ECON 1100 Global Economics Study Guide for Exam 1

Chapter 1: We did not explicitly go through chapter 1 in order, but the concepts were interspersed in lectures since the beginning of the semester. When you review the chapter be sure you understand the following concepts: 1. What is the difference between a normative statement and a positive statement? Norminative- aims to assess the desirability of how the world is or functions, perhaps with suggestions about how to improve matters. Positive- aims to describe how the world actually is or functions. Makes observations or predictions without judgments. 2. Why is this particularly difficult for economists? Greater agreement on positive than norminative statements and micro than macroeconomics.

3. What does rationality mean, and how does it apply to economic behavior? Acting with a well-defined goal in mind, to take actions to achieve the goal as best as possible 4. How does the cost-benefit principle apply to what we are studying in Ch. 4 on consumer demand? Undertake an activity only if the additional benefit is greater than or equal to the cost of doing so.

5. How does self-interest tie into rational consumer behavior? 6. Does self-interest prevent the people of a country from cooperating with others and reaching a balance of interests between them, or does a powerful government have to direct and plan activities for a society to function? 7. What mechanism incorporates self-interest and uses it? (See Ch. 4)

Chapter 2: Since we didnt have time to go over this material in class, and it is technical in nature, we will not test on Ch. 2.

Chapter 3: What are the differences between pure Socialism and pure Capitalism? First, make a list of the all the synonyms of these two systems and be able to explain what the different names are emphasizing about the systems they name. For Capitalism: Explain what property rights are and what they consist of. (Hint: Ownership and Control, Acquisition and Transfer, and Restitution for Damages) What do they permit people to do and not do? Are property rights treated as morally on the same level of other rights like free speech and freedom of religion in a capitalist system? Why? What is the moral basis of capitalism? What is the distinction between positive rights and negative rights? Which type do capitalists believe is the correct way to think about morality? What do capitalists think of the opposite view of rights? Be able to identify what type of right is being asserted in a scenario in a test question. Who are the two major thinkers that we covered that laid out the procapitalist argument in the English speaking world? (One of them is introduced in Ch. 1, and the other in Ch. 3. See discussion of John Locke and Adam Smith) For Socialism: Who is the major thinker that we identified as the foremost proponent of Socialism? (Ch. 3) Who are the Bourgeoisie, or Entrepreneurs? What does Marx think of them? What do the Capitalists think of them? What did Marx propose that government do in dealing with the Bourgeoisie and their property? What do the Socialists want to do with private property? If there are no private owners, who will now make all of the decisions of what to produce, how to produce it, and who gets the goods? What are the names of the system that must be set up? What do Socialists think about private property rights? Do they believe that rights are negative in nature or positive? Give examples of things that a government is entitled to do under positive rights that it is not entitled to do under negative rights. (Hint: Medical care issues, income redistribution, etc.) What is a Mixed System, and how does it differ from pure Capitalism?

What are the three main parts of the system? (Hint: Govt. ownership, government regulation of private industry, and the Welfare State.) Be able to explain what all three possible government interventions mean. Do all mixed economies use the same amount of each of these parts? Be able to place several countries (listed in lecture) on a continuum based on percentage of GDP spent by government. Where does the U.S. stand compared to European countries? Compared to Hong Kong? Compared to the U.S. in 1902? Is the U.S. a capitalist country? (No definitive answer, just be able to explain why it is difficult to say) Is the U.S. the most capitalist nation according to the three major ranking systems listed in our book? Is it close to being Capitalist or closer to Socialist? Where does Russia rank? Venezuela? Gov. Ownership, regulation, welfare state What kinds of firms are owned by govt. in U.S.? Other countries? What does government tend to regulate in the U.S. version of Mixed economy? What is the Welfare State, and how is it related to the mixed economy? Examples of welfare state activity such as Social Security, Public University, etc.

Chapter 4: What are inputs in the production process? List 4 major factors of production and be able to explain them What are product or output markets? Who produces the output? Who consumes it? Where do the households get the income to pay for the output? How are output and income for a country related? Can one be larger than the other? Why not? Explain how Supply and Demand works Law of Demand: explain Law of Supply: explain

Equilibrium Price: what is it and what causes it?

Explain shortages and surpluses when price is not at equilibrium Determine the size of the shortage or surplus What causes the entire supply curve to shift from one position to another? Same for the Demand Curve What is a Normal Good vs. an Inferior Good? What is a substitute good vs. a complementary good? How do changes in tastes and preferences affect the demand curve? Be able to show how the equilibrium price changes as supply and demand curves shift Explain the difference between a change in demand and a change in quantity demanded. What is the difference between moving along an existing demand curve and shifting the entire demand curve? Same for change in supply and change in Quantity supplied What are the positive aspects of using the price mechanism to determine the output of goods and services vs. centrally planning the decisions in Gov.? Discuss freedom of choice for both consumers and producers. Also go back to ch3 and review the concept of Consumer Sovereignty. What are the negative aspects of using the price mechanism? Discuss the negative aspect of letting people choose what to consume. (We discussed New York City banning more than 16oz soft drinks as an example) What is Profit, and how is it defined? Be able to calculate What factors cause profit to rise or fall? Is profit guaranteed in Capitalist system? What is a subsidy or bail-out? Does pure capitalism approve of this? What is the solution in a Capitalist society if a firm is losing so much money that is failing? (Hint: discuss bankruptcy) What are the advantages and positive of bankruptcy for the economic system as a whole? Why does Socialist often oppose bankruptcy of firms and insist that the government subsidize the firm? Are Socialist firms required to make a profit? Chapter 6 What is a nations GDP? What does GDP consist of? How do we measure it? What is the difference between nominal GDP and real GDP? Which one has had the inflation taken out of the numbers. Why do we want to take out the inflation when we make comparisons of GDP (or any economic number) over time? Be

able to calculate a real number from a nominal one. Use the GDP Deflator or CPI (explain what they are) to accomplish this. What is economic growth? Has there been much in the U.S. over the past 80 years or so? Past 200 years? Explain how the industrial revolution kicked growth into high gear. What is the business cycle? Explain its parts such as recessions, expansions, peaks, troughs, etc. Explain the long-term trend. Do recessions happen frequently? Do they fall on a predictable schedule? What is the difference between a recession and a depression?