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What is GDP? How is it defined?
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Terms in this set (44)
What are the five institutions of economic growth?1.Property Rights 2.Honest Government 3. Political Stability 4.Dependable legal system 5. Competitive and open marketsWhat is the Solow Model? Be able to identify the elements in the production function used in this modelThe solow-swan model is an exogenous growth model, an economic model of long-run economic growth set within the framework of neoclassical economics (look up how to use actual graph)What is the marginal product of capital? Does it diminish with the addition of more capital? The same two questions applied to labor or human capital.Additional output resulting, ceteris paribus from the use of an additional unit of physical capital. It equals the opposite of 1 divided by the incremental capital output ratio. Physical capital: Stock of tools, machines, equipment, etc. Across the US economy: each worker uses on average 100,000 in capital: 10 times the level for India Human Capital: Productive knowledge and skills of workers, which can be acquired via education, training, or experience. "tools of mindCan bombing a country raise its growth rate?YESWhat are the four main ideas we discussed regarding the economics of ideas?• Ideas for increasing output are primarily undertaken by research and development funded by private firms • Ideas can be freely shared, but spillovers mean that ideas are under produced • Government has a role in increasing the production of ideas • The larger the market, the greater the incentives to research and develop new ideas.Who supplies savings to the economy?Savers who are households, firms and venture capitalist supply savings to banks and bonds/stock market.Who demands savings?Borrowers who are firms, entrepreneurs, and households from demand saving from banks and bonds/stock marketWhat institutions/intermediaries link savers to borrowers?Banks and Bonds/Stockmarket link savers to borrowersWhat four factors help determine the supply of savings?• Smoothing consumptions • Impatient • Marketing and psychological factors • Interest ratesWhy do people want to 'smooth' their consumption over time?People prefer smoother consumption although they make less during working years since they are saving for retirement, they have more money during retirement period after income ceases so a better quality of life.What factors influence the demand to borrow funds?• Smooth Consumption • Borrowing is necessary for finance large investments • The interest rateKnow how equilibrium is reached in the market for loanable funds and what can cause a shift in the supply or demand. Be able to graph the equilibrium and the effects of a shift in supply or demandThe quantity of funds supplied equals the quantity of funds demanded. The interest rate adjusts to equalize savings and borrowing in the same way and for the same reasons that the price of oil adjusts to balance the supply and demand of oil (EX).What can cause a shift in the supply or demand for loanable funds?1. Changes in economic conditions will shift the supply or demand curve and change the equilibrium interest rates and quantity of savings. 2. Economic Boom they invest a lot (supply) 3.Recession they don't invest (demand) 4. A tax credit increase demand 5. Decline in life cycle decreases supply 6. Supply interest rate, if the interest rate is up it is an increase in supply, decrease would be a decrease in demand 7. Interest rates for demand if it is down it increases in demand, if it is up he decreaseWhat role do intermediaries play in the market for loanable funds? Banks? Bonds? And Stock Markets?1. Banks receive savings from many individuals, pay them interest, and loan these funds to borrowers. Charging them interest, banks earn profit by charging more for loans then they pay in savings. Too earn this money they provide useful services, by evaluating investment and spreading risk. 2. Bond is a corporate IOU where individuals lend money to a corporation, all bonds carry a risk of default, lower default risk equals lower interest rates, bonds backed by an asset are collateral, which have lower interest rates. Some bonds pay periodic interest payments called coupon books. Interest on non-coupon book bonds carry interest if a bond is taken by a company, for 950 but they promise to pay 1000 in one year the interest rate 1000-950/950=5.26%. If price of bond drops to 909 interest is 1000-909/909=10%. Interest rates and bond prices move in opposite directions. Companies taking out bonds hope for bond prices to rise, meaning interest rates fall. 3. Stock Markets are traded and organized markets called stock exchanges, when new stocks are issued it is called an initial public offering, stocks are shares of ownership in a company. Owners have a claim to the firms profits, which is what is leftover after everything is paid. If profits are high shareholder benefit if they are low or negative they don't. Companies only receive new revenue, when new stock is issued.What is the relationship between bond prices and interest rates?They go in opposite directions, companies hope for low interest rates meaning high bond pricesWhat happens when intermediation fails?There is small markets for loans, usage of savings ineffectively, and fewer good investments by: Insecure property rights, which means the expected return on savings depends on more than just interest rates. In some governments safe funds are not immune from later confiscation, freezes or other restrictions. 