All your questions…answered!

What might lead a country to export goods? What might lead them to import them?

1 The facts that countries import many goods and services yet must produce a large quantity of goods and services themselves to enjoy a high standard of living are reconciled by noting that there are substantial gains from trade. In order to be able to afford to purchase goods from other countries, an economy must generate income. By producing many goods and services, then trade them for goods and services produced in other counties, a nation maximizes its standed of living.

2A More investment would lead to faster economic growth in the short run.

2B The change would benefit many people in society who would have higher incomes as the result of faster economic growth. However, there might be a transition period in which workers and owners in consumption-good industries would get lower incomes, and workers and owners in investment-good industries would get higher incomes. In addition, some group would have to reduce their spending for some time so that investment could rise.

3A (or not 2B) Private consumption spending includes buying food and buying clothes; private investment spending includes people buying houses and firms buying computers. Many other examples are possible. Education can be considered as both consumption and investment.

3B Government consumption spending includes paying workers to administer government programs; government investment spending includes buying military equipment and building roads. Many other examples are possible. Government spending on health programs is an investment in human capital. This is truer for spending on health programs for the young rather than those for the elderly.

4 The opportunity cost of investment in capital is the loss of consumption that results from redirecting resources toward investment. Over investment in capital is possible because of diminishing marginal returns. A country can “over-invest” in capital if people would prefer to have higher consumption spending and less future growth. The opportunity cost of investing in human capital is also the loss of consumption that is needed to provide the resources for investment. A country could “over-invest” in human capital if people were too highly educated for the jobs they could get – for example, if the best job a Ph.D. in Philosophy is working at a burger joint.

5A When a German firm opens a factory in South Carolina, it represents for direct investment.

5B The investment increases U.S. GDP because it increase production in the US. The effect on U.S. GDP would be smaller because the owners would get paid to return on their investment that would be part of German GNP rather than US GNP.

Real vs. Nominal GDP What is the difference in when we are thinking about a country and personal wellbeing?

Problem 1 Mr. Wicker owns a bike shop that only sells bikes. All of his employees work 8 hours per day. In 2006, he employed 3 employees and they produced 100 bikes each day. In 2007, he employed 4 employees and they produced 248 bikes each day. What was the change in productivity?

Diminishing returns What is this? How does this relate to productivity?

Physical Capital vs. Human Capital What are these? Give me examples of each

Savings rate What happens when a country increases its savings rate? What happens when it decreases it?

Problem 2 Suppose that Uzbekistan undertakes a policy to increase its saving rate. This policy will likely do what to GDP in the short run and long run?

Problem 3 Last year real GDP per person in Uzbekistan was 4,500. The year before it was 4,250. By about what percentage did Uzbek real GDP per person grow during the period?

Problem 4 At first patents might seem like a deterrent to growth because in effect they restrict the use of new technology. Yet many economists believe that patents generate growth. Explain why.

Problem 5 Suppose that a new government is elected in Uzbekistan. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Uzbekistan find these efforts credible and outsiders believe these changes will be effective and long lasting. These changes will probably do what to Real GDP and Productivity per person?

Problem 6 Mr. Wicker’s Beard Balm © uses 10 workers, each working 8 hours, to produce 100 rocking chairs. What is the productivity of these workers?

Problem 7 Georgia looks over reports on four of her workers. Max made 20 shirts in 5 hours. Sam made 36 shirts in 6 hours. Kevin made 35 shirts in 10 hours. Alex made 22 shirts in 4 hours. Tommy made 50 shirts in 10 hours. Who has the greatest productivity?