ECONOMICS, Section 3, Part 2

How many shares of stock are issued if a company issues 10,000,000 shares?

10,000,000 shares.

What is a bond?

A debt instrument that represents a loan made by an investor to a borrower.

What is a bond?

A debt instrument where the purchaser lends money to a company.

What is an organized stock exchange?

A platform where shares of stock can be bought and sold.

What do mutual funds purchase?

A portfolio of stocks and bonds.

What does the expression GDP/POP tell us?

Average quantity of goods and services available for each person to consume

What is the benefit of diversifying assets?

Avoiding tying the value of assets to the ups and downs of a single business.

Give an example of diversification benefiting savers.

During recessions, discount retailers may see sales rise while upscale department stores see sales fall.

What is the main explanation for the obstacles to successful borrowing?

Dysfunctional political and legal systems.

How is human capital different from physical capital?

Human capital is intangible, while physical capital is tangible.

What is the role of incentives in achieving a high standard of living?

Incentives motivate individuals and businesses to work towards economic growth and development.

What explains the increase in output per person in the economy?

Increased average labor productivity.

What are financial markets?

Institutions for saving and borrowing money for investment.

Bank Deposits

Insured, withdrawable, low risk deposits

What do bondholders receive?

Interest payments.

What are some examples of advances in technological knowledge?

Invention of semiconductors, integrated circuits, lasers, genetic engineering, and better methods of organization.

What is the relationship between bond price and interest rate?

Inverse relationship - as rates rise, bond prices fall.

What is the relationship between bond price and maturity?

Inverse relationship - longer maturity, lower bond price.

What are mutual funds?

Investment vehicles that pool money from multiple investors.

Give examples of natural resources.

Iron ore, petroleum, natural gas.

Why is the political and legal environment important?

It helps create incentives for achieving a high standard of living.

What is capital equipment?

It is a produced factor of production used as input.

Why can the U.S. government borrow at lower rates?

It is considered a safe credit risk.

What is the importance of technological knowledge?

It is the most important factor in raising average labor productivity historically.

How does the ability to buy and sell shares on organized exchanges contribute to shareholders?

It makes it easier for them to access the wealth represented by the shares.

What role does the quantity of resources play in determining productivity growth?

It plays a central role in determining the rate of growth of productivity.

What is the trade-off when increasing the capital stock?

It requires giving up present consumption.

What is technological knowledge?

Knowledge about techniques to transform inputs into desired goods and services.

What is technological knowledge?

Knowledge about technology and its applications.

What is technological knowledge?

Knowledge of how to produce goods and services.

What is technological knowledge?

Knowledge used to create new technology.

What is the role of capital equipment in modern manufacturing?

Large quantities of capital per worker are used to achieve high production levels.

What are patents?

Legal protections for inventions or technological knowledge.

What are some examples of small businesses that are too small to issue bonds?

Local construction companies or retail stores.

How does bond maturity affect risk?

Longer maturity increases the risk of price changes.

What are natural resources?

Materials found in nature that are valuable to humans.

What are natural resources?

Materials or substances occurring in nature.

Define GDP per capita:

Measure of average economic output per person.

Who assumes the risks of variation in the value of mutual fund shares?

Mutual fund shareholders.

Do stock transactions contribute to investment?

No, only new issues of stock contribute to investment.

What does the persistent poverty in some countries suggest?

Obstacles to successful borrowing of techniques.

What is the New York Stock Exchange (NYSE)?

One of the largest stock exchanges in the world.

What are financial institutions?

Organizations that coordinate saving and investment decisions.

What does each share represent if a company issues 10,000,000 shares?

Ownership of 1/10,000,000 of the business.

What does each share of stock represent?

Ownership of a portion of a firm.

What do POP and N stand for in the equation?

POP stands for the country's population, and N stands for the labor force.

What is labor force participation rate?

Percentage of working-age population that is employed or actively seeking employment.

What is know-how?

Practical knowledge and expertise in a particular field.

What is the impact of dysfunctional political and legal systems on countries?

Prevents full exploitation of modern manufacturing techniques.

