Chile Econ Final

Front 1

Reforms to what two markets have improved plant efficiency in Chile?

Back 1

financial and traded goods market

Front 2

What is the main reason for Chile's great macro performance since the 70's?

Back 2

large increase in TFP

Front 3

How much of Chile's total growth since 1980 is attributed to efficiency gains?

Back 3

90%

Front 4

5 major reforms in Chile in the 70's and 80's

Back 4

public firms privatized
trade impediments lifted
labor markets made flexible
financial system liberalized
individual ss accounts created

Front 5

4 elements of productivity growth

Back 5

within-plant effect
reallocation effect
entry effect
exit effect

Front 6

After one period, how productive is a new plant, relative to incumbents?

Back 6

productivity is statistically equal to that of an incumbent

Front 7

3 ways trade liberalization enhances plant and aggregate productivity

Back 7

1. exposure to foreign competition forces increased efficiency
2. domestic & foreign mkt entry costs force least efficient plants to exit
3. access to foreign technology and reduced cost of foreign intermediate and capital goods

Front 8

who experienced the largest gains from credit market deepening?

Back 8

firms that were credit constrained

Front 9

What is the purpose of behavioral economics?

Back 9

tries to increase the explanatory power of economics by providing it with more realistic psychological foundations

Front 10

3 bases for evaluating behavioral economics

Back 10

1. congruence
2. generality
3. tractability

Front 11

Congruence with reality

Back 11

theories are better descriptions of reality

Front 12

Generality

Back 12

making sure behavioral economic modifications of existing theories are still widely applicable

Front 13

Tractability

Back 13

able to make accurate predictions

Front 14

Recipe for behavioral economics research - 4 steps

Back 14

1. identify normative assumptions or models
2. identify anomalies
3. use anomalies as inspiration to create alternative theories
4. construct economic models of behavior using step 3, derive fresh implications, and test them

Front 15

2 differences between behavioral and traditional economic experimentation

Back 15

context & stationary replication

Front 16

Context - behavioral vs. traditional

Back 16

in behavioral, context/environment is relevant to performance - ignored in traditional

Front 17

Stationary replication

Back 17

repeated performance of the same task

Front 18

Stationary replication - behavioral vs. traditional

Back 18

is used in traditional; in behavioral, subject's performance in first trial may be most relevant (ex: people only buy a few houses/cars in their lifetime)

Front 19

5 basic concepts of probability judgment

Back 19

1. primacy and recency
2. availability heuristic
3. hindsight bias
4. representativeness
5. confirmation bias

Front 20

Primacy and recency

Back 20

info received most recently (or longest ago) may be weighted more heavily when estimating probability

Front 21

Availability heuristic

Back 21

the easier it is for us to imagine an event occurring, the more bias we have in estimating it as probable

Front 22

Hindsight bias

Back 22

when something has already happened, we judge it as more likely to happen

Front 23

Representativeness

Back 23

misjudging probability by assuming a given sample is a representative one

Front 24

Law of small numbers

Back 24

incorrect assumption that a small sample will reflect characteristics of a large one

Front 25

Confirmation bias

Back 25

people who believe A to be more likely than B will misread data to support A over B

Front 26

Framing effects

Back 26

answer depends on how the question is asked

Front 27

Anchoring effect

Back 27

when a random number is mentioned, people will believe it is relevant

Front 28

Preference reversals

Back 28

people show different preferences for A vs. B in different situations

Front 29

Context effects

Back 29

the context affects preference for options in a set over others in the same set (ex: if 3 price options are provided, the one in the middle will elicit more choices)

Front 30

Endowment effect

Back 30

people are attached to what they already have

Front 31

Loss aversion

Back 31

people feel worse about losing $5 than they do about gaining $5

Front 32

Exception to loss aversion rule

Back 32

professional traders exhibit less attachment to goods

Front 33

Counteracting loss aversion

Back 33

some Wall St. firms have traders switch portfolios to mitigate attachment to portfolios and endowment effect

Front 34

Cumulative prospect theory

Back 34

when considering a set of prospects, a person tends to misjudge their likelihood of occurring based on how they rank the prospects

Front 35

2 theories regarding preferences over risky and uncertain outcomes

Back 35

cumulative prospect theory
distaste for uncertainty

Front 36

Time discounting

Back 36

how agents trade of costs & benefits at a different point in time

Front 37

Immediacy effect

Back 37

dramatic discounting when one delays immediate consumption

Front 38

What happens to discount rates with duration?

