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Economics 101: Principles of Economics

Economics 101: Principles of Economics. Questions?. Consumer Price Index. Is the CPI a good measure of changes in cost of living? 1. Substitution bias Causes CPI to overstate or understate? 2. New goods 3. Quality 4. Growth in Discount purchasing

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Economics 101: Principles of Economics

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  1. Economics 101: Principles of Economics • Questions?

  2. Consumer Price Index • Is the CPI a good measure of changes in cost of living? 1. Substitution bias • Causes CPI to overstate or understate? 2. New goods 3. Quality 4. Growth in Discount purchasing • Correcting for the effects of inflation • Babe Ruth’s salary today? What do we need to know? • http://minneapolisfed.org/research/data/us/calc/ • http://www.the-movie-times.com/ • COLA’s • Real vs. Nominal interest rates

  3. Production and Growth • Level of real GDP is good indicator of standard of living and the growth rate of real GDP is good indicator of economic progress • International comparisons • Average growth rates are just that, averages. • Growth rates imply that the rankings can change dramatically over time. • What determines the level and growth of real GDP? • Principle #8: A Country’s Standard of Living depends on its Ability to Produce Goods & Services • Public policy must ask itself, “How can we  productivity?” • Productivity = quantity of g & s a worker can produce per hour worked • Okay, what determines productivity? Let’s build decks. • Physical capital, Human capital, Natural resources • Big beneficiaries? Limited supply – is it a problem? • Technological knowledge/understanding • Production function Y = A f(K, L, H, N) … Y/L depends on

  4. Economic Growth & Public Policy • How can a government help raise productivity ? • Invest in production of capital • Trade-off -- more investment means less consumption today • Reverse causation? Investment  Growth, or vice versa, or 3rd var. • Diminishing returns to capital • Implies that higher savings  growth of Y and productivity only temporarily • Catch-up effect: poorer start can mean faster growth • Investment in capital by foreigners • Foreign Direct Investment (FDI) is capital investment owned & operated by a foreign firm • Foreign Portfolio Investment (FPI) is capital investment that is owned by foreigners, but operated by domestic persons • Investment in human capital • Motivation is in part positive externalities from education

  5. Economic Growth & Public Policy • How can a government help raise productivity ? • Protect property rights • Effective judicial and legal system throughout the country • Corruption Index • Promote free trade • Geography • Major trade centers are located on waterways • Limit population growth • GDP per person is most important • More people  harder to keep up capital stock (human & physical) • Explicit – China • Implicitly – increase awareness of birth control increase opportunities for women • Promote Research & Development • Inventions improve productivity, so • promote them via NSF/NIH, patents, tax breaks

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