Whenever anyone claims that a person or a government should spend money on something, an economist always thinks of what else could have been bought with the money and thus the opportunity costs.
Whenever anyone claims that a person or a government should spend money on something, an economist always thinks of what else could have been bought with the money and thus the opportunity costs. Opportunity costs are the benefits that one could have gotten with the resources spent on something, so the ‘best’ thing one did not buy. If the opportunity cost is higher than the value of what is bought with the resources, an economist advocates to buy the thing with higher value.
In this exercise, I would like you to write a story about a bad choice you have seen made in an organization, like a firm or a government department. If you don’t want to talk about your own organization, take an example from an organization you know about or have heard about (it can be an example from another country). You have to describe a real-life situation that you know about of big expenditures in an organization where a lot of money was spent on one thing whilst, given the information available at that time, something else was clearly a better purchase for that organization . Describe the choice made and the better alternative.
Then analyse why the inferior choice was made. Why did the organization not recognize that the choice made was a bad one (given the information at that time?
Then give practical suggestions for the organization in the future can avoid making similar mistakes. Be clear as to why you think your suggestion would work to avoid mistakes and not cause other mistakes.
As with all the concepts we discuss, I would like you to be able to recognize in the real world the phenomena that we discuss in class. This leads to a more systematic way of perceiving the reality.
The goal of this exercise is not to explain what an opportunity cost is; it already is explained above. Nor is the goal to google for examples of bad purchases. Rather, the goal is for you to reflect on your own experiences and memories to find examples from your own working life of the concepts discussed in class. I am hoping to read some interesting stories.
Exercise 2
Please read the lecture slides on GDP measurement
By definition, GDP = C + G + I + X – M, where C is personal consumption, G government expenditures, I investments, X exports, and M imports. In the table below, you can find an example of USA GDP in 2018 divided by its components.
What we see is that – no matter whether nominal or real GDP – it is Consumption that is the biggest % of GDP. It tells an interesting story about the American economy and society.
USA (2018) Nominal GDP Real GDP In billions USD As % of GDP In billions USD As % of GDP C 13,952 68% 12,891 70% I 3,652 18% 3,387 18% G 3,522 17% 3,177 17% X 2,531 12% 2,547 14% M 3,156 15% 3,461 19% GDP 20,501 100% 18,541 100%
Definitions. Nominal GDP 2018: computed for current prices (2018). Real GDP 2018: computed for prices from 2012 (i.e., 2012 is the base year). Source. “Gross Domestic Product, Fourth Quarter and Annual 2018 (Initial Estimate)” by the U.S. Bureau of Economic Analysis. Downloaded from: https://www.bea.gov/data/gdp/gross-domestic-product. Methodology. I downloaded the Excel file gdp4q18_ini_0 and used data from Table 3. “Gross Domestic Product: Level and Change From Preceding Period.”
Your task is to re-do this table for Saudi Arabia in 2021 or for 2020.
Try to find the most recent data. You should find data for nominal and real GDP. Compute each component of GDP as % of GDP. As in the table above, include definitions, sources, and methodology.
Then, find the GDP for Saudi Arabia in Purchasing Power Parity terms for 2020 or 2021. Be very clear about the definition you use and the source of your information.
Note. Use only the reliable sources of data: government agencies (e.g. GASTAT), World Bank, or other reputable places (there is a lot of good information at tradingeconomics.com).
Exercise 3
Please read the lecture slides on comparative advantages of the state and the market. Suppose you are the Mercedes dealer in Saudi Arabia, thus selling Mercedes cars and spare parts all over the country. Suppose you face the problem in September 2022 that the Mercedes factories in Germany have been disrupted by the high gas prices, such that they are no longer producing spare parts. So you have the problem of trying to find sources of Mercedes spare parts to sell to your own customers. If you cant supply those spare parts, the customers will start buying other cars and your revenue will suffer. Answer the following questions about this problem of reacting to a supply chain disruption.
1. Is this the kind of problem government is good at solving or the private market is better at solving? Motivate your answer by referring to the information on the lecture slides. 10 points.
2. Is the production of Mercedes spare parts itself subject to increasing returns to scale or decreasing returns to scale? Motivate your answer by referring to the information in the lecture slides on returns to scale (10 points).
3. Would it be possible for Saudi Arabia to set up its own Mercedes spare parts production factories in 12 months? Motivate why that would be possible or, realistically speaking, impossible (10 points).
4. If you were the Saudi Arabian Mercedes car seller faced with the hypothetical problem given above, what would you do when customers ask you for spare parts you can no longer receive from the Mercedes factories?
Exercise
4 In class you were taught about the policies Saudi Arabia could pursue to improve life expectancy. Please suggest a policy Saudi Arabia could implement to improve the life satisfaction of the population. Motivate your suggestion on the basis of the information about life satisfaction on the lecture slides or the World Happiness reports referred to in the reading material 4
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