Chapter 5-1
Price ceilings set below equilibrium prices cause shortages. Price ceilings set above equilibrium prices have no effects.
A price control reduces the incentive to respond to shifts in demand, thus resources become misallocated according to essentially random factors. For example, it costs much more to ship oil from Alaskan oil fields to refineries on the East Coast than on the West Coast. Price ceilings did not let that difference become factored in the price, and therefore reduced the incentive to ship oil to where it was most needed so shortages could be worse in some areas than in others.
Chapter 5-2
If landlords under rent control have an incentive to do only minimum upkeep, deteriorating buildings inevitably accompany rent control. Only major repairs are made. Tenants with dripping faucets may never get a response from landlords, and have to fix it themselves. At a minimum, they will have to wait, maybe until the drip becomes something larger and so has an effect on the landlord’s water bill.
Vested interests will fight any attempt at rolling back rent control, and these vested interests become powerful over time. It’s especially difficult to eliminate rent controls because tenants (people who already have an apartment) don’t care much about the shortage—they do not have to find a new apartment every week. In contrast, buyers of gasoline have to deal with the shortage every time they need a fillup so it may be easier to get rid of price controls on oil than on apartments.
Chapter 5-3
Price ceilings cause shortages. Universal price controls cause shortages across the economy, with no obvious pattern. Sometimes one product is in abundance, at other times there are shortages. A rational response when there are products that face inexplicable shortages is to buy as much as possible when possible: buy as much toilet paper now because who knows when it will come available again? In other words, hoarding is a standard response to universal price controls. Hoarding is wasteful because it implies a misallocation of resources. Some people, for reasons of luck (or influence), may have a lot of toilet paper while others have none. If trade were allowed, people would experience gains from trade and products would gravitate to their highest-value uses.
B-4
The Soviet Union also faced surpluses of goods as well as shortages because under universal price controls there was no incentive to get products to the places at the times that they had the highest-value uses. As a result, goods would be misallocated and production and consumption would be chaotic. One week a farm might get enough oil to deliver its chickens to the city and in that week the city shops would get a lot of chickens as the farm dumped its accumulated stock. A few weeks later there might be no oil available and chickens would disappear from the shops.
Chapter 5-4
A price floor set above the equilibrium price leads to surpluses. Because the European Union price floor for butter is above the equilibrium price, the EU has created a surplus of butter, which the government must buy. The surplus has been so large that it has been called a butter mountain.
The U.S. price floor for milk, set above the equilibrium price, has led to a surplus of milk. The government has dealt with the surplus by buying the surplus and giving away milk and dairy products produced from milk (such as cheese) to schools. This accounts for the low or zero price you paid for milk at most schools.
Chapter 6-1
The purchase of wheat flour used to make bread is the purchase of an intermediate good. Thus, it is not counted in GDP: Only final goods are counted in GDP.
Pokemon cards were counted in GDP when they were first produced. Selling used Pokemon cards on eBay does not contribute to GDP.
Because the worker from Colombia earns his money in New York, this is considered part of the GDP of the United States, not Colombia. GDP counts what is produced within a country, whether by its citizens or others.
Chapter 6-2
The growth rate is found by subtracting $5,803 billion from $5,995 billion, and then dividing that number by $5,803 billion:
($5,995 - $5,803)·$5,803 = $192·$5,803 = 0.033, or 3.3%
Chapter 6-3
China has a high GDP but a low GDP per capita.
B-5
Of the top 10 countries ranked by GDP in Table 6.1, the United Kingdom, France, and Italy have GDP under $2.5 trillion but have considerable GDP per capita.
We convert nominal variables into real variables to account for price changes so that we can make comparisons over time.
Chapter 6-4
Business fluctuations are the short-run movements in real GDP around its long-term trend.
It is sometimes difficult to determine if an economy is in a recession because of simple data problems: It takes time to collect data, then the conclusions drawn from the data may be revised once additional data become available after additional time has passed.
Chapter 6-5
Consumption (C) is the largest component of national expenditure, averaging 62.9%.
Consumption expenditures are more stable than investment expenditures. It’s usually easier to delay investment than consumption so consumption normally varies only slightly, but investment expenditure can vary dramatically, especially in an economic downturn, as businesses hold off on investment. For these reasons, the part of consumption that is most volatile is consumption of durable goods such as cars and major appliances, because the purchase of these goods can usually be easily delayed.
The income approach is the flip side of the spending approach: Every dollar that someone earns in income is a dollar of income that someone else has spent.
Chapter 6-6
GDP measures things for which market values can be obtained. It does not measure things such as illegal activities or clean air because it is difficult to determine their market values.
Two countries that have the same level of GDP per capita do not necessarily have the same level of inequality. Let’s take Country A and Country B, each of which has only two citizens. Country A’s citizens earn $999 and $1, respectively, with GDP per capita of $500. Country B’s citizens earn $500 and $500, respectively, with GDP per capita of $500 also. Note that the two countries have the same GDP per capita but they have different levels of inequality.
Because they do not account for everything, GDP statistics are not perfect. Nevertheless, they are useful in giving a good sense of how the value of what a nation produces changes over time.
Chapter 7-1
According to Figure 7.2, approximately 30% of the world’s population lived in China in 2011.
B-6
Using the rule of 70, if you make 5% on your savings, it will take 70/5 or 14 years for your savings to double. At 8%, it will take 70/8 or a little under 9 years to double.
According to Figure 7.4, Japan’s real GDP per capita crossed the $10,000 barrier around 1970 and the $20,000 barrier around 1990. Using the rule of 70, we know that it took 20 years to double, or 70/x = 20. Therefore, the growth rate was approximately 3.5% per year over this time span.
Chapter 7-2
The United States has much more physical capital—tools, machines, equipment—than China, but China has more than Nigeria.
Physical capital, human capital, and technological knowledge are the three primary factors of production.
Chapter 7-3
Five institutions that promote economic growth are property rights, honest government, political stability, a dependable legal system, and competitive and open markets.
The Wars of the Roses were a time of civil war. Economic growth tends to decline during such times. Throughout Henry VII’s unchallenged reign, economic growth picked up dramatically.
Under a system of collective farming where corn production was shared, increased individual effort would bring very little reward to the individual. Because individual incentives were poor, you would expect limited corn production, maybe even starvation.
Chapter 8-1
In Figure 8.6, when the capital stock is 400, depreciation is higher than investment.
When capital is 400, investment is 6 units.
When capital is 400, depreciation is 8 units.
When depreciation is greater than investment, the capital stock shrinks.
Chapter 8-2
As more capital is added, the marginal product of capital declines.
Capital depreciates because machines wear out over time and have to be replaced, roads wear out and need to be repaired or replaced, bridges wear out. As the capital stock increases, the total amount of capital depreciation increases.
Chapter 8-3
At the steady-state level of capital, investment and depreciation are equal.
B-7
In Figure 8.7, output is 15 units available to be consumed in the old steady state, and 20 units in the new steady state.
The farther they are below their steady-state level, the more quickly countries can grow.
Countries with higher investment rates have higher GDP per capita.
Chapter 8-4
High tax rates on imports would reduce trade and thus lower the incentive to produce new ideas.
Spillovers occur when ideas benefit other consumers and firms, besides the creator of the idea. If the creator of an idea cannot get the full benefit of the idea, this will reduce the incentive to generate new ideas.
The economic reason to support a prize for malaria research rather than cancer research is that the incentive to produce cancer drugs is already high because of a large and wealthy market. Malaria tends to be located in poorer countries where people have a lower ability to pay for drugs and thus the incentive to develop new drugs is lower.