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52 Cards in this Set
- Front
- Back
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Standards of Living (or Income per person) among countries vary... |
Tremendously |
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Over time the standard of living changes. This proves.... |
Poorer countries do not have to stay poorer, and richer countries have no guarantee they will stay richer. |
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Why do some countries grow quickly while others seem stuck in poverty? |
Think about Productivity |
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Productivity |
The average quantity of goods and services produced per hour of a worker's time. Let Y = Real GDP = Quantity of Output produced. Let L = quantity of labor. Let Y/L = Productivity (output per worker) |
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Physical Capital Per Worker (K) |
The stock of machinery, equipment and structures used to produce goods and services. K/L = Capital per worker. Productivity is higher when the average worker has more (physical Capital) |
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Human Capital Per Worker (H) |
The knowledge and skills workers acquire through education, training, and experience. H/L = Human Capital Per Worker. Productivity is higher when the average worker has more human capital. An increase in H/L causes an increase in Y/L |
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Natural Resources Per Worker (N) |
The inputs into production that nature provides such as minerals and petroleum (non-renewable), forests (renewable). N/L = Natural resources per worker. Productivity is higher when the average worker has more natural resources. |
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Technological Knowledge |
Society's understanding of the best ways to produce goods and services. Technological progress does not mean only a faster computer, a higher-definition TV, or a smaller cell phone. |
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Technological Knowledge refers to... |
Society's understanding of how best to produce goods and services. |
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Human Capital results from... |
The effort people expend to acquire knowledge. |
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The relationship (table, graph or equation) between inputs and output (The Production Function)... |
Y = AF(L,K,H,N) |
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Function that shows how inputs are combined to produce output... |
F(L,K,H,N). Output (or real GDP) depends on labor, capital, etc. |
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"A" is... |
The level of technology. SO "A" multiplies F(L,K,H,N), so improvements in technology (increases in A) allows more output (Y) to be produced from any given combination of inputs. |
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The production function has the property of... |
Constant returns to scale; changing all inputs by the same amount causes output to change by that amount. Doubling all inputs (multiplying each by 2) causes output to double. |
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How can we boost productivity by increasing K? |
It requires investment |
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Since resources are scarce, producing more capital requires... |
Producing fewer consumption goods. |
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Faster growth in K (causing productivity and living standards to rise) causes.... |
Diminishing returns to capital |
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Foreign Direct Investment |
A capital investment (e.g., a factory) that is owned and operated by a foreign entity |
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Foreign Portfolio Investment |
A capital investment (e.g., a factory) financed with foreign money (e.g., through a share purchase), but operated by domestic residents |
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Some of the returns from these investment (e.g., profits; dividends) flow back to.... |
the foreign countries that supplied them. |
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Why can foreign investment be beneficial for poorer countries? |
It stimulates growth, and it removes the restrictions on foreign ownership of domestic capital is a policy that is often advocated by economists. It also helps poorer countries learn state-of-the-art technologies developed and used in richer countries. |
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How is health care expenditure another type of investment in human capital? |
Because healthier workers are more productive |
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Inward-Oriented policies (e.g., tariffs, limits on investment from abroad) |
Aim to raise living standards by avoiding interaction with other countries |
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Outward-oriented policies (e.g., the elimination of restrictions on trade or foreign investment) |
Promotes integration within the world economy |
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Technological Progress is... |
The main reason why living standards rise over the long run. |
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Knowledge is a public good, it benefits productivity because... |
Ideas can be shared freely, increasing the productivity of many. |
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Policies to promote technological progress include... |
* Patent Laws * Tax incentives or direct support for private sector R&D * Grants for basic research at universities |
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Population Growth may affect living standards in 3 different ways |
1. Stretching Natural Resources. 2. Diluting the Capital Stock 3. Promoting technological progress |
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Diluting the Capital Stock |
A bigger population leads to higher L, lower K/L, Lower productivity and living standards. This applies to H as well as K. Fast population growth leads to more children, greater strain on educational system. Countries with fast population growth tend to have lower educational attainment. |
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To combat fast population growth, many developing countries use policies to control population growth such as... |
* China's one child per family laws * Contraception education and availability * Promoting female literacy to raise the opportunity cost of having babies |
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Promoting Technological Progress (Population growth benefits) |
More people leads to more scientists, inventors, engineers, more frequent discoveries, faster technological progress and economic growth. |
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The Financial System |
The group of institutions that helps match the saving of one person with the investment of another |
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Financial Markets |
Institutions through which savers can provide funds directly to borrowers. |
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The Bond Market |
Debt Finance |
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The Stock Market |
Equity Finance or Shares |
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Financial Intermediaries |
Institutions through which savers can indirectly provide funds to borrowers |
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Three Different Kinds of Saving |
1. Private Saving 2. Public Saving 3. National Saving |
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Private Saving |
The portion of households' income that is not used for consumption or paying taxes. Y-C-T or (Y-T) - C. Where Y-T is disposable income |
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Public Saving |
Tax revenue (total minus transfers) minus government spending. T - G |
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National Saving |
Private Saving + Public Saving. (Y - C - T) + (T - G). Y - C - G. The portion of national income that is not used for consumption or government purchases. |
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The national income accounting identity for a closed economy is... |
Y = C+I+G |
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Budget Surplus |
An excess of tax revenue over government spending.
= T - G
= Public Saving |
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Budget Deficit |
A shortfall of tax revenue from government spending.
= G - T
= - (T - G) = - (Public Saving). |
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Since a budget deficit is simply a negative budget surplus, we will use only the latter notation in what follows... |
I.e., T-G If T> G -> Budget surplus / public saving If T< G -> Budget deficit If T = G -> Balanced Budget |
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Private Saving |
The income remaining after households pay their taxes and pay for consumption. |
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Examples of what households do with saving; |
* Buy corporate bonds or equities * Purchase a certificate of deposit at the bank * Buy shares of a mutual fund * Let interest accumulate in saving or chequing accounts. |
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Investment |
The purchase of new capital |
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Examples of (physical) investment; |
* Dofasco spends $250 million to produce a new line of steel products in Hamilton * You buy $5000 worth of computer equipment for your business * Your parents spend $400,000 to have a new house built. |
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In economics, investment is NOT... |
The purchase of stocks and bonds. |
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Financial Markets help... |
Allocate the economy's scarce resources to their most efficient uses |
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Like many other markets, financial markets are governed by... |
The forces of supply and demand |
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Financial markets also link the present to the future |
They enable saves to convert current income into future purchasing power. They enable borrowers to acquire capital to produce goods and services in the future. |
