Econ ch 12, 13 &15

measurement problems

*unemployment rate understates true extent of joblessness (official unemployment rate is lower than the actual unemployment rate) *measurement bias is worse during recessions *discouraged workers are not counted in unemployed

policies hold wage up off its equilibrium

Min wage: gov set Unions: organizations of workers Efficiency wages: firm voluntary pays more

Not in the Labor Force

Not working and not looking *discouraged workers (want jobs but gave up looking) * retired ppl *students with out jobs *stay at home parents

The U.S. Government Debt

The debt of the U.S. federal government, expressed here as a percentage of GDP, has varied throughout history. Wartime spending is typically associated with substantial increases in government deb

stock

a claim to partial ownership in a firm

crowding out

a decrease in private investment that results from higher government borrowing & budget deficits

budget deficit

a shortfall of tax revenue from government spending

Banks

are the financial intermediaries with which people are most familiar. A primary job of banks is to take in deposits from people who want to save and use these deposits to make loans to people who want to borrow

labor demand

comes from firms (firms pay households for factors of production) *slopes downward: quantity of labor demanded fall as wage rises

The demand for loanable funds

comes from households and firms who wish to borrow to make investments. *families taking out mortgages to buy new homes. * firms borrowing to buy new equipment or build factories.

The supply of loanable funds

comes from people who have some extra income they want to save and lend out. This lending can occur directly, such as when a household buys a bond from a firm, or it can occur indirectly, such as when a household makes a deposit in a bank, which in turn uses the funds to make loans. In both cases, saving is the source of the supply of loanable funds.

labor supply

comes from workers (households provide firms with land labor & capital) *slopes upward : as wages rise, quantity of labor supplied rises

financial markets

financial institutions through which savers can directly provide funds to borrowers

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

political stability property rights

helps promote economic activity protect physical capital but also encourages invention by protecting intellectual property

investment Incentives Increase the Demand for Loanable Funds

if the passage of an investment tax credit encouraged firms to 5% invest more, the demand for loanable funds would increase. As a result, the equilibrium interest rate would rise, and the higher interest rate would stimulate saving. Here, when the demand curve shifts from D1 to D2,

research and development

increase technology

education

increases human capital DRAWBACKS 1. high opp. cost ( edu. is expensive) 2. brain drain: most educates emigrate to wealthier countries

Policies 1. Promote saving and investment

investment: firms spending on physical capital so investment increases physical capital

bond

is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond

(GDP) Y = C + I + G. divided into four components of expenditure:

is both total income in an economy and the total expenditure on the economy's output of goods and services. GDP (denoted as Y) consumption (C), investment (I), government purchases (G), and net exports (NX).

labor force

is the current available pool of workers = EMPLOYED+ UNEMPLOYED

The interest rate

is the price of a loan. It represents the amount that borrowers pay for loans and the amount that lenders receive on their saving. * high interest rate makes borrowing more expensive, the quantity of loanable funds demanded falls as the interest rate rises the demand curve for loanable funds slopes downward, and the supply curve for loanable funds slopes upward.

labor market should settle on equilibrium wage

shortage of labor >wage should rise surplus of labor> wage should fall

importance of small differences in growth

small differences in growth rate lead to large differences in standard of living over time

cyclical unemployment (business cycles)

the deviation of unemployment from its natural rate *ups and downs due to economic activity ex: recession & expansion

financial system

the group of institutions in the economy that help to match one person's saving with another person's investment

private saving (Y - T - C)

the income that households have left after paying for taxes and consumption

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates *for the U.S that is 5-5.5 % *some unemployment is inevitable its normal for an economy

labor force participation rate

the percentage of the adult population that is in the labor force labor force participation rate = (Labor force) / (Adult population) × 100.

unemployment rate

the percentage of the labor force that is unemployed and can't find jobs (unemployed) / ( labor force) *100

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

2. diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

productivity

the quantity of goods and services produced from each unit of labor input (how much a worker can produce each hr they are on the job)

Determinants of productivity physical capital: Human capital: Natural resources: Technical knowledge:

the stock of equipment and structures that are used to produce goods and services the knowledge and skills that workers acquire through education, training, and experience the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits society's understanding of the best ways to produce goods and services

public saving (T - G)

the tax revenue that the government has left after paying for its spending If T exceeds G, the government runs a budget surplus because it receives more money than it spends. This surplus of T - G represents public saving. If the government spends more than it receives in tax revenue, then G is larger than T. In this case, the government runs a budget deficit, and public saving T - G is a negative number.

national saving Y - C - G = I

total income in the economy that remains after paying for consumption and government purchases *This equation states that saving equals investment.

frictional unemployment (short term & unsevere)

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills *takes time to match workers to open jobs

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one * workers skills don't match the available jobs

unemployed

with out work and actively seeking employment

Employed

works either full-time or part-time

Saving Incentives Increase the Supply of Loanable Funds

A change in the tax laws to encourage Americans to save more would shift the supply of loanable funds to the right from S1 to S2. As a result, the equilibrium interest rate would fall, and the lower interest rate would stimulate investment.

investment from abroad

Foreign direct investment : capital owned & operated by foreign entity Foreign portfolio investment:capital financed with foreign money ( loan money to foreign firms who buy & operate the capital themselves)

The Effect of a Government Budget Deficit

When the government spends more than it receives in tax revenue, the resulting budget deficit lowers national saving. The supply of loanable funds decreases, and the equilibrium interest rate rises. Thus, when the government borrows to finance its budget deficit, it crowds out households and firms that otherwise would borrow to finance investment.

free trade

allows us to share capital education and technology

budget surplus

an excess of tax revenue over government spending

mutual fund

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds