what are the main tenets of traditional economics?
- consumers have infinite wants, but limited resources to satisfy those desires. therefore, traditional economics focuses on the most efficient, least-cost allocation of scarce resources;
- optimal growth;
- perfect markets, in which you get market clearance;
- consumers know what is best for them and make rational decisions;
- prices adjust automatically;
- individuals make decisions at the margin.
define human development.
income-based measures and economic growth/development are not necessarily sufficient ways to ensure legitimate development. indeed, development should also focus on individual freedoms, such as access to healthcare, education, and political civil rights.
why should we try to measure economic development?
we need to be able to assess and evaluate how a policy is impacting the community (does the policy actually work?). by measuring economic development, we can set more tangible and appropriate goals.
what is the gross domestic product (GDP)?
it considers the market value of all goods and services produced within a country in a given period of time.
what is the gross national product (GNP)?
it measures the market value of all goods and services produced by permanent residents of a nation within a given period of time.
what are the three aspects considered by the human development index?
HDI considers the weighted average of life-expectancy, the education index (which is basically the expected years of schooling), and the GNP per capita.
what are the limitations of the human development index?
- can fail to acknowledge inequality
- can fail to consider regional differences
- can fail to take into account important economic sectors (e.g.: unpaid labour)
what is purchasing power parity?
PPP computes exchange rates between currencies of different countries so that the same basket of goods in any two different countries has the same dollar value.
what is a very, if not the most, important advantage of purchasing power parity?
it makes cross-countries comparisons easier, by tackling the problem of relative prices.
if exchange rate price > PPP, is the currency under or over valued?
the currency is under valued.
if exchange rate price < PPP, is the currency under or over valued?
the currency is over valued.
what are the limitations of GDP/GNP?
- it does not consider income inequality
- it does not consider non-market transactions
- it does not show if the economic growth is sustainable or not
