Econ 4130 Review 1

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Economics 4130

SP13 Midterm 1 Review

The exam will have 5, 10-point questions on it from the questions below.

1. List 2 data sources researchers use to estimate historical standards of living and explain what they can infer from these sources. List three indicators of economic development other than National Income measures (NI, GDP, or GNP, level, growth rate, or per capita) that are of interest to economists and explain what can be inferred from each of these indicators.

2 data sources: Censuses, surveys (population, demographic information, occupational distributions)&Tax records (production information, shipping information, exports and imports, wealth). 3 indicators: a. Average annual rate of inflation: Measure of government stability. Low rate of inflation shows that the government is not printing money for its own purposes (wars, palaces, lavish courts). b. Life expectancy at birth. (Unambiguous measure of welfare.) c. Adult literacy, both female and total: Adult literacy is a good human capital measure (productive capacity of a society). Negatively correlated with child labor. If kids are in school learning to read, then they are not in fields or factories, associated with more development economy.

2. Explain in detail 3 weaknesses of per capita GNP (or GDP) as a measure of economic well-being. Although this measure has the flaws you just listed (and others) it is the most oft-referenced statistic when considering standard of living differences across countries. Why? Both of those measures have weakness in common. We discussed 4. Do it in detail. Cannot just answer these questions by just writing what is in the lecture outlines. Requires more detail than just filling in the banks. Two main reasons why discussed in lecture.

GDP per capita does not always translate as improvement of welfare because it does not capture all economically important activities. Illegal activities in black market are not reported for income taxes and are thus difficult to include in GDP. It also does not include value of non-paid work of housewives, and agricultural production for own consumption. Secondly, GDP per capita does not assign any negative value to those side effects of economic activities resulting into reduction in total welfare like pollution and noise. Thirdly, GDP per capita does not reflect differences in cost of living in different countries and the cost of a certain bundle of goods or a certain lifestyle is not the same across time and space like differences of housing price and taxes. Despite these weaknesses, GDP per capita is still most oft-referenced measure of countries’ welfare for two main reasons: a. It is available for most countries for many years (at least 50), back to 1840 for the U.S. Even further back for Britain and some other European nations. b. Highly, predictably correlated with any other measure.

3. Describe the North and Thomas model explaining the Neolithic Revolution. Specifically, use a graph to illustrate how population growth affected this change. How is this model consistent with what we know about the transformation from Hunter-Gatherers to Settled Agriculturists? Reproduce graph. Properly label and explain. What happens as population decrease/increase. Explain what happens as you move from person 1 to other important points in graph such as change in slope. Diminishing return scale. How is this model consistent with what we know. Look in outline…”the model and what we know”—relative productivities and etc.

In the North and Thomas model, the value margin production of hunting is more productive and constant returns with increase population, but the return begins to diminish when the population increases to a certain lever. The VMP of agriculture always keeps constant but lower than hunting with increase population. Due to the decline in the productivity of hunting and increase in the return of agriculture, more people transit from...
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