Consumption Quiz

1) The increase in investment spending to 50 billion dollars has a very significant positive affect on Real GDP. You find the multiplier, which is 1/1-mpc and you get that the multiplier is 5. Thus to find the affect on the real GDP of a country, you do the multiplier multiplied by the increase in investment that is added to GDP, which results in $250 billion inserted into the economy.

2)  It has a lot to do with expectations .Expectations have an affect on how much money individuals spend on goods and services in an economy. For example, if someone has money saved up with no debt and their expectations to gain wealth are positive, then they will consume more and be more willing to spend their money. However, a person who owes a lot of money and does not expect to gain a lot of wealth, than they will definitely not want to spend money on consumption.

Unexpected Inflation

Firstly, Wheelan addresses the fact that inflation hurts the lenders but it helps the debtors. If inflation occurs, when the debtor has to pay the lender back, he might still give him the same dollar amount however the value of that dollar and the purchasing power of that same amount of money has gone done due to inflation. Thus, the debtor is left better off than the lender. This creates a societal problem in the end because banks and people who lend money are not going to be willing to lend money because they don’t know what inflation is going to be, so they don’t know if they money they will receive back will have the same purchasing power. Thus, the money people would have used from the bank to promote economic growth through business as well as buy things and thus increase the GDP is no longer happening because of unexpected inflation causing people to be apprehensive about lending. 

Real GDP

In Chapter 9 of Naked Economics, Whellan discusses key macroeconomic concepts including GDP, GDP per capita and finally real GDP. To understand what real GDP means for the average person, we must first compare the real GDP of a country to the nominal GDP. Nnominal GDP could be very high,but  if inflation is high too then we arn't that much better off. However, real GDP takes into account the changes in inflation. Let us take cars for example. If in one year we are producing 20 cars at a price of 10,000 our nominal GDP is going to be 200,000. In the next year, if we produce 10,000 cars for 25,000 our nominal GDP is going to be 250,000 indicating that the people are left better off. However, Wheelan shows that this is in fact false. Although the GDP went up, we still only have 10 cars so we are not left better off. Thus, nominal GDP doesn't really show much better off the country and its citizens are. However, Real GDP does. The Real GDP is going to show us if we really do have growth, based on how much we produce taking into account inflation. So, for the average citizen, Real GDP shows us if we are actually better off then we were before, taking into account changes in price.

Black Rhino

The market for black rhinos is a unique market that differs from many other markets. The black rhinos horn is about 30 times the average income on a family in southern Africa. Thus, to many people, the black rhino is worth a lot more dead than alive. As Wheelan describes, this gives people an incentive to kill the black rhino, which has resulted in a huge problem. The black rhino's population has dramatically dropped and unlike other markets, the supply of the good is becoming very very limited. In most markets, people have the means by which they can create more supply of the good however, as is the case in the market for black rhinos, because of these poachers they are close to becoming extinct, and thus the supply is quickly running out. Even worse, as the supply dwindles, the price on the market for the black rhino increases even more, thus giving people an even greater incentives to kill them. Another aspect that is different about the black rhino market is the fact that these animals are communal property rather than private property. If they were private property, the owner would have an incentive to protect them and keep them alive because he can make more profit, but since they are public property, this is not the case.  The fact that they are public property creates a bigger problem for conservation. However, as every Economic student knows, there are ways in which incentives can be changed. One way is by haring the profits that can be made by tourism. If the people of the land would get a portion of the profit from tourists who come and take pictures of the black rhino, they would have an incentive to keep it alive.

Wheelan Markets

1. Prices allocate scarce resources in the best way.
2. A market directs resources to its most productive uses.
3. Who Feeds Paris? The idea of self interest in a market.
4. A market provides the goods we want not the goods we need.

Charles Wheelans first Chapter discusses a key idea which is answering the question Who Feeds Paris? Similar to Adam Smith's idea of an invisible hand, which is the idea that if everyone works for their own self interest, then things will get done. In our world market, there are billions of transactions that occur everyday.  Wheelan asks how a restaurant in Paris for example has the perfect amount of wish to serve the customers who want fish. As Wheelan explicates, is it in the fisherman's best interest to get the fish, and it is in the best interest of the restaurant to carry the fish. Thus, by working for self interest in a market, as Smith states, transactions occur that ultimately leave people better off. . As Wheelan discusses later in the chapter, prices are the most efficient way for a market to allocate the scare resources, which is the basic economic problem- infinite wants with finite resources. 


A market directs resources to its most productive use. Wheelan asks why Tom cruise does not sell car insurance and the answer is because his unique talents for acting better suit him and the market if he uses his precious "resources" for acting. If Tom decides to a car salesmen, he is not being productively efficient because he is not using his resources in the best possible way. As Wheelan discusses, the beauty of a market is that resources are directed to its most productive use.

Wheelan also discusses how markets in the world make our lives better. As every Economics student knows, its all about profits. Companies are either looking to make the next best new product, or to make an existing product better or cheaper. By doing this, this creates competition which fuels the market economy. By creeating this competition which generates profit for people, we have incentive to work hard and these profits as Wheelan states provides us with some of our greatest work in education, medicine etc. Also, while it may not be a good thing, markets are indeed special because they provide us not with the goods and services that we need but the goods and services that we want. Wheelan elaborates on this speaking about healthcare. Poor in America do not receive health care because they cannot afford it. While they might need it, they do not have the means to pay for it.