Back 38

Discount rates fall with duration

Front 39

Hyperbolic time discounting

Back 39

implies that people will make relatively far-sighted decisions when planning in advance (when all costs & benefits will occur in the future), but will make short sighted decisions when costs and benefits are immediate

Front 40

Reason for quasi-hyperbolic time discounting

Back 40

accounts for the immediacy effect - because people lack self control

Front 41

Effect of asset liquidity in time discounting

Back 41

Less liquid assets can serve as a commitment device; people tend to overconsume when they have cash/liquid assets

Front 42

Naivete

Back 42

agents are often unaware of their own over-consumption; simple awareness of self control can moderate behavioral consequences of quasi-hyper modeling

Front 43

Positive time discounting

Back 43

explains how people derive utility (positive and negative) from anticipation of future consumption

Front 44

Ultimatum game

Back 44

exhibits how people may choose to spend their own wealth to punish others who have harmed them, reward those who have helped, or make outcomes more fair; person is given $10 and told to split it with another - responder often rejects offer to punish proposer

Front 45

Trust game

Back 45

shows that people are willing to reward those that help them

Front 46

Behavioral game theory

Back 46

social preferences for allocations of money

Front 47

Life-cycle model of savings (permanent income hypothesis)

Back 47

assumes people make a guess about their lifetime earnings profile, and then plan savings and consumption to smooth consumption across their lives

Front 48

Behavioral Life Cycle Theory of Savings

Back 48

different sources of income are kept track of in different accounts; mental accounts reflect cognitive divisions

Front 49

Money illusion

Back 49

tendency to make decisions based on nominal quantities rather than converting those figures into "real" terms by adjusting for inflation

Front 50

Central puzzle in macro

Back 50

Why are some people involuntarily unemployed? Are wages too high, creating an excess supply of workers? Why are wages too high?

Front 51

Efficiency wage theory

Back 51

paying workers more than they deserve is necessary to ensure they have something to lose if fired

Front 52

Standard life cycle theory

Back 52

assumes that, if people can borrow, they should prefer work profiles that maximize the present value of their lifetime wages; workers should intertemporarily substitute labor and leisure based on the wage rate they face and the value they place on leisure at different points in time

Front 53

Ex. of how price changes can have opposite of intended effects

Back 53

Daycare that charged for picking up kids late - and all parents started picking up late

Front 54

What do behavioral finance theories explore?

Back 54

the hypothesis that some investors have limited rationality

Front 55

Equity premium puzzle

Back 55

average returns on stocks are higher than those on bonds to compensate for risk

Front 56

Two reasons risk in stocks vs. bonds must be compensated

Back 56

1. decision isolation
2. aversion to losses

Front 57

Efficient markets hypothesis

Back 57

primary belief until recently - investors are too rational to ignore observed historical patterns

Front 58

2 new studies taking behavioral economics in a different direction

Back 58

1. case-based decision theory
2. study of emotion

Front 59

Case-based decision theory

Back 59

treats choice situation as case bearing similarity to previous cases; actions in current case evaluated by sum or avg. of outcomes of the same action in previous cases, weighted by the similarity of those previous cases to the current one

Front 60

Study of emotion

Back 60

people with minor emotional impairments have trouble making decisions; at times, what has been rationalized as a thoughtful decision was actually driven by emotion

Front 61

Hedonics

Back 61

expands the notion of utility

Front 62

4 types of utility

Back 62

1. decision utility
2. remembered utility
3. instant utility
4. forecasted utility

Front 63

Decision utility

Back 63

neoclassical view - utility is simply a number that codifies an expressed preference

Front 64

Remembered utility

Back 64

people have memories of which goods or activities they enjoyed most

Front 65

Instant utility

Back 65

immediate momentary senses of pleasure and pain

Front 66

Forecasted utility

Back 66

guesses about what future utilities will be like

Front 67

Influence costs

Back 67

costs managers incur lobbying for projects they like or personally benefit from; reason markets are better at making dramatic changes than managers