What are some examples of saving according to economists?

Putting money in a bank or buying shares of stock.

What are some ways someone can save according to economists?

Putting money in a bank or buying shares of stock.

What does the equation GDP/POP = GDP/N x N/POP represent?

Real GDP per capita

What does the left-hand side of the equation represent?

Real GDP per capita

What is GDP per capita?

Real GDP per capita is equal to real GDP per worker multiplied by the fraction of the population employed.

What is the sacrifice required to create human capital?

Reducing current consumption and productive activities.

What are periodic interest payments?

Regular payments made by the company to the bondholder.

What is debt finance?

Sale of bonds.

What is equity finance?

Sale of shares of stock.

Which countries have a high standard of living due to natural resources?

Saudi Arabia, Kuwait.

How do economists differentiate between saving and investment?

Saving is having excess income, while investment is the purchase of new capital equipment.

What is human capital?

Skills and experience acquired through education and training.

What is human capital?

Skills, knowledge, and experience of workers.

How does diversification reduce potential ups and downs?

Some companies perform well when others are suffering.

What is the difference in living standards between North and South Korea?

South Korea has a high standard of living, while poverty is widespread in North Korea.

What is diversification?

Spreading investments across different assets to reduce risk.

What do stock transactions contribute to?

Stock transactions contribute to the willingness of shareholders to hold these assets.

What does the rapid growth of living standards in Japan, South Korea, and China demonstrate?

Successful borrowing and adaptation of techniques.

What determines the price at which shares can be sold?

Supply and demand for shares in the company, influenced by current profits and future prospects.

What is physical capital?

Tangible assets used in production.

What are some ways the government can encourage R&D?

Tax credits, subsidies, direct expenditures, legal protections.

What factors contribute to the increase in average labor productivity?

Technological advancements, improved skills, and efficient use of resources.

What happens when shares of stock are traded on a stock exchange?

The company does not receive any revenue from these transactions.

What affects the probability of default?

The financial conditions of the borrower.

What is the political and legal environment?

The framework of laws, regulations, and political factors that influence business operations.

What is the principal of a bond?

The original amount of money lent to the company.

How do economists define investment?

The purchase of new capital equipment.

What risk does the buyer assume with bonds?

The risk of price variation due to interest rate changes.

What is default risk?

The risk that the borrower may fail to pay some or all of the principal or interest on the bond.

What does the size of an economy determine?

The total quantity of goods and services produced.

Why is holding the stock or bonds of a single company risky?

The value depends on the fortunes of that one company.

What determines the value of mutual fund shares?

The value of the portfolio of assets it owns.

What happens when more resources are devoted to capital formation or research and development?

There are fewer goods and services available to consume today, but more in the future.

Why are mutual funds attractive to savers with small amounts of money?

They allow for diversification and reduce risk.

How do mutual funds help savers with small amounts of money?

They allow them to purchase bonds and stocks that would otherwise be difficult to buy.

What happens when someone purchases a share of Wal-Mart?

They become a part owner of the company.

How do natural resources contribute to the wealth of countries?

They can be extracted and sold, generating revenue.

How does capital formation and research and development affect the standard of living?

They contribute to the rate of growth of productivity and hence the standard of living.

How have labor force participation rates changed in the United States?

They have increased modestly due to more women entering the labor force and lower birth rates.

Why are financial institutions important?

They help to facilitate the flow of funds in the economy.

What do banks do to attract deposits?

They pay interest to depositors.

What do small businesses do when they need to borrow money for investments?

They turn to a bank.

How do shareholders benefit from Wal-Mart's profits?

Through dividends or an increase in share value.

What is the role of government in encouraging R&D?

Through tax credits, subsidies, direct expenditures, or legal protections.

What is the purpose of shareholders easily buying and selling shares?

To access the wealth represented by the shares.

Why is investment in R&D desirable?

To create new technological knowledge.

What is the purpose of the patent system?

To give inventors a temporary monopoly on their inventions.

Why should investment in capital be encouraged?

To increase future production and economic growth.

What is the role of financial institutions?

