Macroeconomics Midterm Review
Chapter One - What is Economics?
Two Big Economic Questions
1. How do choices end up determining what, how and for whom goods and services get produced?
• WHAT - what specific resources/services are accountable for production percentages in Canada.
example, agriculture=2% , manufactured goods=20% and services/healthcare = 78%
• HOW - goods and services are produced using factors of production (4 categories)
-Land,Labour,Capital(incl.Human Capital), Entrepreneurship
• For WHOM - who gets the goods and services depends on the incomes that people earn.
-Land earns rent / Labour earns wages / Capital earns interest / Entrepreneurship earns profit
2. When do choices made in the pursuit of self-interest also promote social interest?
- Choices for everything are made in either self-interest or social interest
-Social Interest has two dimensions ; Efficiency & Equity
• Efficiency is achieved when the available resources are used to produce goods and services :
1. At the lowest possible price AND/OR
2. In quantities that give the greatest possible benefit
• Equity is fairness, but economists have a variety of views about what is fair
- Four topics that generate discussion and that illustrate tension between self-interest and social interest
are; 1.Globalization 2.Information-age economy 3.Global warming 4.Economic Instability
1. Globalization is the expansion of international trade, borrowing and lending, and investment
- “..” is in the self interest of consumers who buy low-cost imported goods and services
- is globalization in the self-interest ? Social interest?
2.The Information-Age Economy - technological change of the past 40 years
-has clearly served your self-interest: it has provided your cell,laptop,handy apps and internet
-did the information revolution serve as a social interest?
- everyday we make self-interested choices by electricity and gasoline(contribute to carbon emissions)
- making a “Carbon footprint” which can be lessened by walking,colder showers or planting a tree
- can each of us be relied on to make choices that affect the Earths CO2 concentration in social interest?
4. Economic Instability - where financial stress begins to grip the entire global financial system
-choices of banks to borrow and lend & people and business to lend and borrow from those banks are
made in self-interest
-does this lending and borrowing serve the social interest?
The Six Economic Ways of Thinking
1.A choice is a tradeoff
-you can think of every choice as a “tradeoff” - an exchange
-Saturday night, will you study or have fun? You can’t study and have fun at the same time so you must
make a choice. Whatever you choose, you could have chosen something else, your choice is a tradeoff
2.People make rational choices by comparing benefits&costs
-rational choice compares costs and benefits and achieves the greatest benefit over cost
-only the wants of the person making a choice are relevant to determine its rationality
-Answers the first question - “WHAT goods and services will be produced and in what quantities?”
- those that people rationally choose to buy!
3.Benefit is what you gain from something
- benefit : what you gain
- the benefit of something is the gain or pleasure that it brings and is determined by preferences
4.Cost is what you must give up to get something
-cost : what you must give up Macroeconomics Midterm Review
- the opportunity cost of something is the highest-valued alternative that must be given up to get it - has 2
components ( opportunity cost of going to a concert)
1. Things you can’t afford to buy if you purchase the ticket 2. Things you can’t do with your time if you go
5.Most choices are “how-much” choices that are made at the margin
- you can spend the next hour between studying and texting - not all or nothing-how much time for each?
- to make decision - you must compare the benefit of a little more studying with its cost.
- to make a choice at the margin, you evaluate the consequences of making progressive changes in the
use of your time
- the benefit from pursing a progressive increase in an activity is its marginal benefit
- the opportunity cost of pursing a progressive increase in an activity is its marginal cost
- if the marginal benefit exceeds its marginal cost, your rational choice is to do more of that activity
ex. I have an hour for homework but I want to watch TV at the same time too. The marginal benefit if I did
home work for an hour would be improving my mark, where as watching TV (marginal cost) does
nothing... rational choice is to do homework and stick with the marginal benefit
6.Choices respond to incentives
-a change in marginal cost or marginal benefit changes the incentives that we face and lead us to change
-incentives are also the key to reconciling self-interest and the social interest
Economist As Social Scientist
-Economists distinguish between two types of statement
• What is - positive statement
• What ought to be - normative statement
- A positive statement can be tested by checking it against facts
- A normative statement expresses an opinion and cannot be tested
-with these statements , economists create and test economic models
• Economic Model is a description of some aspect of the economic world that includes only those
features that are needed for the purpose at hand
- a model is tested by comparing its predictions with the facts
- economists also use, Natural experiments, Statistical investigators & Economic experiments
Chapter 20 - GDP
• GDP measures the value of production, which also equals total spending on final goods and total
GDP had four parts ;
1. Market Value -
-GDP is a market value - goods and services are valued at their market prices
-too add apples and oranges, we add the market values so we have a total value of output in dollars
2. Final goods and services
-GDP is the value of the final goods and services produced
-a final good and an intermediate good are brought into play under this category
-excluding the value of intermediate goods and services avoids counting the same value more than once
3. Produced within a country
-GDP measures production within a country - domestic production
4. In a given time period
-GDP measures production during a specific time period, normally a year or a quarter of a year Macroeconomics Midterm Review
• Households and Firms
-households sell and firms buy the services of labour,capital and land in factor markets
-for these factor services - firms pay income to households: wages for labour services,interest for the use
of capital,and rent for the use of land and lastly entrepreneurship receives profit
-Consumption = C ; Investment = I
-governments buy goods and services from firms and their expenditure on goods and services is called
-government spending is = G
-finance their spending with taxes
-sum of all employed and unempl