Economics

• Economics


  The study of how society manages its scarce resources. The study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
• Microeconomics


  • Studies individual agents and markets. The study of how households and firms make decisions and how they interact in markets.
• Macroeconomics


  • Studies the entire economy. The study of economic-wide phenomena, including inflation, unemployment and economic growth.
• Scarcity


  Refers to the limited nature of society's resources. Scarcity creates trade-offs - each hour you spend doing one activity is one hour less that you have to do something else.
• Trade-offs


  All the alternative options you are considering at a point in time, for example, studying economics, meeting with friends, or working an extra shift.
• Opportunity cost


  The best alternative that must be given up to obtain some item. It is your second best option - if your first choice had been unavailable, you would have chosen the second best because you are rational.
• Opportunity cost


  Explicit cost vs implicit cost
• Law of increasing opportunity cost


  When all resources are being used, an increase in the production of one good will lead to greater forgone production of another good.
• Incentives


  Rewards and punishments that motivate behaviour. Help us predict human behaviour. Understanding how people respond to incentives is central to understanding how markets work.
• Technology


  A process that uses inputs to produce an output. Technological changes allowed significant increases in living standards.
• Industrial revolution


  A wave of technological advances starting in Britain in the 18th century, which transformed an agrarian and craft-based economy into a commercial and industrial economy. Technological progress also greatly improved the speed at which information travels, making the world more connected.
• Gross Domestic Product (GDP)


  A measure of the total income and expenditures of an economy. Includes goods and services produced by the government, such as schooling, national defence, law enforcement. How economic growth is measured.
• Components of GDP


  GDP (Y) is the sum of Consumption (C), Investment (I), Government purchases (G), and Net exports (NX). Y= C + I + G + NX
• Real GDP versus Nominal GDP

  Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices.
• Uses of Real GDP


  To compare the standard of living over time and across countries.
• Standard of living


  Used to describe the level of income, necessities, luxury, and other goods and services that are generally readily available to a designated population. Real GDP per person is real GDP/ population.
• Comparison across countries


  Two problems: 1) The Real GDP of one country must be converted into the same currency units as the Real GDP of the other country. 2) The goods and services in both countries must be valued at the same price.
• GDP and Economic Well Being

  GDP is a good measure of the economic wellbeing of a society. GDP per person indicates the income and expenditure of the average person. Higher GDP per person indicates a higher standard of living. However, GDP is not a perfect measure of happiness or the quality of life.
• Impacts of economic growth

  Increase in Real GDP per capita, within and between country inequality, environmental consequences.
• Econometrics


  Specialise in analysing economic data, since economic data usually comes from the real world and not from controlled experiments.
• Disposable income


  Income available after paying taxes and receiving transfers from the government. It is thought to be a good measure of living standards because it is the maximum amount of food, housing, clothing and other goods and services that a person can buy without having to borrow.
• Nominal GDP


  It is not possible to measure Real GDP directly. Instead, to get an estimate of Real GDP, we have to begin with Nominal GDP, which is defined as P x Q, where P is Price and Q is Quantity.
• Nominal GDP calculation


  • 2020: 5 x $2 + 10 x $3 = $10 + $30 = $40

  2021: 15 x $1 + 5 x $7 = $15 + $35 = $50
• Growth rate


  Change in income/ original level of income. Similar to Rate of change → (Q2 - Q1) / Q1
• Growth rate calculation


  • If GDP per capita in 2000 is $31,946 and $32,660 in 2001, then the growth rate is (32,660 - 31,946) / 31,946 = 0.022 = 2.2%
• Real GDP


  Measured at constant prices. Real GDP = Po x Qt, where Po is the base year price and Qt is the current output.
• Real GDP calculation


  • 2020: 5 x $1 + 10 x $7 = $5 + $70 = $75

  2021: 15 x $1 + 5 x $7 = $15 + $35 = $50
• Aggregate output


  The total output in an economy, across all sectors and regions
• Imports


  Goods and services produced in other countries and purchased by domestic households, firms, and the government.
• Exports


  Goods and services produced in a particular country (domestically) and sold to households, firms, and governments in other countries.
• Expenditure


  Money spent on goods and services. The fact that expenditure, output, and incomes are all equal means that we can use any of these perspectives to help us understand the others.
• Consumption (C)


  Includes the goods and services purchased by households.
• Investment (I)


  The purchase of goods or assets with the intention that they will generate income or appreciation in value over time.
• Net exports (NX)


  Also called the trade balance, this is the difference between the values of exports and imports (X-M).
• 90/10 Ratio


  The larger the ratio is, the more unequal the distribution of income is. 90/10 Ratio = income decile 10 / income decile 1
• Real GDP per person


  The standard of living depends on the Real GDP per person. Real GDP per person only grows if Real GDP grows faster than the population grows. Real GDP per person = Real GDP / population
• Rule of 70


  The number of years it takes for the level of a variable to double is approximately 70 divided by the annual percentage growth rate of the variable. Doubling time = 70 / x, where x is the growth rate.
• Productivity


  Productivity refers to the amount of goods and services produced for each hour of a worker's time. A nation's standard of living is determined by the productivity of its workers.
• Real GDP per capita

  Real GDP per capita = Real GDP / number of workers
• Factors of production


  Physical capital, human capital, natural resources, technological knowledge