ECON 347 Study Set 1 Q.41-70

G-8

Forum for the governments of 8 of the world's largest economies: France, Germany, Italy, Japan, UK, US, Canada and Russia (last one to join in 1997).

Lagging Variables

• A lagging indicator is one that follows an event. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly.

Supply Side Economics

• A school of macroeconomics thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.

Total Factor Productivity

• A variable that accounts for effects in total output not caused by traditionally measured inputs. If all inputs are accounted for, then total factor productivity (TFP) can be taken as a measure of an economy's long-term technological change or technological dynamism.

Net Foreign Asset

• The value of assets a country owns abroad, minus the value of the domestic assets owned by foreigners. The net foreign asset position of a country reflects the indebtedness of that country.

Overproduction

• This is the excess supply of goods and services relative to demand in the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment.

Great Depression

A severe worldwide economic depression in the decade preceding World War II. It was the longest, most wide spread and deepest depression of the 20th century. It originated from the US following the stock market crash on October 29th, 1929.

GATT

General Agreements on Tariffs and Trade: A multilateral agreement regulating international trade. Its purpose is the substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis. It was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1958 and lasted until 1993, when it was replaced by the WTO in 1995. The original GATT text (GATT 1958) is still in effect under the WTO framework, subject to the modifications of GATT 1994.

Labor Productivity

The amount of goods and services a worker produces in a given amount of time. According to investopedia, more specifically, labor productivity measures the amount of real GDP produced by an hour of labor. Growing labor productivity depends on three main factors: investment and saving in physical capital, new technology and human capital.

Liquidity

The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. It can also be defined as the degree to which an asset is readily convertible into the medium of exchange. Easily used to make transactions.

Marginal Propensity to Consume

The increase in consumption resulting from a one-dollar increase in disposable income.

Marginal Tax Rate

The marginal tax rate is the rate on the last dollar of income earned. This is very different from the average tax rate, which is the total tax paid as a percentage of total income earned.

Real Exchange Rate

The rate at which one country's goods trade for another country's good.

Real Interest Rate

The return to saving and the cost of borrowing after adjustment for inflation.

Natural Rate of Unemployment

The steady-state rate of unemployment. The rate of unemployment toward which the economy gravitates in the long run.

Terms of Trade

The value of a country's exports relative to that of its imports. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country's terms of trade (TOT) is less than 100%, there is more capital going out (to buy imports) than there is coming in. A result greater than 100% means the country is accumulating capital (more money is coming in from exports) - (Investopedia).

Liquidity Trap

• A liquidity trap is defined as a situation in which the short-term nominal interest rate is zero. Accordingly, people argue that increasing money in circulation has no effect on either output or prices. The old Keynesian literature emphasized that increasing money supply has no effect in a liquidity trap so that monetary policy is ineffective. The modern literature, in contrast, emphasizes that, even if increasing the current money supply has no effect, monetary policy is far from ineffective at zero interest rates. What is important, however, is not the current money supply but managing expectations about the future money supply in states of the world in which interest rates are positive. • The liquidity trap is originally a Keynesian idea and was contrasted with the quantity theory of money, which maintains that prices and output are, roughly speaking, proportional to the money supply. • Accordinging to Wikipedia, a liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels

J-Curve

• A theory stating that a country's trade deficit will worsen initially after the depreciation of its currency because higher prices on foreign imports will be greater than the reduced volume of imports. (Investopedia) • The 'J curve' refers to the trend of a country's trade balance following a devaluation or depreciation under a certain set of assumptions. A devalued currency means imports are more expensive, and on the assumption that the volume of imports and exports change little immediately, this causes a depreciation of the current account (a bigger deficit or smaller surplus). After some time, though, the volume of exports may start to rise because of their lower more competitive prices to foreign buyers, and domestic consumers may buy fewer of the costlier imports. Eventually, if this happens, the trade balance may improve on what it was before the devaluation. If there is a currency revaluation or appreciation the same reasoning leads to an inverted J-curve. (Wikipedia)

Leading Variables

• Economic variables that fluctuate in advance of the economy's output and thus signal the direction of economic fluctuations. They signal future events.

G-7

• G-7: An international finance group consisting of finance minister from the following seven, industrialized countries: France, Germany, Italy, Japan, UK, US, & Canada (last one to join 1976). It was founded in 1975.

LIBOR

• London Interbank Offered Rate • The average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. • It is the primary benchmark for short-term interest rates around the world.

Seasonal Unemployment

• Seasonal unemployment is unemployment due to changes in the season - such as a lack of demand for department store Santa Clauses in January. Seasonal unemployment is a form of structural unemployment, as the structure of the economy changes from month to month. Also, amusement parks would experience seasonal unemployment in winter.

Asian Financial Crisis

• The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. The crisis began in Thailand after the collapse of Thai Baht. • Also called the "Asian Contagion", this was a series of currency devaluations and other events that spread through many Asian markets beginning in the summer of 1997. The currency markets first failed in Thailand as the result of the government's decision to no longer peg the local currency to the U.S. dollar. Currency declines spread rapidly throughout South Asia, in turn causing stock market declines, reduced import revenues and even government upheaval. The Asian Financial Crisis was stemmed somewhat by financial intervention from the International Monetary Fund and the World Bank. However, market declines were also felt in the United States, Europe and Russia as the Asian economies slumped. (Investopedia).

Net Present Value

• The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. • The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash is computed by discounting them at the required rate of return.

Time Value of Money

• The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

Realization Crisis

• The inability to sell the output produced i.e., to realize, in the form of profits, the surplus value extracted from workers' labor. • Realization crises are defined by the quantitative gap between consumption and production that end in the inability to sell commodities at their value within the market.

Underconsumption

• The purchase of goods and services at levels that fall below the available supply. Underconsumption, as an economic theory, describes a situation where recession and stagnation occurs in reaction to inadequate consumer demand in relation to the amount (of a particular good or service) produced. Underconsumption theories date back hundreds of years and have been largely replaced by modern Keynesian economics and the theory of aggregate demand (the total demand for goods and services in the economy at a particular time and price level). (Investopedia).

Open Market Operations

• The purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply.

Third World Debt Crisis

• These are the very large debts that developing countries have, and the amount of money they owe is quickly increasing. Trying to pay off the debt (debt service) has become a serious problem for these countries, and it causes great hardship for their people. • Many of the world's poorest nations today have foreign debts that are greater than their entire national income in any given year. A significant portion of the foreign currency they earn from exports goes just to make their debt payments. In Latin America and the Caribbean, for instance, on average one-third of all export earnings go to interest payments. • In the 1960s and early 1970s, developing nations were encouraged to borrow money to service old debts and to finance national development projects, especially infrastructure like roads and dams. At the time, northern banks had huge deposits of "petro-dollars" (oil earnings deposited by OPEC member countries) that they were eager to lend at low rates. However, in 1979, the U.S. central bank raised interest rates dramatically in order to fight inflation, with callous disregard for the effect of such a policy on other countries. Central banks in the other northern countries quickly followed suit. By the early 1980s, developing nations found themselves with much larger debt servicing bills than they had ever imagined. At the same time, the prices for raw commodities—their main exports and source of foreign currency earnings—dropped on world markets, leaving less-developed countries strapped for foreign currency.

National Income

• This measures how much everyone in the economy has earned. • NI= C + I + G + (NX) + net foreign factor income - indirect taxes - depreciation- Statistical discrepancy