a country’s residents.
204
Define: rational expectations.
The idea that people use all available information when forecasting the future.
205
Define: adaptive expectations.
Expectations formed by gradually adjusting based on past experience.
206
Define: absolute advantage.
The ability to produce more of a good using the same resources as others.
207
Define: comparative advantage.
The ability to produce a good at a lower opportunity cost than another producer.
208
Define: tariff.
A tax on imported goods.
209
Define: dumping.
Selling products abroad at lower prices than in the home market.
210
Define: infant industry.
A developing sector needing protection to establish itself.
211
Define: bilateral trade agreement.
A trade deal between two countries.
212
Define: trade creation.
When low-cost producers within a trade area replace higher-cost domestic producers.
213
Define: trade diversion.
When high-cost suppliers within a trade area replace lower-cost external suppliers.
214
Define: Ricardian equivalence.
The idea that a tax reduction financed by government debt will not affect consumption.
215
Define: balance of payments.
The record of all economic transactions between a country and the rest of the world.
216
Define: natural rate of unemployment.
The normal level of unemployment around which the actual unemployment rate fluctuates.
217
Define: deflation.
A sustained decrease in the general price level of goods and services.
218
Define: quasi-public goods.
Goods that are partially excludable but have large positive externalities.
219
Define: fiscal policy.
The use of government spending and taxation to influence the economy.
220
Define: fiscal austerity.
Policies aimed at reducing budget deficits through spending cuts or tax increases.
221
Define: goods market.
The market for everyday products such as food, clothing, and entertainment.
222
Define: money supply.
The total value of financial assets in an economy that are considered money.
223
Define: NPV (Net Present Value).
The total present value of a series of cash flows, accounting for the time value of money.
224
Define: PVB (Present Value of Benefits).
The discounted present value of a stream of project or proposal benefits.
225
Define: PVC (Present Value of Costs).
The discounted present value of a stream of project or proposal costs.
226
Define: BCR (Benefit-Cost Ratio).
The ratio of the present value of benefits to the present value of costs in a project.
227
Define: Solow residual.
The part of productivity growth not explained by capital or labour.
228
Define: Total Factor Productivity (TFP).
A measure of output that accounts for inputs other than labour and capital.
229
Define: Cobb-Douglas production function.
A production function showing output as a function of inputs.
230
Define: marginal product.
The additional output generated by using one more unit of input.
231
Define: liquidity.
The ease with which an asset can be converted into cash.
232
Define: liquidity trap.
A situation where monetary policy becomes ineffective because interest rates are near zero.
233
Define: Ordinary Least Squares (OLS).
A statistical method for estimating the parameters of a linear regression.
234
Define: covariance.
A measure of how two variables change together.
235
Define: R-squared.
The proportion of variance in the dependent variable explained by the independent variables.
236
Define: heteroskedasticity.
A condition where the variance of the error term in a regression is not constant across observations.
237
Define: Gauss-Markov Theorem.
A theorem stating that under certain assumptions, the OLS estimator is the best linear unbiased estimator.
238
Define: Gauss-Markov assumptions.
The set of conditions under which OLS estimators are unbiased and efficient.
239
Define: Breusch-Pagan test.
A test used to detect heteroskedasticity in a regression model.
240
Define: multicollinearity.
A situation where independent variables in a regression are highly correlated.
241
Define: autocorrelation.
A situation in time series data where the residuals are correlated across time.
242
Define: dummy variable.
A binary variable used in regression analysis to represent categories.
243
Define: substitution effect.
The change in consumption when a good’s price change leads consumers to substitute it with another good.
244
Define: income effect.
The change in consumption resulting from a price change affecting real income.
245
Define: consumer surplus.
The difference between what consumers are willing to pay and what they actually pay.
246
Define: producer surplus.
The difference between the price received by producers and the minimum price at which they would be willing to supply.
247
Define: tariff barriers.
Financial or fiscal barriers to trade, such as taxes or customs duties on imports.
248
Define: non-tariff barriers.
