Week 1

Question 1

Microeconomics

Answer 1

• Focuses on the behavior of a single agent (firms, households, government)
• or a single market (the market for mush room soups)
• Partial equilibrium

Question 2

Macroeconomics

Answer 2

• Focuses on the behavior of the aggregate variables
• Prices and quantities
• General equilibrium

Question 3

Definition of GDP

Answer 3

• GDP (Gross Domestic Product) is the most important variable in macroeconomics.
• GDP measures aggregate production or aggregate output.
• GDP is a flow variable measured usually during a yearly or a quarterly period.
• GDP per capita indicates the level of development of a country. Massive variations across countries

Question 4

Three different ways to compute GDP

Answer 4

1. Expenditure approach
2. Income approach
3. Value added approach

Question 5

Expenditure approach (measuring GDP)

Answer 5

GDP = total spending on all final goods and services produced in the economy.

Y = C + I + G + NX

• Y : Nominal GDP
• C: Consumption Expenditures
• I : Investment Expenditures
• G: Government Expenditures
  
  • Transferpaymentsnotincluded.Why?
• NX : Net exports
  
  • NX = total export of goods & services minus total imports of goods & services

Question 6

Income approach (measuring GDP)

Answer 6

GDP = all income received by economic agents contributing to

production

Question 7

Value added approach (measuring GDP)

Answer 7

GDP = sum of value-added to goods and services across all productive units in the economy

• Value Added = increase in the value of goods as a result of the production process.
• Value Added = Value of production - Value of intermediate goods

Question 8

Structural transformation

Answer 8

a long-term change in dominant economic activity in terms of prevailing relative engagement or employment of able individuals.

Question 9

Some important issues with GDP

Answer 9

• GDPdifferentfromnationalincome(GNI)
  
  • GDP fails to capture non-market activity
  • Home production, informal sector or black market activity
• GDP excludes:
  
  • Capital gains on assets, financial and non-financial.
• GDP a measure of welfare?
  
  • Does not include some important dimensions of welfare (civil rights, education, inequalities…)
  • Not all GDP based activity is welfare enhancing – e.g prices may not capture social value – environmental pollution.

Question 10

The UN’s Human Development Index

Answer 10

a composite statistic (composite index) of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development. A country scores higher HDI when the lifespan is higher, the education level is higher, and the GDP per capita is higher. The HDI was developed by Pakistani economist, Mahbub ul Haq, for the UNDP.

Question 11

Production function

Answer 11

Question 12

Marginal product of capital (MPK) definition

Answer 12

the increase in output that comes from increasing the capital stock leaving everything else unchanged.

The MPK can be:

• decreasing (Solow model) – each new machine adds less than the last
• constant (Endogenous Growth I – AK) – each new machines adds the same as the last
• increasing (Endogenous Growth II – Poverty Trap) – each new machine adds more than the last

Question 13

The Solow growth model

Answer 13

Question 14

Convergence to the steady state

Answer 14

Question 15

Optimal consumption and welfare

Answer 15

Question 16

Implications of the Solow growth model

Answer 16