Front 68

Traditional economic view of the agent

Back 68

agent of economic theory is rational and selfish; his tastes do not change

Front 69

Behavioral economic view of agent's selfishness

Back 69

people have motives besides pure profit; people show preferential treatment for a person with a less attractive deal over a better deal with a person they dislike; our behavior changes because we are forced to interact with people, and we care about being treated fairly

Front 70

Behavioral economic view of agent's rationality

Back 70

rational behavior = maximizing utility; BUT bounded rationality and satisficing affect rational behavior

Front 71

Behavioral economic view of agent's unchanging tastes

Back 71

we hate losing more than we hate gaining - which will affect our tastes/satisfaction; we often neglect opportunity costs; loss aversion

Front 72

Bounded rationality

Back 72

the replacement of of utility maximization with satisficing

Front 73

Two systems of cognition

Back 73

Reasoning and intuition

Front 74

Why is Latin America growing at a slower pace than the rest of the world?

Back 74

Low productivity - especially in the "lost decade" of the 80's

Front 75

What is Latin America's main challenge?

Back 75

How to sustain their growth long-term to lift income levels and bring people out of poverty

Front 76

6 positive factors in Latin America's growth

Back 76

1. growth of China has spread to LA (due to China's need for commodities)
2. LA exports have tripled as % of GDP since 60's
3. Current account balances in the positive
4. Increasing commodity prices & higher corp tax income for govt.
5. External debt slashed
6. Inflation slashed to less than 5%

Front 77

3 Structural Factors for Global Competitiveness

Back 77

1. macroeconomic stability
2. quality institutions (political/regulatory)
3. innovation/technology
(Chile has all 3, but most LA countries lack)

Front 78

How bad is income distribution in Latin America, relative to other parts of the world?

Back 78

Only Africa has worse income distribution

Front 79

Is progress being made in Latin America with regards to poverty and income distribution?

Back 79

Poverty reduction is happening, but reduction in income disparity is not

Front 80

Best and worse income distribution in Latin America

Back 80

Best: Uruguay
Worst: Bolivia

Front 81

Best and worst Latin American poverty level

Back 81

Best: Chile
Worst: Honduras

Front 82

5 reasons natural resource abundance can actually hurt growth

Back 82

1. creates strong currency, which inhibits development of manufacturing sector
2. creates corruption & rent seeking
3. higher macro volatility around commodity prices, which leads to lower economic growth
4. strong exchange rate that deteriorates over time as resources are depleted-leads to depreciation of the economy and falling real wage rates
5. negative effect on demand for capital, which diminishes the real interest rate & national savings

Front 83

What must Latin American countries do to counteract the negative effects of resource abundance?

Back 83

1. must diversify exports to reduce volatility that comes from relying on a handful of commodities
2. must institute sound policies

Front 84

Primary reason for investment boom in Chile

Back 84

reduction in corporate taxes; higher corporate taxes decrease investment

Front 85

Fiscal policy to manage macroeconomic volatility

Back 85

want slow and steady growth; use fiscal policy to save in good times and spend in bad; Chile does this - saving must be 1% of GDP

Front 86

Why is innovation lacking in Latin America?

Back 86

lots of bureaucratic red tape to open or close a business; tough for entrepreneur to exit a venture quickly and start a new one - innovation stifled

Front 87

3 effects of low levels of innovation in Latin America

Back 87

1. negative impact on GDP - there is a positive correlation between R&D & GDP
2. fewer products & less differentiation
3. new, higher quality products aren't created, so old low quality ones survive; productivity growth stifled

Front 88

3 ways education helps economic growth

Back 88

1. increased productivity
2. innovation
3. ability of people to understand new info

Front 89

7 challenges in Latin American economy

Back 89

1. low productivity
2. low innovation
3. high poverty; poor income distribution
4. natural resource dependence-corruption & rent seeking
5. inflexible labor markets
6. bureaucracy
7. lacking education (and not investing in it)

Front 90

What is the most important factor moving forward, in order to drive long term growth in Latin America?

Back 90

good economic policies - (interest rates, govt. expenditure, property rights, etc.)

Front 91

Why is per capita income in Chile 1/3 of that in the US?

Back 91

TFP

Front 92

TFP formula

Back 92

Y=f(K, L, TFP) TFP=A

Front 93

Why is Y higher in rich countries?

