Questions and Answers of Principles Of Economics

What are the key ‘rules’ which institutional economists focus research on?
Briefly describe the three main types of transactions.
Why is an understanding of transaction costs important in understanding markets and the economy?
Why do feminist economists question the effectiveness of neo-classical approaches to economics in providing answers to questions which affect women?
What is the difference between ‘sex’ and ‘gender’, and why is an understanding of this difference important in economic analysis?
Explain why feminist economists criticize the use of GDP as a measure of well-being.
Explain why complexity economics focuses on non-equilibrium analysis rather than equilibrium analysis.
Explain why complexity economists argue that any decision has to take into account time.
Consider a world without markets.a. Why is money not necessary in this world?b. Does specialization exist in this world? Explain.c. Is exchange a feature of this world and, if so, what role do you
It is said that classical economists were of a particular time and place and that their analysis is now not relevant, albeit, at the time it was hugely influential and insightful. Comment on this
a. Define the term ‘mainstream’ in relation to the discipline of economics.b. Why do you think that the neo-classical approach came to be the ‘mainstream’ in economics?c. Look at the
Why is trust such a fundamental requirement for a market system to work effectively?
Re-read the opening paragraph under the heading Institutional Economics about the pencil. Consider a recent purchase you have made. Sketch out the web of people and firms involved in the production
‘If transaction costs did not exist, the market system would not be needed.’ Critically examine this comment.
You are asked by ministers in government to use your knowledge of economics to make recommendations on ways in which the value of non-paid work in the home by (mainly) women can be calculated so that
‘It is time to dispense with any reference in economics textbooks to homo economicus because that merely frames any debate, discussion, and analysis from the wrong perspective and encourages latent
‘Economics is as much a science as any other science and has much in common with physics.’a. Consider the approach taken to research and investigation in economics and that in physics. To what
Because any decision involves some intertemporal consideration which cannot be satisfactorily estimated or forecast at the time of decision-making, economics should concern itself only with
The ONS in the UK produces a report called Personal Well-Being in the UK. This In the News looks at some of the highlights from the report published in 2018, for the period June 2017 to June 2018.The
What is meant by the term GDP per capita and how is it measured?
What are the limitations of using GDP as a measure of well-being for a country?
What are the five stages of constructing a prices index?
Describe the three problems that make the CPI an imperfect measure of the cost of living.
Assume that the price of a bottle of wine in 1990 was €3.50 and in 2021 it is €8.50. Further assume that the price index in 1990 was 95 and in 2021 was 160. Was wine cheaper in 1990 than in 2021?
What components of GDP (if any) would each of the following transactions affect? Explain.a. A family buys a new refrigerator.b. Aunt Jane buys a new house.c. Aston Martin sells a DB7 from its
Why do you think households’ purchases of new housing are included in the investment component of GDP rather than the consumption component? Can you think of a reason why households’ purchases of
Economists sometimes prefer to use GNP rather than GDP as a measure of economic well-being. Which measure should we prefer if we are analyzing the total income of domestic residents? Which measure
Given the limitations of using GDP as a measure of well-being, should calculation of GDP be scrapped in favour of wider reporting of well-being such as objective and subjective well-being?
Suppose that people consume only three goods, as shown in this table:a. What is the percentage change in the price of each of the three goods? What is the percentage change in the overall price
Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.a. The increase in streaming films.b. The introduction of air bags in cars.c.
Suppose the government were to determine the level of the state retirement pension in the UK so that it increased each year in proportion to the increase in the CPI.a. If the elderly consume the same
Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.a. Is the real interest rate on this loan
The Solow model assumed that there are constant returns to scale and that increases in capital and labour are subject to diminishing marginal product. What if these assumptions are relaxed?
In what way is a university degree a form of capital?
Assuming the population is stable, what effects will an increase in capital accumulation have on growth? Can a country generate sustained growth through rising capital investment?
What is the steady-state equilibrium?
Why is technological progress important in improving growth rates in any economy?
List the capital inputs necessary to produce each of the following:a. carsb. secondary educationc. air traveld. fruit and vegetables.
UK income per person today is roughly four times what it was a century ago. Many other countries have also experienced significant growth over that period. What are some specific ways in which your
The idea of creative destruction suggests that economic growth through changes in technology can have winners and losers. In the country in which you are studying, what firms or industries have
To what extent do you think that endogenous growth theorya. refutes the Solow model, orb. provides a further refinement to the Solow model?
Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending.a.
Using an appropriate data source, conduct some research into the economic and political characteristics of two contrasting countries – one with a relatively high GDP per capita and one with a
The recession following the Financial Crisis of 2007–9 hit most developed countries. As economies began to gradually experience growth again, it was largely expected that unemployment, which had
Why might a person who does not have a job not be unemployed?
How do national statistical offices compute the labour force, the unemployment rate and the labour force participation rate?
Why, according to Marx, does capitalism need a ‘reserve army of the unemployed’?
What is the hysteresis effect?
What is the ‘neo-classical synthesis’?
Outline three costs of unemployment to (a) an individual and (b) to society.
Assume that in a country, of all adult people, 29,500,000 were employed, 1,120,000 were unemployed and 11,000,000 were not in the labour force. How big was the labour force? What was the labour force
Go to the website of the UK Office for National Statistics (www.statistics.gov.uk) or Eurostat (ec.europa.eu/eurostat)or the statistics office for the country in which you are studying.a. What is the
According to a Labour Force Survey in a country, total employment increased by around 1.35 million workers between 2014 and 2020, but the number of unemployed workers increased by 350,000.a. How are
Both Marx and Keynes criticized Say’s law as being a fallacy. What do you think is the flaw in Say’s argument?
