Econ Basics
What is the fundamental economic problem created by limited resources and unlimited wants?
Scarcity
What does GDP stand for?
Gross Domestic Product
What does the Consumer Price Index measure?
Changes in prices of a representative "market" basket of consumer goods and services
A country has a large trade deficit. Does this automatically mean its government also has a budget deficit? Explain.
Why might someone believe this?
No. A trade deficit occurs when imports exceed exports. A government budget deficit occurs when government spending exceeds government revenue. They measure different things, though Balance of Trade is used to calculate GDP
What type of income tax charges everyone the same percentage of taxable income?
Flat tax
What are the four factors of production?
Land, labor, capital, entrepreneurship
What is the difference between GDP and GDP per capita?
GDP is total domestic production; GDP per capita is GDP divided by population (shows "production" per person)
A worker receives a 3% living adjustment raise, but inflation is averaging around 6% this year. Has their purchasing power increased or decreased? Explain.
Decreased. Although they earn more money, prices have risen faster than their wages, meaning they can afford less than before.
What is the difference between a government budget deficit and a budget surplus?
Deficit: spending exceeds revenue; surplus: revenue exceeds spending
What type of income tax charges higher rates on higher portions of taxable income?
Progressive tax
A factory purchases new robotic equipment to improve efficiency. Which factor of production does this represent?
Physical capital
What five components go into GDP's expenditure formula?
Consumption, investment, government purchases, exports, imports
If CPI rises from 200 to 220 from one period to the next, what is the inflation rate?
10%
Japan has maintained a very high debt-to-GDP ratio for years without experiencing a government debt crisis. Explain one reason a high debt-to-GDP ratio might be manageable and one reason it could still be concerning.
Much of Japan's government debt is held domestically, including by Japanese financial institutions and the central bank, especially for retirement. This can reduce certain risks associated with dependence on foreign lenders.
High debt can lead to significant interest costs, especially if borrowing rates rise, potentially limiting future government spending choices. It could unsettle foreign investors and financial institutions/banks
Why are broad sales taxes often considered regressive relative to income?
They generally take a larger percentage of lower-income households' income
What is the difference between trade-offs and opportunity cost?
Trade-offs are alternatives given up; opportunity cost is the next-best alternative
Question: A Japanese-owned company manufactures cars in the United States, while an American-owned company manufactures cars in Mexico. Which company's production contributes to U.S. GDP?
The Japanese-owned company's production in the United States. GDP measures production within a country's borders, regardless of who owns the business.
Why might a country experience rising inflation and increasing unemployment at the same time, even though governments often try to reduce inflation by slowing economic activity?
A supply shock, such as a major increase in energy prices, can raise production costs while causing businesses to reduce output and employment. Or a pandemic could significantly reduce trade, causing demand to increasingly outweigh supply.
What is the difference between a budget deficit and national debt?
A deficit is a shortfall during a period; debt is total outstanding borrowing
A country is considering replacing its progressive income tax with a flat income tax. Identify one potential advantage and one potential disadvantage of this change.
Possible advantage: A flat-rate system can be simpler to calculate and administer. Possible disadvantage: It may shift a greater relative burden toward lower-income taxpayers, depending on the rates, exemptions, and deductions.
A student has three options for Saturday: work an eight-hour shift, attend a concert, or study for an exam. They choose the concert, but working was their second choice.
Identify the trade-off and explain the opportunity cost.
Trade-off: Giving up the opportunity to work or study.
Opportunity cost: The wages and other benefits the student would have received from working their eight-hour shift.
Why could GDP increase without ordinary citizens experiencing an improved standard of living? / Why might GDP per capita be higher than the average or median salary?
GDP growth does not necessarily mean gains are equally distributed or improve quality of life
A country's unemployment rate decreases, but the number of people with jobs has not increased. How could this happen?
Some unemployed individuals may have stopped actively looking for work and left the labor force. The unemployment rate could therefore decrease without an increase in employment.
Unemployment=unemployed who are currently looking for work
Country A has $2 trillion in national debt and a GDP of $4 trillion. What is its debt-to-GDP ratio?
50%
A government wants to raise more revenue without changing its income tax rates. What two other types of tax it could introduce or increase and what would it be a tax on?
Answers will vary.