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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?