To what extent do you think the reasons why some frictional unemployment will always exist confirms the idea of sticky wages and the neo-classical synthesis?
Consider an economy with two labour markets, neither of which is unionized. Now suppose a union is established in one market.a. Show the effect of the union on the market in which it is formed. In
Some workers in the economy are paid a flat salary and some are paid by commission. Which compensation scheme would require more monitoring by supervisors? In which case do firms have an incentive to
Explain why changes to the structure of the population and policies to improve job matching might lead to changes in the NRU.
Statistics from the International Labour Organization in 2019 suggest that there are around 64 million young people (those aged between 16 and 23) unemployed worldwide and that 145 million young
The Financial Crisis of 2007–9 hit Italy hard. It was one of the countries which faced problems with its deficit. By 2018, the situation had not improved a great deal. Elections in March 2018
Outline the concept of present value. The interest rate is 7 per cent. Use the concept of present value to compare €200 to be received in 10 years and €300 to be received in 20 years.
What is meant by the term ‘fundamental analysis’?
Why is knowledge of whether people are risk averse or risk seeking important in financial markets?
What is the role of the financial system? Name and describe two markets that are part of the financial system in the economy of the country in which you are studying. What is a financial
Assume the interest rate is 6 per cent. In each of the following three cases, state which you would rather receive and briefly explain why:a. €200 today or €480 in two years?b. €205 today or
What factors might affect the decisions of economic actors to save more today for consumption in the future? Why are the decisions of economic actors today important for the welfare of economic
How might you go about pricing the risk on the following:a. The price of a 10-year bond from the Portuguese governmentb. The price of a 10-year bond from the German governmentc. The construction of a
Suppose that BP is considering exploring a new oil field.a. Assuming that BP needs to borrow money in the bond market to finance the purchase of new oil rigs and drilling machinery, why would an
The Financial Crisis of 2007–9 saw interest rates in the UK and Europe at historically low levels. Low interest rates appeared to have a limited stimulus effect on economies, and central banks
Imagine a firm that employs two types of workers – some with computer skills and some without. If technology advances so that computers become more useful to the firm, what happens to the marginal
Assume that the value of a good is determined by the amount of labour time a worker puts into production. How does Marx explain why a worker who is inefficient and takes twice the time of the average
a. To what extent should any model of the labour market take into consideration non-market labour employed in the home such as raising children and housework?b. Do social norms and the approaches
a. Explain the difference between a ‘minimum wage’ and a ‘living wage’.b. What should governments use to base calculations of wage rates for the lower paid? Justify your response.c.
Consider three different policies which governments could use to tackle discrimination in the workplace. Comment on the likely success of these policies in reducing discrimination in the labour
There are many people who point out that the capitalist system is synonymous with inequality. Libertarians suggest that governments should set up and maintain the structures of society which allow
What is meant by the terms ‘income inequality’ and ‘income distribution’?
Explain the Lorenz curve and what it measures.
How is the Gini coefficient calculated and what does it show?
How does the extent of income inequality in your country compare to that of other nations around the world?
Poverty is described as a relative concept – what does this mean?
Distinguish between absolute and relative poverty.
What factors might account for the levels of income inequality that exist in a country? Use the country you are studying in as a case study to help illustrate your answer.
According to the World Bank, the Gini coefficient in Portugal, measured on a scale from 0–100, was 35.5 in 2017 whereas the Gini coefficient in Norway was 27.5. Does this mean that the bottom
per cent of the population in Portugal must be poorer than the equivalent quintile in Norway? Explain.
Suppose that a family’s tax liability equalled its income multiplied by one half, minus €10,000. Under this system, some families would pay taxes to the government, and some families would
John and Carlos are utilitarians. John believes that labour supply is highly elastic, whereas Carlos believes that labour supply is quite inelastic. How do you suppose their views about income
Why is an understanding of belief systems important in assessing approaches to dealing with poverty and inequality?
The rallying cry of Donald Trump in the US presidential election in 2016 was to ‘Make America Great Again’ and to focus on policies that protected and boosted US jobs and US workers. On election,
Draw a PPF for a country producing only computers and wheat. What determines the shape and position of the PPF you have drawn? Use your diagram to show the opportunity cost of different output
Can two countries gain from trade if the opportunity cost ratios relating to the production of goods they can both produce is the same? Explain.
Thousands of tourists visit European cities every year. Is tourism an import or an export to a country? Explain.
Describe what a tariff is and its economic effects. What is an import quota? Compare its economic effects with those of a tariff.
Outline the main principles of the role of factor endowments in the Hecksher–Ohlin theory.
How do time and the product cycle influence trade patterns?
Draw the PPF for a country which produces just oranges and cars. Assume that the country is better at producing oranges than cars.a. What can you say about the opportunity cost of the country
Look at the table below which shows the production possibilities for two products, pens and pencils.a. Calculate the opportunity cost of producing 1 additional pen between points A and B.b. Calculate
European and Chinese workers can each produce 4 capital goods a year. A European worker can produce 10 tonnes of grain a year, whereas a Chinese worker can produce 5 tonnes of grain a year. To keep
The UK and Poland both produce cakes and coats. Suppose that a UK worker can produce 50 cakes per hour or 1 coat per hour. Suppose that a Polish worker can produce 40 cakes per hour or 2 coats per
Answer the questions on comparative advantage below.a. Explain how countries in Africa, which have an abundance of labour as a natural resource, can benefit from trade and allow countries to grow by
Explain why the increase in globalization since the late 1960s might have resulted in a widening of the gap between the pay of low-skilled workers and high-skilled workers in developed economies.

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