lecture 4 measuring the cost of living

Macroeconomics

Lecture 4

Measuring the Cost of Living

Questions?

1. Is economics a hard science or a soft science? 2. What does GDP stand for? 3. What is the definition of GDP? 4. What is GDP per capita? 5. Which country has a higher GDP, Japan or Germany? 6. Which country has a higher GDP per capita, Japan or Germany? 7. What is the formula for estimating GDP? 8. If I marry the person I used to buy my dinner from, what happens to GDP? (Assume she no longer charges me for dinner). 9. I sell my used car this year. What will it do for GDP? 10. If the government gives people money to go to college, where does it show up in GDP? 11. If I buy a new house this year, where does it show up in GDP? 12. I grow and eat my own carrots. Where does this produce show up in GDP? 13. What is the world GDP per Capita? 14. When did things start to change in China? 15. Calculate GDP based on: Consumption = 150, Investment = 50, Government = 25, Exports = 50, Imports = 60 16. According to Warren Buffet if you don't have ________ what two things will kill you? 17. What are the two elements of trust? 18. What generally happens to a country as people trust each other? 19. Which country would you expect to have a brighter economic future: Philippines or Vietnam and why? 20. Please read the essay by Basiat. Provide an example of what is seen and unseen in Rexburg.?

StudentIntroductions

Yabut

What to make?

How much to make?

Who will make it?

Who will consume it?

Four Questions

How you slice the pie

determines the size of

the pie

Who decides? Government

or Individuals

Planned Economy vs.

Market Economy

Government Economy vs.

Individual Economy

Adam SmithMarket Economy

Individual Economy

Karl MarxPlanned Economy

Government Economy

Adam Smith The Wealth of Nations

1776

Invisible Hand

individualself interestpromotes

wealth

Price System is a

Knowledge System

buyer and seller both win

Voluntary Exchange

One Price Two values

Every Exchange

Buyer Value

Seller Value

PriceRange?$

100

70What if the price

was 120?

What if the price was 60?

Buyer Value

Seller Value

PriceRange?$

100

70

Opportunity Cost

The highest valued alternative

What else could you be doing?

It’s cheaper to pay someone else than

to do it myself

Opportunity Cost is too high

Absolute Advantage

Produce more with the same resources

Comparative Advantage

Produce at a lower opportunity cost

Comparative Advantage

My opportunity costis lower than your opportunity cost

Comparative Advantage

I don’t have to give up as much as you do

The basis for trade is comparative advantage,

not absolute advantage.

Who should mow my lawn?Me - one hour

Son - three hours

Who should mow my lawn?Who is best is not important

Must know the opportunity costs

Me - Can earn $100 doing economics

Son - Can earn $25 working at McDonalds

Who ever has a lower opportunity cost has a comparative advantage.

The son has a lower opportunity cost

Adam EveTotal

Hours

Make a Hook

3 2 5

Catch a Fish

4 1 5

TotalHours

7 3 10

No Trade2 Hooks and 2 Fish

10 Hours - 5 Hours per Fish

Adam EveTotal

Hours

Make a Hook

2 hooks6 hours 6

Catch a Fish

2 fish2 hours 2

TotalHours

6 2 8

With Trade2 Hooks and 2 Fish

8 Hours - 4 Hours Per Fish

Markets Where Buyers and

Sellers Trade

CircularFlow

Diagram

Households

Individuals in a home

Sell Factors of Production

Buy Goods & Services

Firms

Buy Factors of Production

Sell Goods & Services

Product Markets

Markets for finished goods and services

- Stores -

Factor Markets

Markets for goods and services used to make

products

LaborCapitalNatural

ResourcesEntrepreneurs

SpendingWages & Payments

for Factors

Goods & Services

Households

Firms

FactorMarkets

ProductMarkets