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48 Cards in this Set
- Front
- Back
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What is real GDP per capita? and what does it measure?
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Real GDP divided by the population size.
It measures total value of an economy's production of final goods and services and income earned in that economy in a given year. |
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Why is GDP used to measure a country's standard of living?
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Serves a useful summary measure of a country's economic progress over time. The available GDP resources distributed over the population.
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Factors that determine a country's labor productivity (3)
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-- Physical Capital: machinery, office space. This increases labor productivity because each person can do more thanks to better technology
-- Human Capital: This increases as education and knowledge incrases. -- Technology: technical means for the production of goods and services. |
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Why does economic growth differ around the world?
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A country needs to have an increase in physical capital, human capital, and technological progress to achieve economic growth.
The differences in -- savings/investment spending -- foreign investment -- education -- infrastructure -- research and development -- political stability -- protection of property rights |
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In what regions does economic growth tend to be higher and where is it low?
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High:countries in Europe, North America, few in the Pacific.
The rest of the world has low incomes. |
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What are a country's government policies and institutions that influence its economic growth? (4)
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1) Physical Capital: building roads, power lines, ports and etc add to the infrastructure of the country. It lays the foundation for economic growth.
2) Human capital: investing in education by the government. Primary and secondary education paid by government in US 3) Technology: Government investing on gov research 4) stability: gov should provide a foundation of stability,property right, and reduce gov intervention. |
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What is Long-Run growth dependent on?
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Rising productivity
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What is the definition of labor productivity?
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Labor productivity or productivity is the output produced per worker.
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What is diminishing returns to physical capital?
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When human capital per worker and technology is fixed, each successive increase in amount of physical capital per worker leads to a smaller increase in productivity.
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Investment spending
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Spending on new physical capital
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Saving-investment spending identity
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The fact that savings = investment spending.
This is true in a simplified economy with no government spending and no trade. |
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Relationship steps in the Savings-Investment Spending Identity (Total Income)
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Total income = consumer spending + Savings
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Relationship steps in the Savings-Investment Spending Identity (Total Spending)
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Total spending = consumption spending + investment spending
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Budget Surplus
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When government collects more tax revenue than it spends
This illustrates the point that government can save in an economy also along with households |
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Budget deficit
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When government spending exceeds tax revenue.
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Budget Balance
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Factors in both tax revenue and government spending.
When a budget balance is positive, there is a surplus When a budget balance is negative, there is a deficit |
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National savings
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Private savings + Budget balance
Private savings is Disposable Income (income after taxes) - Consumption |
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Capital inflow
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International inflow - international outflow of funds. It is the money from other countries. A dollar that comes from another country is not equal to the dollar that comes from inside the country.
The dollar that comes from outside the country comes at a higher national cost. |
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Loanable funds market
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It is the hypothetical market, shows the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders.
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Interest Rate
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It is the price determined by the loanable funds market. It is the return a lender receives for allowing borrowers the use of their dollar.
The "y" axis of a "Loanable Funds Market" graph |
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Rate of Return
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Businesses calculate this to determine their profit on a given project, and to see whether the funds they borrow at a given interest rate is going to benefit them in the long run.
RateofReturn = (Revenue from project - Cost of Project)/(Cost of project) x 100 |
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Factors that shift DEMAND loanable funds market
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1) ~ in perceived business opportunities
2) ~ in government borrowing: if a government is in a budget deficit, it would borrow from the Loanable Funds Market which can drive interest rates up |
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Factors that shift SUPPLY loanable funds market
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1) ~ in private savings behavior: increase in house values make homeowners feel richer, causing them to spend more, shifting the curve to the Left
2) ~ in capital inflows: increases in capital inflow from foreign countries can increase the supply of loanable funds. |
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What is the crowding out effect?
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It is what happens when the government borrows excessively from the Loanable Funds Market, due to a Budget Deficit.
It drives up demand, driving interest rate up as well. |
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Functional relationship between real and nominal interest rate
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Real interest rate factors in the inflation rate.
Real interest = nominal interest rate - inflation rate |
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Factors that shift interest rate
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1) ~ in government policy
2) ~ in technological innovations. 3) ~ in expectations about the future inflation. |
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Fisher Effect
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An increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.
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What are the five main types of financial assets?
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1) Loans: leanding agreement between an individual lender and an indv borrower. High transaction costs
2) Bonds: It is an "IOU" from the borrower. The seller of the bond promises to pay a fixed interest, and also repay the principal by a particular rate. 3) Loan-backed securities: It is created by pooling individual loans and selling shares in that pool (secularization) 4) Stocks: Share in the ownership of a company. 5) Bank deposits |
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Wealth
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A household's value in its accumulated savings, its power to purchase financial assets
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Financial Asset
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Paper claim that entitles the buyer to future income from seller.
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Physical asset
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Claim on a tangible object, preexisiting house.
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Three tasks of a financial system
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1) Reducing transaction costs: expense of putting together and executing a deal
2)Reducing risk: makes people more comfortable engaging in borrowing and leading. This can be done by diversifying investments 3) Providing liquidity: Way for lenders to still have the power to have liquidity on some items so they're more comfortable lending the money out. |
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Marginal Propensity to Consumer (MPS)
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It is the increase in consumer spending when disposable income rises by $1
~consumer spending/~disposable income |
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Marginal Propensity to Save (MPS)
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It is the increase in household savings when disposable income rises by $1
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Autonomous change
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It is an initial change in the desired level of spending by firms, households, or government at a given level of real GDP
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Multiplier
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It is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.
1/MPS |
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Consumption function
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Equation showing how an individual household's consumer spending varies with the household's current disposable income.
c = a + MPC(yd) a is autonomous consumer spending MPC is Marginal Propensity to Consume yd is disposable income |
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Factors that cause shift in Aggregate Consumption Function
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1) ~ in expected future disposable income: buying more when you land a good job.
2) ~ in aggregate wealth: increase in house value |
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Planned Investment Spending
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The investment spending that businesses intend to undertake during a given period. Second biggest factor driving the business cycle.
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Three factors that affect Planned Investment Spending
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1) Interest Rate: Affects everything from house buying, which requires borrowing from the bank and also affects businesses looking to invest in projects.
2) Expected future level of real GDP 3) Inventories |
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Assumption underlying multiplier process
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1) ~ in overall spending, leads to change in aggregate output. The aggregate price level is fixed.
2) Interest rate is fixed. 3) Taxes, transfers, government purchases are zero 4) Exports/imports are zero, no foreign trade. |
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Financial Intermediaries
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Institution transformes funds gathered from many individuals into financial assets
1) Mutual funds: can reduce risk by holding a diversified stock portfolio. 2) Pension funds: non profit, collects savings and invests. Then when members retire, they get income from it. 3) Banks: accepts funds from depositors. |
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Inventory investment
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Value of the change in total inventories held in the economy during a given period. This can actually be negative.
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Unplanned inventory investment
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Unintended swings in inventories due to unforeseen investment spending. Represent investment spending in the positive/negative that was occurred.
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Actual investment spending
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Actual investment spending = Planned investment spending + unplanned inventory investment.
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Planned aggregate spending
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Planned Aggregate Spending = Consumer Spending
+ Planned Investment Spending. |
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Income-expenditure equilibrium
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When aggregate output (measured by real GDP) is equal to planned aggregate spending. (Y*)
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Relationship between Unplanned Investment Spending and GDP
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-- Iunplanned is negative -> GDP rises
-- Iunplanned is positive -> GDP falls changes in inventory are the leading indicator of future economic activity. |
