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Exam 1 review
- 2. Questions?
- 4. Economic Models SimplifiedVersion of Reality Value in Prediction
- 5. Incentives Matter Change Incentives Change Behavior
- 6. Incentives are more important than goals
- 9. What is Wealth? What People Want
- 10. Wealth requires Innovation People are the ultimate wealth Innovation requires ideas Ideas require people
- 11. Get wealthy by making others happy
- 12. Every person has the power to create wealth
- 13. Because every person has the power to make someone happy
- 14. 20121 AD $3 $100 $30 World 10x Northern Europe North America 33x 1820 Angus Maddison “The Millennium–Poor Until 1820” Income Per Person Per Day
- 16. Whales to 747s
- 17. Intellectual Financial Physical Human Culture Entrepreneur trust knowledge skills personality health relationships natural resources time buildings equipment things than make things money and risk savers and borrowers time is money (1+r)n insurance limited liability corporations ideas technology methods
- 21. Most people Most of the time Economics is a Soft Science
- 22. GDP Gross Domestic Product The market value of all final goods and services produced in a country in a given time
- 23. GDP How much stuff a country makes
- 24. GDP Per Capita GDP Per Person Average GDP
- 26. GDP = C = Consumption I = Investment G = Government X = Exports M = Imports
- 27. GDP = C + I + G + (X - M)
- 28. Consumption Spending by households on goods and services, except new housing
- 29. Investment Spending on capital equipment, inventories, and structures, including new housing
- 30. Government Spending on goods and services from local, state, and federal governments.
- 32. Net Exports Foreigners buying exports minus domestic residents buying foreign goods
- 33. GDP $75 trillion Population 7.5 billion GDP Per Capita $10,000
- 34. GDP $18 trillion Population 318 million GDP Per Capita $56,600 United States
- 35. Atoms Bits
- 36. What to make? How much to make? Who will make it? Who will consume it? Four Questions
- 37. How you slice the pie determines the size of the pie
- 39. Price System is a Knowledge System
- 40. buyer and seller both win Voluntary Exchange
- 41. One Price Two values Every Exchange
- 42. Opportunity Cost The highest valued alternative What else could you be doing?
- 43. It’s cheaper to pay someone else than to do it myself Opportunity Cost is too high
- 44. Absolute Advantage Produce more with the same resources Comparative Advantage Produce at a lower opportunity cost
- 45. Comparative Advantage My opportunity cost is lower than your opportunity cost
- 46. Comparative Advantage I don’t have to give up as much as you do
- 47. The basis for trade is comparative advantage, not absolute advantage.
- 48. Absolute Advantage Produce more with the same resources Comparative Advantage Produce at a lower opportunity cost
- 49. Comparative Advantage My opportunity cost is lower than your opportunity cost
- 50. Money Price Time Price Which one is more important to you?
- 51. Recession two successive quarters of negative GDP growth
- 52. Measuring the Cost of Living
- 53. What two ways do we measure inflation? GDP Deflator CPI
- 54. Nominal vs. Real
- 55. Inflation Cause: Printing money faster than making goods Effect: Rising prices
- 57. Real will always have a base year
- 59. GDP Deflator Nominal GDP Real GDP= x 100
- 60. GDP Inflation Rate GDP DelflatorYear 2 - GDP DelflatorYear 1 GDP DelflatorYear 1= x 100
- 61. CPI Consumer Price Index The market value of a typical basket of goods.
- 64. CPI Consumer Price Index The market value of a typical basket of goods.
- 65. Measure CPI - Five Steps 1. Select items for Basket 2. Find Prices 3.Total Cost 4. Pick BaseYear and compute Index 5. Compute Inflation Rate
- 66. CPI Total Cost thisYear Total Cost in base year x 100
- 67. CPI Inflation Rate CPIYear 2 - CPIYear 1 CPIYear 1 = x 100
- 68. Problems with CPI 1. Substitution 2. New goods 3. Changes in Quality
- 70. New Goods 1983
- 71. New Goods Added in 1998
- 72. Quality 2007 - $600 2016 - $600
- 73. Questions?
- 74. Good Luck