Question

1. Describe the discipline of economics and the difference between macroeconomics and microeconomics.

2. If you are told that one country has a real GDP per capita of $20,000 and another country has a real GDP per capita of $40,000, explain what you know and don’t know about the differences in production and standard of living in those two countries. Make sure your answer shows that you understand exactly what real GDP per capita is!

Answer 1

1) Economics is the study of allocation of resources under scarcity. It studies the distribution of wealth as well as it's transfer between economic agent. It is also related with the production and consumption of wealth. The central theme of Economics is to study and analyse the resource utilization is justified. Then there are two branches of Economics: Microeconomics deal with smaller and individual unit such as individual markets and industries. This also includes consumption and production behavior of household and firms respectively. Macroeconomics studies the whole economy and the manner in which it works, including the basic concepts of unemployment inflation real GDP, etc.

2) GDP is the market value of all the final goods and services that are produced by a nation in a particular year within its national territories. Real GDP per capita is real GDP divided by population. Real GDP per capita is considered to be one of the measures of economic welfare and is used to compare standards of living of different nations. It does not however provide any insight over other social indicators such as health and education levels, sanitation, poverty, etc. Now one country has a real GDP per capita of $20,000 and another country has a real GDP per capita of $40,000, so we can infer that the country with the higher real GDP per capita should have a higher standards of living based on the estimates of real GDP per capita. However, this only provides a rough idea of how much each individual in the two countries is likely to receive as her share in the GDP and does not reflect actual contribution.