Economics Answer Note #11

Question 1 An irrigation system is installed on a farm in Idaho. This is an example of which factor of production? A) physical capital B) human capital C) land D) labor Answer The installation of an irrigation system on a farm in Idaho is an example of physical capital as a factor of production. Physical capital, also known as capital goods, refers to the tangible assets used in production and includes items such as machinery, tools, and equipment. These physical assets are used to produce goods and services and are essential in increasing productivity and efficiency. This can be further supported by the theory of production, which identifies three main factors of production: land, labor, and capital. Land refers to natural resources such as land itself, water, and mineral deposits. Labor is the human effort and skills involved in the production process. On the other hand, capital refers to the assets used to produce the final goods and services. The installation of an irrigation system on the farm in Idaho would require the use of equipment and machinery, such as pipes, pumps, and sprinklers, which are considered physical capital assets. This system would improve the efficiency of water usage and increase the productivity of the land, making it a crucial factor of production in the farming process. In addition, the use of physical capital in agriculture has been proven to have a positive impact on agricultural productivity. According to a study by the Food and Agriculture Organization (FAO), investment in agricultural machinery and equipment has resulted in significant productivity gains in various developing countries (FAO, 2017). Moreover, the installation of an irrigation system can also be seen as a form of technological advancement and innovation, which is a crucial aspect of human capital. Human capital, the knowledge, skills, and abilities of individuals, is also considered a factor of production as it contributes to the efficiency and productivity of the other factors. With the advancement of technology in the agricultural sector, there has been a significant increase in productivity, making human capital an essential factor in economic growth (Asare, 2016). In summary, the installation of an irrigation system on a farm in Idaho is an example of physical capital, which is an essential factor of production in the production process. Its use has been proven to increase efficiency and productivity, ultimately contributing to economic growth. Additionally, the advancement of technology in agriculture highlights the importance of human capital in the production process. Question 2 Real GDP per Capita, Year 1 is 50,000, the Population for Year 1 and Year 2 300 million, the inflation rate is 2 percent, the Growth Rate of real GDP year 1 to year 2 is 9 Percent. Answer According to the given information, the real GDP per capita and population for Year 1 are 50,000 and 300 million, respectively. Additionally, the inflation rate is 2 percent and the growth rate of real GDP from Year 1 to Year 2 is 9 percent. In order to accurately understand and analyze this scenario, it is important to first define and understand the concepts of real GDP, GDP per capita, inflation rate, and growth rate. Real GDP, or gross domestic product, is a measure of the total economic output of a country, adjusted for inflation. This means that real GDP takes into account the changes in the overall price level, allowing for an accurate comparison of economic growth over time. On the other hand, GDP per capita is a measure of the average economic output per person in a country, providing insight into the standard of living of the population. Inflation rate refers to the general increase in prices of goods and services over time, reducing the purchasing power of a currency. This is typically measured using the consumer price index (CPI), which tracks the change in prices of a basket of goods and services commonly purchased by households. In contrast, growth rate represents the rate at which the economy is growing, and is typically measured by the percentage change in real GDP over time. Based on the given information, we can calculate the real GDP for Year 2 using the growth rate of 9 percent as follows: Real GDP Year 2 = Real GDP Year 1 x (1 + Growth Rate) = $50,000 x (1 + 0.09) = $54,500 We can also calculate the inflation-adjusted GDP per capita for Year 1 and Year 2 as follows: Real GDP per capita Year 1 = Real GDP Year 1 / Population Year 1 = $50,000 / 300 million = $0.1667 million or $166,700 Real GDP per capita Year 2 = Real GDP Year 2 / Population Year 2 = $54,500 / 300 million = $0.1817 million or $181,700 Furthermore, to determine the nominal GDP per capita for Year 1 and Year 2, we can use the inflation rate to adjust the real GDP per capita as follows: Nominal GDP per capita Year 1 = Real GDP per capita Year 1 x (1 + Inflation Rate) = $166,700 x (1 + 0.02) = $170,034 Nominal GDP per capita Year 2 = Real GDP per capita Year 2 x (1 + Inflation