To provide services such as lending, borrowing, and investing.

What are the trade-offs we face in terms of consumption?

Trade-offs between consuming today and consuming tomorrow.

What can private incentives to create new knowledge lead to?

Underinvestment.

When does investment take place according to economists?

When the bank lends money to a business for a new factory or when a company uses funds from stock sales.

What is the relationship between tools and productivity?

Workers with better tools are more productive.

Can a bond be sold before maturity?

Yes, the purchaser can sell the bond to someone else.

Can a high standard of living be achieved without natural resources?

Yes, through importing raw materials.

The difference between the interest rate banks charge and what they pay depositors covers the costs of accepting deposits and making loans

as well as the risk that some borrowers may be unable to repay their loans and provides profits for the bank owners.

In addition to their role as financial intermediaries

banks serve another important function in the economy—they facilitate purchases of goods and services by providing checking accounts.

An intermediary is a third party who acts as a link between two others. In developed economies

there are a great variety of intermediaries who help to link savers and borrowers. Two of the most important intermediaries are banks and mutual funds.

How do banks make a profit?

By charging borrowers more interest than they pay to depositors.

How does a large corporation borrow money?

By selling bonds directly to the public.

How do mutual funds raise money?

By selling shares to savers.

What is a bond?

Certificate of indebtedness specifying borrower's obligations.

What determines the quantity of goods and services that households and the government choose to purchase?

Ability of firms to transform inputs into desired outputs.

What is a bond similar to?

An IOU.

What is NASDAQ?

An electronic stock exchange for buying and selling securities.

How do economists refer to technological knowledge?

As technology.

What is the source of high productivity in advanced countries?

Availability of learnable and replicable techniques.

Bank Borrowers

Borrowers whose fortunes affect deposit value

How do banks get the funds that they lend?

By accepting deposits from people.

What are some examples of investment according to economists?

Bank lending money for a new factory or a company using funds from stock sales.

Give examples of financial institutions.

Banks, credit unions, insurance companies, and investment firms.

Bank Owners

Bear all risks associated with deposits

Why is new knowledge considered a public good?

Because its utility is not diminished by others knowing it.

Why do most companies use both equity and debt finance?

Because they have different characteristics.

Who gets paid first in case of financial difficulties?

Bondholders.

How does market interest rates affect bond prices?

Changes in rates cause bond prices to fluctuate.

What are trade secrets?

Confidential information about technology kept by a company.

What is capital formation?

Directing resources towards creating physical and human capital.

What does a bond specify?

Date of maturity and rate of interest to be paid.

What is the main reason for the difference in living standards between North and South Korea?

Differences in governmental institutions.

What is the consequence of excessive investment in capital?

Diminishing returns and reduced desirability.

What has offset the increase in labor force participation rates?

Earlier retirement and longer education.

What does the circular flow model emphasize?

Economy's output depends on quantity of goods and services produced.

What activities contribute to the creation of human capital?

Education, training, and on-the-job experience.

What determines the ability of firms to transform inputs into outputs?

Firms' ability to produce goods and services.

What does the right-hand side of the equation represent?

GDP per capita

What is GDP/POP?

GDP per capita

How can we express the relationship between GDP per capita and GDP per worker?

GDP/POP = GDP/N x N/POP

What is the trade-off of investing in capital?

Giving up current consumption for future benefits.

What is the political and legal environment?

Government policies and regulations affecting productivity.

What risks do stock purchasers face?

Greater risks but also potential for high returns.

What is the economist's definition of saving?

Having more income than spending.

What is an example of a better method of organization?

Henry Ford's introduction of the moving assembly line.

How does default risk affect interest rates?

Higher default risk leads to higher interest rates.

What happens to interest rates with longer bond maturities?

Higher interest rates are required to attract lenders.

What is the relationship between interest rate and bond risk?

Higher rates increase the risk of price fluctuations.

What is the relationship between bond risk and interest rate?

Higher risk requires higher interest rates to attract lenders.

What does the quantity of factor inputs depend on?

Households' ability to supply inputs to firms.