Back 93

TFP; poor countries actually work harder (L) and invest more (K)

Front 94

Whose education level most strongly influences children's education success?

Back 94

Mother's

Front 95

What is the goal of economics?

Back 95

maximize social welfare or happiness

Front 96

Happiness is a function of

Back 96

consumption

Front 97

Consumption is a function of

Back 97

income

Front 98

4 pillars of macro and financial resilience

Back 98

1. monetary policy
2. fiscal policy
3. solid financial system
4. increased trade openness

Front 99

monetary policy in Chile

Back 99

controlled by central bank with inflation targeting and floating exchange rate; transparency

Front 100

Fiscal policy in Chile

Back 100

guarantees public sector solvency; smooths spending out of copper income

Front 101

Financial system in Chile

Back 101

solid, with competitive and well-capitalized banks appropriately regulated and supervised

Front 102

What does increased trade openness allow for?

Back 102

import and export market diversification

Front 103

Who controls the creation of money in Chile?

Back 103

central bank

Front 104

Why was inflation so high in Chile, in the past?

Back 104

government created money without proper backing

Front 105

Aggregate Demand formula

Back 105

AD = C + I + G + (X+M)

Front 106

C+I (policy)

Back 106

monetary policy; when interest rates fall, we are trying to encourage consumption

Front 107

G (policy)

Back 107

fiscal policy; aimed at creating action - spurring spending, hiring etc;

Front 108

What is the problem with a significant increase in G?

Back 108

how do we finance it? what are the long term effects?

Front 109

If we fund G with an increase in taxes, what is the result?

Back 109

C is reduced; C has a bigger impact on AD than G

Front 110

Why do poorer countries suffer more after an economic shock?

Back 110

wealthy countries pull out money, reducing poor countries' exports; falling exports cause interest rates to increase, causing consumption to fall, and thus, economic development

Front 111

Negative inflation

Back 111

can be a problem when banks lend in nominal terms bc debt can be repaid at lower value than amt. originally borrowed

Front 112

Stable inflation

Back 112

economies can invest in infrastructure and growth

Front 113

Issues with inflation

Back 113

uncertainty increases, future decisions made more expensive, difficult to get long term contracts

Front 114

What is needed to aid poverty in the short term?

Back 114

social policy

Front 115

What is needed to eradicate poverty in the long term?

Back 115

development and growth

Front 116

Where is Chile investing vs. the US?

Back 116

Chile - basic research and sciences (60/20)
US - companies and innovation (50/10)

Front 117

Why do we need micro instability?

Back 117

only countries that allow flexibility at the micro level are successful in achieving productivity gains

Front 118

5 sources of growth in exports

Back 118

1. growth in existing export firms
2. growth in avg. size of entrants with respect to exiters
3. more firms entering than exiting
4. increasing sales of exports
5. higher sales of entrants

Front 119

Primary source of production reallocation in Chile

Back 119

entry of new, more productive firms

Front 120

What is the key to generating conditions to promote aggregate growth?

Back 120

exposing firms to best practices

Front 121

2 potential sources of productivity gains

Back 121

1. within-plant efficiency gains (due to exposure to better production methods)
2. reallocation of resources (due to creative destruction)

Front 122

Why is reallocation critical for growth in Chile?

Back 122

productivity (TFP) heterogeneity at a micro level

Front 123

What is the implication of positive mean productivity growth?

Back 123

industries grew faster than inputs

Front 124

What happens as flexibility increases?

Back 124

more heterogeneous firms, increase in process experimentation as greater access to credit and lower cost of failure

Front 125

What happens to TFP after plants begin to export?

Back 125

increases

Front 126

How can incumbents contribute most to productivity growth?

Back 126

if they become more efficient, or if more efficient plants increase their market share

Front 127

How can new plants entering the market contribute most to productivity growth?

Back 127

if their productivity is higher than initial industry average

Front 128

How can plants exiting the market contribute most to productivity growth?

Back 128

if their productivity is lower than initial industry average

Front 129

Why did the crisis of the 80's have a lower impact in Chile's manufacturing sector?

Back 129

reallocation - causing TFP to actually increase

Front 130

What happened to overall TFP in Chile in the 80's, and why?

Back 130

declined due to negative within-plant productivity growth
the opposite is true for the 90's