2. Controls on interest rates make price ceilings on interest rates causing a shortage of funds because not as many people will invest. 3. Politicized lending and government owned banks, this is when banks are pressured to loan to government, or government puts money into bankrupt banks and causes banks to act as a storehouse for government. So new companies can't get money, this decreases standard of living and business innovation 4.Bank failures and panics- systematic problems in the banking system cause many too lose life savings and reduce their spending. Bank failures cause small business failures, banks lose customers and revenue, ex: great depressionHow is unemployment defined? Who is counted in the figure? Who is not?Someone is unemployed only if he/she is willing and able to work, but cannot find a job. Must be an adult and over the age of 16How is the unemployment rate calculated?Unemployment/Labor ForceWhy is the unemployment rate an imperfect measure of labor market performance?Because discouraged workers are not included, it doesn't count people who have part time jobsFrictional UnemploymentCreate difficultly in matching employees to a potential job, leads to friction in the labor market, results in temporary unemployment. Causes are scarcity of information, creative destruction, and short-term unemploymentStructural UnemploymentPersistent, long-term unemployment caused by long lasting shocks to the government, it implies one year or more. Causes labor market regulations, unemployment benefit levels, minimum wage levels, strict laws on firing workers.Cyclical UnemploymentUnemployment that correlates with the business cycle, ups and downs in the economyWhat two primary factors drive labor force participation?• Life Cycle effects and demographic (Culture)- Young adults are full time students and not workers, prime working years are in the labor force, and during retirement only a small minority are available in the labor force. • Incentives: Penalties for working pass retirement age, women is culture shifts such as rise of feminism and equality of women and birth control, which helps women work more.What is inflation? How is it measured? How is the inflation rate calculated?Increase in the average level of prices, its measured with an index, which is the average price of a basket of goods and service. We find inflation by changes in price index. Inflation rate is calculated by P2-P1/Pl P2= year 2 P1= Year 3Prices indexes: CPI, GDP Deflator, PPICPI- Measures the price level of a market basket of consumer goods and services (80000 items), increase in bigger item counts for more than a smaller item. Core CPI excludes food and oil GDP Deflator- Ratio of nominal to real GDP Formula: P2xQ2/P1xQ2x100 PPI- measures the average price received by producers, measures price of intermediate and final goods.What is a real price? Why do we use the real price to analyze price changes?Real Price is a price that is corrected for inflation for a certain year. Formula: Nominal Price X inflation of the period We use it to compare price of goods overtimeWhat is the Quantity Theory of Money? What equation do we use to explain it? What do the terms in the equation stand for?It sets out the relationship amongst prices, the money supply inflation and real prices, it also represents the critical role of the money supply and regulating price level. Formula= MXV=P X YR M= Monthly Pay check V= times paid per year P= Prices Yr= Goods and services you buy per year For an entire nation M= Money Supply V= Velocity of money, # of times a dollar is spent P= Price level Yr= Level of GDPWhat is the ultimate cause of inflation and why is this so?Growing money supply because the more money that circulates the higher the price will be.What are the costs of inflation?Higher Prices, Price Confusion and money illusion, People mistake normal price changes with real price changes, wasteful resources, redistribution of wealthWhat is the nominal interest rate equal to? What is the Fisher effect?Nominal interest rates equal to the rate of return that does not account for inflation The Fisher effect- nominal interest rates tend to rise when expected inflation. If expected inflation equals actual inflation no redistribution. If actual inflation is more that expected inflation, unexpected inflation occurs and wealth is redistributed too borrowers. If expected inflation is more than actual wealth is redistributed too lenders.What equation or relationship do we use to demonstrate the aggregate demand curve?M+V=P+Yr M+V= Inflation and real growth P+Yr= Growth rate of prices and GDPWhat causes a shift in the AD curve?Increases: due to an increase in spending growth Decreases: due to a decrease in spending growthWhat is the Solow growth curve and what causes it to shift? What does a given Solow growth curve say about the rate of inflation for a given spending level?AN economy potential/growth rate, given flexible prices in exciting rates of production. A vertical line scoring the long run aggregate supply curve. It shifts with interest prices and it shows the inflation rate of a given growth level. If the growth level is high, inflation is low, if growth level is low, then inflation is high.What factors can shift the Solow Growth Curve (shocks)?Negative- Bad weather, higher price of oil, productivity slump, higher taxes or regulation, natural disasters, wars Positive- good weather, lower price of oil, productivity/ technology boom, lower term of regulation, no disruptors