Rate) = $181,700 x (1 + 0.02) = $185,334 Question 3 A farmer has 100 acres of land on which he can grow soybeans or corn. An acre of land yields 200 bushels of soybeans or 100 bushels of corn. The above figure refers to the farmer's? A) substitution options curve. B) opportunity cost curve. C) demand curve. D) production possibilities curve. Answer The farmer's situation can be represented on a production possibilities curve, also known as a production possibilities frontier. This curve shows the maximum combination of soybeans and corn that can be produced with the given resources. In this case, it is 100 acres of land. A) Substitution options curve is not the correct term for this situation as it refers to the relationship between two goods and the ability to substitute one for the other. B) Opportunity cost is the value of the next best alternative that must be given up in order to produce more of a certain good. In this case, the opportunity cost of producing soybeans is the amount of corn that could have been produced instead. This can be illustrated graphically by the slope of the production possibilities curve. C) Demand curve is not relevant in this context as it represents the relationship between price and quantity demanded by consumers. D) Production possibilities curve is the correct term for this scenario as it shows the different combinations of soybeans and corn that can be produced with the given resources. In order to determine the most efficient use of the farmer's land, we can calculate the opportunity cost of producing each crop. The opportunity cost is calculated by dividing the amount of one good given up by the amount of the other good gained. For example, the opportunity cost of producing 1 bushel of soybeans is 1/2 acre of land (100 acres/200 bushels), while the opportunity cost of producing 1 bushel of corn is 2 acres of land (100 acres/50 bushels). This shows that the farmer has a comparative advantage in producing soybeans, as the opportunity cost is lower compared to corn. It is also important to consider the market demand for each crop in order to make a decision on what to produce. According to the United States Department of Agriculture (USDA), the average market price for soybeans in 2020 was $8.48 per bushel, while the average market price for corn was $3.56 per bushel. This shows that the demand for soybeans is higher, making it a more profitable choice for the farmer. In conclusion, the above figure refers to the farmer's production possibilities curve as it shows the different combinations of soybeans and corn that can be produced with the given resources and reflects the opportunity cost of producing each crop. However, it is also important to consider market demand and prices when making a decision. Question 4 Real GDP per Capita, Year 1 is 50,000, the Population for Year 1 and Year 2 300 million, the inflation rate is 2 percent, the Growth Rate of real GDP year 1 to year 2 is 9 Percent. 1. What is real GDP per capita in year 2 Answer According to the given information, real GDP per capita in Year 1 is $50,000 and the population for both Year 1 and Year 2 is 300 million people. The inflation rate is 2 percent and the growth rate of real GDP from Year 1 to Year 2 is 9 percent. To calculate the real GDP per capita in Year 2, we need to first calculate the real GDP for Year 1 and Year 2. According to the formula for real GDP, it is equal to nominal GDP divided by the GDP deflator. Since the nominal GDP is not given, we can assume it to be the same as the real GDP in Year 1 which is $50,000. The GDP deflator can be calculated using the inflation rate, which is 2 percent. GDP deflator = 100/(100+inflation rate) = 100/(100+2) = 100/102 = 0.9804 Therefore, the real GDP for Year 1 is $50,000/0.9804 = $51,029. To calculate the real GDP for Year 2, we can use the growth rate of 9 percent to find the nominal GDP and then use the GDP deflator to get the real GDP. Nominal GDP for Year 2 = Nominal GDP for Year 1 * (1+growth rate) = $50,000*(1+0.09) = $54,500. Real GDP for Year 2 = $54,500/0.9804 = $55,586. Now, to find the real GDP per capita in Year 2, we simply divide the real GDP by the population. Real GDP per capita in Year 2 = $55,586/300 million = $184.62. In conclusion, the real GDP per capita in Year 2 is $184.62. Question 5 Under a pure price system, the decision of resource allocation is made by? A) the head of the government. B) those who have the right to vote in government elections. C) individuals who own the resources. D) no one. Answer Under a pure price system, also known as a market system, the decision of resource allocation is primarily made by individuals who own the resources. These individuals, also known as resource owners, have the right to sell or allocate their resources to the highest bidder, based on the market demand and supply forces. This means that the price of a good or service will adjust based on its scarcity and demand, which in turn influences the allocation of resources in a market economy.