Trade restrictions other than tariffs, such as quotas or licensing requirements.
249
Define: government failure.
When government intervention leads to inefficient allocation of resources.
250
Define: Tobin tax.
A small tax on currency transactions intended to reduce speculation.
251
Define: Fisher equation.
An equation stating that the real interest rate equals the nominal interest rate minus the inflation rate.
252
Define: fixed exchange rate.
An exchange rate system where the currency’s value is tied to another currency or commodity.
253
Define: floating exchange rate.
An exchange rate system where the currency’s value is determined by market forces.
254
Define: cyclical unemployment.
Unemployment caused by fluctuations in the economic cycle.
255
Define: voluntary unemployment.
Unemployment where individuals choose not to work at the current wage rate.
256
Define: structural unemployment.
Unemployment caused by a mismatch between workers’ skills and job requirements.
257
Define: frictional unemployment.
Short-term unemployment as workers transition between jobs.
258
Define: production possibilities frontier (PPF).
A curve showing the maximum attainable combinations of two goods that can be produced with available resources.
259
What is the difference between nominal and real interest rates?
Nominal interest rates are the stated rates without adjusting for inflation. Real interest rates are adjusted for inflation and reflect the true cost of borrowing. Real rate ≈ nominal rate – inflation rate.
## Footnote
Nominal rates do not reflect the purchasing power of money over time, while real rates do.
260
What are the key assumptions behind the law of comparative advantage?
The law assumes:
* Two or more countries
* Differences in opportunity costs
* Constant opportunity costs (in simple models)
* No transport costs
* Countries specialize where they have the lowest relative opportunity cost.
## Footnote
This principle explains how trade can benefit all parties involved.
261
Define crowding in and explain how it contrasts with crowding out.
Crowding in occurs when government spending stimulates additional private investment, often during a recession. Crowding out happens when government borrowing raises interest rates and reduces private investment, usually when the economy is near full capacity.
## Footnote
Crowding in is seen as beneficial for economic recovery, while crowding out can hinder growth.
262
What is meant by the natural rate of unemployment?
The natural rate of unemployment is the rate at which the labour market is in equilibrium, including frictional and structural unemployment, but excluding cyclical unemployment.
## Footnote
This concept reflects the normal functioning of the economy.
263
Explain the significance of the Solow growth model in understanding long-term economic growth.
The Solow model shows that long-term growth is driven by technological progress and increases in productivity, not just capital accumulation, and predicts convergence among countries with similar savings and population growth rates.
## Footnote
It emphasizes the role of innovation and efficiency in economic development.
264
Define the liquidity preference theory and its implication for interest rates.
Liquidity preference theory suggests that interest rates adjust to balance the supply and demand for money: people prefer liquidity, so higher demand for money leads to higher interest rates.
## Footnote
This theory was proposed by John Maynard Keynes.
265
What is the purpose of using lagged variables in time series econometrics?
Lagged variables account for delayed effects, reduce endogeneity, and help capture dynamic relationships, improving the explanatory power of time series models.
## Footnote
They are crucial for accurately modeling economic relationships over time.
266
Explain the difference between short-run and long-run aggregate supply.
Short-run aggregate supply (SRAS) is upward sloping because wages and some prices are sticky. Long-run aggregate supply (LRAS) is vertical at the economy’s potential output, where all resources are fully employed.
## Footnote
This distinction is essential for understanding inflation and output dynamics.
267
Define the J-curve effect in relation to currency depreciation.
The J-curve effect describes how a country’s trade balance initially worsens after a depreciation due to higher import costs, but improves over time as exports become more competitive and demand adjusts.
## Footnote
This effect illustrates the short-term versus long-term impacts of currency fluctuations.
268
What is meant by terms of trade, and why does it matter for a country’s economic welfare?
Terms of trade refer to the ratio of export prices to import prices. An improvement means a country can buy more imports for each unit of exports, increasing national welfare, while a deterioration reduces purchasing power.
