Econ Midterm 2
facts about wealth of nations and economic growth
GDP per capita varies enormously, everyone used to be poor, there are growth miracles and growth disasters
owners equity
The value of an asset minus the debt associated with the asset
national spending approach to GDP calculation
Y + C + I+ G+ (Exports- Imports). Consumption, investment, government purchases,
higher
______interest rates result in more savings
not in investment category of national spending
a household purchasing stock in apple
is higher
all else equal, people will usually save more if the interest rate
increases interest rate
an investment tax credit, an increase in large investments
GDP deflator
Nominal GDP/ Real GDP x100
saving
People whose incomes fluctuate (like salespeople, writers, and homebuilders) smooth consumption by
interest rate
Percentage of amount borrowed to be added to the amount loaned and paid back
crowding out
The decrease in private consumption and investment that occurs when government borrows more is called:
advancement in technology
causes production function to shift upwards, can produce more capital,
quantity demanded will increase
decrease interest rates
economies of scale
decrease of average cost of production that occurs as total quantity of production increases
lawful goods sold under table to evade taxes
do not show up in GDP
rule of 70
doubling time is equal to 70/x (x being the percentage growth rate )
upward shift of supply of loanable funds
equilibtrium quantity of savings decreases
catching up growth
growth due to capital accumulation and adopting already existing ideas
cutting edge growth
growth due to new ideas
shifts demand curve to the right, increase in equilirbium interest rate and quantity of funds demanded and supplied
how does in an increase in investment demand change the equilibrium interest rate and quantity of savings
conditions that lead financial intermediation to fail
insecure property rights, politicized lending, controls on interest rates, bank failures and panics
key to producing/ organizing factors of production
institutions that create incentives
in opposite directions
interest rates and bond prices move
steady state K
investment = depreciation. every unit of investment is being used to replace depreciated capital . no new net investment, economic growth stops
Gross Domestic Product (GDP)
market value of all finished goods and services produced by a countries permanent residents wherever located within the borders of a country, in a year
CPI (Consumer Price Index)
measures average price for a basket of goods and services bought by a typical american consumer
what production function should look like
more capital produces more output, but at a diminishing rate, increase in capital produces less output. output increases but at diminishing rate
factors of production
physical capital, human capital, technological knowledge
factors that increase speed of technology growth in the future
population, incentives, ideas
key institutions include
property rights, honest government, political stability, dependable legal system, competitive and open markets
how does greater patience affect supply of savings and change the interest rate and quantity of savings
shift supply of savings curve to the right, increase in quantity of savings, decrease in equilibrium interest rate
increase in supply in savings
shifting supply curve down and to the right (more savings at any interest rate)
microeconomics
study of how households and firms make choices, how they interract in markets, how government attempts to influence their choices
macroeconomics
study of the economy as a whole, inflation, unemployment, economic growth
All else equal, if consumers decide to save more, the
supply curve in the market for loanable funds will shift to the right. interest rate falls
market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds, determining equilibrium interest rate
events that cause GDP to increase
total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy.
nominal GDP
variables that have not been adjusted for changes in price. calculated using prices at time of sale
interest rate
what represents the price of a loan
GDP
where production takes place
GNP
who is doing the production
Solow production function Y = F (A, K, eL)
Y(output) is a function F of the inputs A (technological knowledge) , K (physical capital) and eL (human capital)
iron logic of diminishing returns
as more capital is added, output increases by less and less
when investment is greater than depreciation
capital stock grows and output next period is bigger. economic growth
when investment is less than depreciation
capital stock shrinks
included in GDP calculation
consumption, investment, government purchases, exports-imports (net exports)
countries with a high GDP
have alot of physical human capital that is organized using best technological knowledge to be highly productive .
in solow model which factors are constant
human capital, technological knowledge
quantity supplied will increase
increase in interest rates
marginal product of capital
increase in output when capital increases by one unit
decreases interest rate
increase in saving, decrease in investor optimism
in solow model if first unit of capital increases output by one unit, then the second unit of capital will cause total output to....
increase, but by less than one unit
If the stock of physical capital (e.g., machinery and equipment) and human capital remain the same but the population increases:
labor productivity will decrease
decreases demand to invest and borrow
less optimistic investors, recession, unprofitable projects
depreciation increases with capital stock at a ....
linear / constand rate
greater investment rate....
more capital, more output , increases steady state level of GDP
production functions
show relationship between output and the factors of production
the higher the interest rate
smaller quantity of funds demanded for investment
intermediate good
sold to a firm than bundled or processed with other goods for sale at a later stage
finished good
sold to the end user and then consumed or held in personal inventories
growth in real GDP per capita is
the best reflection of changing living standards
the greater the capital stock....
the more capital will depreciate (more tractors, more tractor repairs)
investment
the source for demand for loanable funds is
saving
the source for supply for loanable funds is
physical capital
the stock of tools that include machines, structures, and equipment. (desks, computers, hammers etc) more and better toold make workers more productive
if a nation sells fewer finished goods and services abroad than it buys from other nations
net exports will be negative
weekly earnings increase over the course of a year and prices in economy rise over
nominal earnings rise, real earnings fall
Fisher equation
nominal interest rate = expected inflation rate + equilibrium real rate of return. nominal rate will rise with expected inflation
nominal v real gdp
nominal is for a given year , gdp is for some base year
excluded from GDP calcuation
non priced production, environmental costs, health of nations, distribution of income, imported goods
purchases of stocks and bonds are
not included in GPD because they are not part of production and goods
capital
output that is saved and invested rather than consumed . divided between consumption and investment (ex out of 10 units of output, 7 units might be consumed and 3 units invested , gamma= 3/10= .3)
depreciation
.02 x K (ex)
investment
.3 x square root K (ex)
Supply in the market for loanable funds would increase, and the interest rate would fall
All else equal, if consumer preferences changed so that they generally decided to save more, what would occur
does not
Buying and selling existing shares of stock _____increase net investment in the economy.