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70 Cards in this Set
- Front
- Back
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Business Cycle
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Alternating periods of economic expansion and economic recession
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Long run economic growth
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The process by which rising productivity increases the average standard of living
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Calculating Growth Rates and the Rule of 70
AKA Equation for Doubling |
Number of years to double = 70 / Growth Rate
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What Determines the rate of Long-Run Growth?
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Labor Productivity
Increases the Capital per hour worked. Technological Change |
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Labor Productivity
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The Quanitity of goods and services that can be produced by one worker or by one hour of work
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Capital
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Manufactured goods that are used to produce other goods and services
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Technological Change
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Growth is more dependent on this.
an increase in the quantity of output firms can produce using a given quantity of inputs. |
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Potential GDP
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The level of GDP attained when all firms are producing at capacity.
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Financial system
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The system of financial markets and financial intermediaries through which firms acquire funds from households.
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Financial Markets
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Markets where financial securities, such as stocks and bonds are bought and sold.
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financial intermediaries
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Firms, such as banks mutual funds, pension funds and insurance companies that borrow funds from savers and lend them to borrowers
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Y = C + I + G + NX
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Y is GDP, C is consumption, I is investment, G is government spending and NX is net exports.
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Mundell Fleming Model
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Y = C + I + G + NX
Used to calculate investment and savings |
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Market for loanable funds
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The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged
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Crowding out
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A decline in private expenditures as a result of an increase in government purchases.
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How would a consumption tax affect savings, investment, the interest rate and economic growth?
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Lower interest rates = lower amount of funds available for lending
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What creates an economy to be more stable?
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The increasing importance of services and the declining importance of goods
The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed. Active federal government policies to stabilize the economy. |
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Private Savings is defined as
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Y + Tr + C - T
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The Four Basic Laws of Supply and Demand
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The four basic laws of supply and demand are [1]
If demand increases and supply remains unchanged then higher equilibrium price and quantity. If demand decreases and supply remains the same then lower equilibrium price and quantity. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity. If supply decreases and demand remains the same then higher price and lower quantity. |
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Equilibrium
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Where the quantity demanded is equal to the quantity supplied, represented intersection of the demand and supply curves.
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Deficit Spending
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The amount by which a government, private compant or individuals spending exceeds income over a particular period of time.
The Opposite of budget surplus |
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Explain why increasing the government budget deficit can decrease investment spending.
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Government borrowing in this market increases the demand for loanable funds and thus (ignoring other changes) pushes up interest rates. Rising interest rates can "crowd out" (discourage) fixed private investment spending, canceling out some or even all of the demand stimulus arising from the deficit—
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How do you calculate GDP?
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The basic formula for calculating the GDP is:
Y = C + I + E + G where Y = GDP C = Consumer Spending I = Investment made by industry E = Excess of Exports over Imports G = Government Spending |
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GDP Deflator
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s a measure of the level of prices of all new, domestically produced, final goods and services in an economy
AKA How much things have become more expensive or less expensive |
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How to Calculate GDP Deflator?
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Nominal GPD / Real GDP * 100 = GDP Deflator
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How to Calculate Real GDP?
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Use Current Year Product #s multiplied by Base Year Prices.
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Industrial Revolution
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The application of mechanical power to the production of goods, beginning in england around 1750
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Why do Growth Rates Matter?
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Growth rates matter because an economy that grows too slowly fails to raise living standards.
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Economic growth model
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a model that explains growth rates in real GDP per capita over a long run
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Human capital
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the accumulated knowledge and skills that workers acquire from education and training or from their life experiences.
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Per-worker production function
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The relationship between real GDP per hour worked and capital per hour worked holding the level of technology constant.
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Which is More important for Economic Growth: More Capital or Technological Change?
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Technological change helps economies avoid diminishing returns to capital.
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New Growth Theory
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A model of long-run economic growth which emphasized that technological change is influenced by economic incentives and so is determined by the working of the market system.
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Patent
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The exclusive right to a product for a period of 20 years from the date the product is invented.
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Catch-up
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The prediction that the level of GDP per capita, in poor countries will grow faster than in rich countries.
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Property rights
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The rights individuals or firms have to exclusive use of their property including the right to buy or sell it.
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Rule of law
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The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.
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Why Don't More Low-Income Countries Experience Rapid Growth?
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War and Revolutions
Poor Public Education and Health Low Rates of Savings and Investment |
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War and Revolutions
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Wars have made it impossible for countries such as afghanistan, Angola, Ethiopis and the central african republic to accumulate capital or adopt new technologies.
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Foreign direct investment (FDI)
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the purchase or building by a corporation of a facility in a foreign country.
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Foreign portfolio investment
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The purchase by an individual or a firm of stock or bonds issued in another country.
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Globalization
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The process of countries becoming more open to foreign trade and investment
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Diminishing Returns
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how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected
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Aggregate expenditure (AE)
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The total amount of spending in the economy: the sum of consumption, planned investment, government purchases and net exports.
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Aggregate expenditure model
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A macroeconomic model that focuses on he relationship between total spending and real GDP, assuming that the price level is constant.
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Aggregate expenditure
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Consumption
Planned Investment Government Purchases Net Exports |
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Inventories
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Goods that have been produced but not yet sold
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Macroeconomic Equilibrium
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AE = GDP
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If... Aggregate Expenditure is equal to GDP Then...
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Inventories are unchanged and the economy is in Macroeconomic equilibrium
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If... Aggregate expenditure is less than GDP Then...
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Inventories rise and GDP and employment decrease.
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If Aggregate Expenditure is greater than GDP Then...
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Inventories fall and GDP and employment increase.
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Consumption: Current Disposable Income
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The most important determination of consumption is the current disposable income of households.
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Consumption: Household Wealth
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Consumption also depends on the wealth of households.
A household's wealth is the value of its assets minus the value of its liabilities. |
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Consumption: Expected Future Income
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Consumption also depends on expected future income. Most people prefer to keep their consumptions fairly stable from year to year, even if their income fluctuates significantly.
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Consumption: The price level
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The price level measures the average prices of goods and services in the economy. Consumption is affected by changes in the price level.
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Consumption: The Interest Rate
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When interest rate is high, the reward to saving is increased. and households are likely to save more and spend less.
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Consumption Function
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The relationship between consumption spending and disposable income.
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Marginal propensity to consume (MPC)
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The slope of the consumption function: The amount by which sonsumption spending changes when disposable income changes.
MPC = Change in consumption / Change in disposable income = ΔC / ΔYD |
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Change in consumption =
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Change in disposable income * MPC
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Disposable Income =
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Natinoal income - Net Taxes
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National income =
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GDP = Disposable income + Net taxes
also Consumption + savings + Taxes |
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Change in national income =
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Change in consumption + Change in savings + Change in taxes
ΔY = ΔC + ΔS + ΔT |
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Change in national income, assume taxes are always constant =
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ΔY = ΔC + ΔS
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Marginal propensity to Save (MPS)
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The change in saving divided by the change in disposable income
ΔY/ΔY = ΔC/ΔY + ΔS/ΔY or 1 = MPC + MPS |
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Equation for MPC and MPS
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MPC = ΔC / ΔY
MPS = ΔS / ΔY |
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The four most important variables that determine the level of investment are
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Expectations of future profitability
The interest rate Taxes Cash Flow |
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Expectations of Future Profitability
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The optimism or pressmism of firms is an important determinant of investment spending.
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Planned Investment: The Interest Rate
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A higher real interest rate results in less investment spending and a lower real interest rate results in more investment spending.
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Planned Investment: Taxes
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Firms focus on the profits that remain after they have paid taxes
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Planned Investment: Cash Flow
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The difference between the cash revenues received by a firm and the cash spending by the firm.
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