## Footnote
Changes in terms of trade can significantly impact a country's economic health.
269
How do economists define efficiency for an economy?
Pareto efficiency occurs when it is impossible to make anyone better off without making someone else worse off.
## Footnote
A market economy would be Pareto efficient if there is everywhere perfect competition and no externalities.
270
Why do markets not achieve Pareto efficiency?
Markets do not achieve Pareto efficiency due to:
* dis-equilibrium
* imperfect competition
* transactions costs
* externalities
* imperfect information
* public/collective goods
* other 'missing' markets.
## Footnote
These factors prevent the idealized state of perfect competition and efficiency.
271
What does Pareto inefficient mean?
Pareto inefficient means that someone can be made better off without anyone being made worse off.
## Footnote
Inefficient outcomes are commonly accepted to be avoided, though not all Pareto efficient outcomes are desirable.
272
What is the formula for point elasticity of demand?
The formula for point elasticity of demand is:
* dX/dP
where X and P represent the initial quantity and price respectively.
## Footnote
Strictly, the change should be infinitesimal.
273
What happens to elasticity over a straight-line demand curve?
The elasticity changes at every point along a straight-line demand curve. It increases as price increases, starting at zero when price is zero.
## Footnote
At price p=0, elasticity=0; it initially is less than unity, hits minus unity, and eventually grows to infinity at the y-axis.
274
What are the major determinants of price elasticity?
The major determinants of price elasticity are:
* substitutability
* degree of necessity or luxury.
## Footnote
Substitutability refers to the ease of substituting one good for another.
275
What is the opportunity cost of owning a bar of gold?
The opportunity cost is the cost of something in terms of the best alternative forgone.
## Footnote
Current consumption is forgone by owning gold, and the return from other financial assets is also forgone.
276
How does banning the sale of ivory affect elephants as a species?
Banning the sale of ivory decreases the incentive to breed and protect elephants, while potentially increasing the incentive to poach due to reduced supply and increased prices.
## Footnote
Ethical considerations may reduce demand, but this does not guarantee an increase in elephant populations.
277
What are the short-run effects of levying a tax on profits in a perfectly competitive industry?
In the short-run, the price will not be affected as profit-maximizing output remains unchanged.
## Footnote
Post-tax profit will still be greatest when pre-tax profit is maximized.
278
What are the long-run effects of a tax on profits in a perfectly competitive industry?
In the long-run, firms will exit the industry until output decreases enough to raise price back to Average Total Cost, allowing zero/normal profits to be earned again.
## Footnote
This occurs if the industry was earning zero normal profits before the tax.
279
What is the difference between adaptive and rational expectations in relation to inflation?
Adaptive expectations adjust based on current and past inflation, while rational expectations use all available information to anticipate changes in inflation.
## Footnote
If information is unbiased, rational expectations will equal the actual rate on average.
280
What happens to the UK exchange rate if domestic interest rates rise?
A rise in domestic interest rates attracts capital, increasing demand for sterling and driving up its value against other currencies.
## Footnote
This assumes that inflationary and exchange rate expectations do not offset the expected interest differential.
281
Is street lighting a public good?
Street lighting is non-rival but not purely a public good as it can have tolls charged for its use.
## Footnote
Public goods are defined as non-rival and non-excludable.
282
What are the implications of charging for street lighting?
Charging could lead to high transaction costs and a Pareto welfare loss unless funded by a lump sum tax that everyone is willing to pay.
## Footnote
Tolls would need a mechanism to turn lights on and off, complicating cost management.
283
What does the fitted equation from a regression analysis on income tax evasion indicate?
Tax evasion increases with the marginal tax rate and income, while it decreases with the level of fine.
## Footnote
Income and fine are statistically significant; the marginal tax rate is insignificant.
284
What does the specification being logarithmic in E and Y imply?
It implies that the elasticity of evasion with respect to income is less than 1, meaning a smaller proportion of income is evaded as income rises.
## Footnote
This suggests diminishing returns to tax evasion as income increases.
