Summary Study Outline for Econ S10b Midterm Exam Harvard University, Summer School

Study Outline for Econ S10b Midterm Exam Harvard University, Summer School Note: The assigned readings are potential sources for exam questions. I will NOT ask narrow factual questions about these readings, but you should be able to relate their main arguments to the material we have discussed in class. Note: The following outline does NOT cover everything we have studied in the class. All concepts and applications that we have discussed in class are possible exam topics. Good items to study would be the class slides, the class notes, and the solutions to the problem sets. If something seems unfamiliar, check your notes, the posted notes, and then, if you still have questions, email me or stop by TA office hours. 1. Basics economic concepts a. Cost-benefit analysis, especially when applied to “how much” decisions b. Absolute and comparative advantage c. Supply and demand; Efficiency and surplus 2. Measuring GDP: Definition and methodology a. “Production” definition: value of final goods and services… b. Principles for measuring GDP: utilize market prices i. In a period: value-added method ii. What is NOT counted? c. Expenditure on final goods and services i. Y = C + I + G + NX  what are these different components? d. Equals total income arising from production of goods and services i. Income from labor AND income from capital e. GDP not the same as economic well-being 3. Measuring costs of living  prices, price levels, and price changes a. Calculating a CPI-type of price index b. What is inflation? Inflation rate? c. Real vs. nominal values; indexing (i.e. dividing a nominal amount by the relevant price index) d. Difficulties of measuring “true” inflation: quality and substitution biases e. Why is inflation costly? Hyperinflations? 4. Labor Productivity and Inequality a. How does economic growth relate to labor productivity and living standards?  through the labor market!! i. What determines labor productivity growth? ii. Labor demand-supply model: understand the curves and what shifts them! b. How have real wages / labor productivity behaved since 1970s? i. Why has growth in real wages been slow for some workers? c. What factors help explain the rise in inequality over the last forty years? 5. Economic Growth: Growth in Real GDP Per Capita a. Compound growth formula b. Why do we care about changes in GDP per capita? c. What are the proximate determinants of economic growth? i. Specialization and trade ii. Physical capital accumulation iii. Natural resource exploitation iv. More labor or higher quality labor (human capital accumulation) v. Entrepreneurship and managerial skills vi. Technological Change vii. Culture and institutions d. Neoclassical (exogenous technological change) vs. “New Growth Theory (endogenous technological change) e. What makes knowledge / ideas especially important for economic growth? Why might governments have a special role in promoting knowledge development? f. Fundamental Determinants of Growth  influence incentives for accumulation and innovation i. Institutions vs. Geography: The work of Acemoglu on what good institutions do g. Policies to encourage economic growth h. Why are some nations stuck in poverty traps? Role of foreign aid? 6. Savings and Investment  accumulation of capital (human and physical) + better technologies in production a. Savings vs. Wealth b. Why do people save? c. How do we define national savings? i. Closed economy: S = Y – C - G 1. personal + business + public savings 2. (Y – T – C) + (T – G) [assume business savings in personal] ii. Government budget deficit  public dissavings 1. How is one financed? d. Market for loanable funds  match up savers and [investment project] borrowers i. Investment demand  comparing the marginal benefits and costs from investment in capital 1. Benefit – value of the (marginal) product of capital…or in discrete terms, the value of a project in terms of revenues 2. A key part of the opportunity costs of the funds that could be used to finance the investment = r, the real interest rate in the economy