Macroeconomics

Lecture 5

Measuring the Cost of Living

Questions?

Quiz 2 Name:______________________

1. Who is considered the Father of Economics?

2. The price system is really a ______________ system.

3. In every exchange there are ______ values and ______ price.

4. If your opportunity cost is higher than mine, who has the comparative advantage, you or me?

5. All trade is based on ___________ advantage.

6. What was the major reason the price of oil has dropped by over 50 percent the last two years?

7. Would you rather live in Hawaii or Idaho and why?

1. What are the four questions all countries must ask and answer?

2. How you ____ the pie, determines the ______ of the pie. What does this mean?

3. Who is considered the Father of Economics?

4. What year was the "Wealth of Nations" published?

5. What is the "Invisible Hand" in economics?

6. The price system is really a ______________ system.

7. In every exchange there are ______ values and ______ price.

8. Define opportunity cost.

9. Define Absolute Advantage.

10. Define Comparative Advantage.

11. Your opportunity cost is higher than mine, who has the comparative advantage, you or me?

12. All trade is based on ___________ advantage.

13. If you are better than me at doing everything, should you still trade with me? Why?

14. In the circular flow diagram, what are the two entities?

15. In the circular flow diagram, what are the two markets?

16. Where do households buy things?

17. Where do households sell things?

18. Nobel laureate economist and author of Development as Freedom, Amartya Sen said, “Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency." Which one of the six capitals is he talking about?

19. Does Karl Marx argue for an individual market economy or a government planned economy?

Take a look at the State GDP Chart and then answer the following questions: (Ignore the District of Columbia)

20. What state has the highest GDP?

21. What state has the highest GDP per capita?

22. States have different costs of living (housing, foot, ect.) After adjusting for the Cost of Living, which state has the highest cost of living adjusted GDP per capita?

23. Look at Hawaii and Idaho. Where would you rather live and why?

How you slice the pie

determines the size of

the pie

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

GDP, Population, GDP Per Capita

Sorted by GDP

Sorted by Population

Sorted by GDP per Capita

]

India Germany Japan

U.K.

France

Brazil Mexico

Intellectual

Financial Physical

Human

Culture

Entrepreneur

trust knowledge skills personality health relationships

natural resources time buildings equipmentthings than make things

money and risksavers and borrowers time is money

(1+r)n

insurance   limited liability corporations

ideas technologymethods

Trust Knowledge and Skills Health and Nutrition Social Relationships

Human Capital

Health & Nutrition

Two types Tools

Natural Resources Water, Oil, Minerals

Physical Capital

Tools we use to make stuff

Natural Resources Renewable

Non-renewable

Physical Capital

Technology How the world works

How we make smart things and make

things smart

Intellectual Capital

Research and Development

Patent System

20 Year Monopoly on your idea

Human CapitalIntellectual Capital

Money

Allows us to store labor and shift time

Financial Capital

Savingsversus

Consumption

Spend or Save?

Save instead of consumeInvestment in new capital

Increase productivity

Three Steps

Capital Allocation

Right capital at the right time

Innovation - Productivity

Continuous Innovation

IdeasIncentivesInvestmentInventionsInnovations

Process

Atoms

Bits

AtomsHardwarePhysical

glass metalplasticsilicon

atoms have

always existed

Make me an iPhone.

How do we get wealthy if the

number of atoms is constant?

BitsBinary Digit

Bi - tKnowledge can be

reduced to bits

Words, Images, Soundsdigitized

converted to bitscomputer language

store, transmit, process

Bitssoftware

intelligenceknowledge

Bitsintelligize

atoms

Make me an iPhone.

Sorry, I don’t have the bits

Not limitedUnlimitedInfinite

LimitedNot UnlimitedFinite

Atoms Bits

Intelligence

ThinkingReasoningInspiring

Ideas

Creating

Organizing, Arranging, Imagining, Designing, Engineering, Building,

Developing, Shaping, FormingDevising, Fabricating

Creating

Acting with an intelligent purpose

Creativity adds value

Creativity is an act of intelligence

Intelligence is infinite

Therefore, value creation is infinite

Infinite Creativity

Barbed Wire Joseph Glidden 1874

1874: 20¢ per pound 1897: 2¢ per pound 90 percent drop in 23 years

Lawful Fence Wood fencing Crops vs. livestock Own land, but could not protect crops

Don’t need timber Improve land Higher-valued crops Increase in land value by 50% in 10 years Entrepreneurs resolve conflicts Source: Daniel K. Benjamin, PERCReports.org

Measuring the Cost of Living

Key Termsconsumer price index

inflation rate

producer price index

indexation

nominal interest rate

real interest rate

GDP per Capita = GDP ÷ Population

GDP = GDP per Capita x Population

Population = GDP ÷ GDP per Capita

Inflation

InflationCause:

Printing money faster than making goods

Effect: Rising prices

When you have lines waiting to buy your product, you can do two things:

make more, or raise prices

Nominal vs.

Real

Nominal Current prices

Current quantity

Real will always have

a base year

Time Price

1930

5 cents

10 cents per hour

30 minutes

2016

$1 dollar

$8 per hour

7.5 minutes

75 Percent Cheaper

Real Constant prices Current quantity

GDP DeflatorNominal GDP

Real GDP= x 100

Pizza Soda

Year Price Qty Total Price Qty Total TotalTotal

%Change

2010 25 100 2500 5 50 250 2750

2011 35 134 4690 6 40 240 4930 79.3%

2011* 25 134 3350 5 40 200 3550 29.1%

2012 45 150 6750 7 30 210 6960 41.2%

2012* 25 150 3750 5 30 150 3900 9.9%

* Prices adjusted to 2010 Rates

Real versus Nominal GDP

GDP Inflation Rate

GDP Delflator Year 2 - GDP Delflator Year 1

GDP Delflator Year 1= x 100

InflationCause:

Printing money faster than making goods

Effect: Rising prices

CPI Consumer Price Index

The market value of a typical basket of goods.

CPIPrice of goods and services this year

Price of basket in base year= x 100

CPI Inflation Rate

CPI Year 2 - CPI Year 1

CPI Year 1= x 100

Converting to Today

Price level today

Price level in prior year

Amount in prior

yearX

2015

2016

Real = Nominal + Inflation

Nominal = Inflation + Real

Inflation = Nominal - Real

Interest Rates