Macroeconomics: Productivity, Growth, Savings, Investment, and Finance

Vocabulary flashcards covering the key macroeconomic concepts of productivity and long-run economic growth, the market for loanable funds, national savings and investment, and the foundations of financial decision-making.

Productivity

The quantity of goods and services produced from each unit of labor input, calculated as $Y/L$ (output per worker).

Physical Capital ($K$)

The stock of equipment and structures used to produce goods and services.

Human Capital ($H$)

The knowledge and skills that workers acquire through education, training, and experience.

Natural Resources ($N$)

Inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits.

Technological Knowledge ($A$)

Society's understanding of the best ways to produce goods and services, representing any advance in knowledge that boosts productivity and allows society to get more output from its resources.

Production Function

A graph or equation showing the relation between output and inputs, represented generally as $Y = A \times F(L, K, H, N)$, where $F()$ combines inputs and $A$ is the level of technology.

Constant Returns to Scale

A property of a production function whereby changing all inputs by the same percentage causes output to change by that exact percentage, such that $xY = A \times F(xL, xK, xH, xN)$.

Diminishing Returns to Capital

The property whereby the benefit from an extra unit of capital declines as the quantity of capital increases; giving more capital to workers who already have a lot of $K$ increases productivity relatively little.

The Catch-Up Effect

The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich because small increases in capital per worker lead to larger gains in productivity.

Foreign Direct Investment

A capital investment that is owned and operated by a foreign entity.

Foreign Portfolio Investment

An investment financed with foreign money but operated by domestic residents.

Brain Drain

The emigration or departure of educated, skilled, and professionally trained individuals from one country, region, or industry to another.

Property Rights

The ability of people to exercise authority over the resources they own, functioning as a necessary prerequisite for the price system to work effectively.

Inward-Oriented Policies

Policies, such as tariffs and limits on investment from abroad, that aim to raise living standards by avoiding interaction with other countries.

Outward-Oriented Policies

Policies involving the elimination of restrictions on trade or foreign investment to promote integration with the world economy.

Financial System

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

Financial Markets

Financial institutions through which savers can directly provide funds to borrowers, including the bond market and the stock market.

Financial Intermediaries

Financial institutions through which savers can indirectly provide funds to borrowers, such as commercial banks and mutual funds.

Bond

A certificate of indebtedness (an IOU) that specifies the principal borrowed, the date of maturity, and the rate of interest that the borrower will pay periodically until maturity.

Debt Finance

The sale of bonds by a government or corporation to raise funds.

Stock

A financial asset representing a claim to partial ownership in a firm and a claim to a share of the firm's future profits.

Equity Finance

The sale of stock to raise money for a business.

Mutual Fund

A financial institution that sells shares to the public and uses the proceeds to purchase a diversified portfolio of stocks and bonds.

National Saving ($S$)

The total income in a closed economy that remains after paying for consumption and government purchases, expressed as $S = Y - C - G = I$.

Private Saving

The amount of income that households have left after paying taxes and paying for consumption, defined mathematically as $Y - T - C$.

Public Saving

The tax revenue that the government has left after paying for its spending, defined mathematically as $T - G$.

Budget Surplus

An excess of tax revenue over government spending ($T - G > 0$), which represents positive public saving.

Budget Deficit

A shortfall of tax revenue relative to government spending ($T - G < 0$, or $G - T > 0$), representing negative public saving.

Market for Loanable Funds

A model of the financial system where all savers deposit their funds and all borrowers obtain loans, coordinated by a single real interest rate.

Saving Incentives Policy

A tax policy reform that increases the supply of loanable funds, shifting the supply curve to the right, which reduces the equilibrium interest rate and raises the quantity of investment and saving.

Investment Tax Credit Policy

A tax incentive that increases firms' demand for loanable funds, shifting the demand curve to the right, which raises both the equilibrium interest rate and the quantity of funds saved and invested.

Crowding Out

A reduction in the level of private investment that occurs when the government runs a budget deficit and borrows to finance it, shifting supply left and driving up interest rates.

Present Value ($PV$)

The amount of money needed today to yield a given future sum at prevailing interest rates, calculated as $PV = \frac{FV}{(1 + r)^N}$.

Future Value ($FV$)

The amount a sum of money will be worth at a specified future date when earning interest at the prevailing rate, calculated as $FV = PV(1 + r)^N$.

Compounding

The accumulation of a sum of money where the interest earned on an initial principal itself earns additional interest over time.

The Rule of 70

A mathematical approximation stating that if a variable grows at a rate of $x\%$ per year, it will double in approximately $\frac{70}{x}$ years.

Risk Aversion

A characteristic of individuals who dislike uncertainty, stemming from diminishing marginal utility of wealth where the utility loss from losing a sum exceeds the utility gain from winning that same amount.

Adverse Selection

A problem in insurance markets where high-risk individuals benefit more from insurance and are consequently more likely to apply for and purchase policies.

Moral Hazard

A problem in insurance markets where individuals with insurance coverage have less incentive to avoid risky behaviors or exercise caution.

Diversification

The practice of reducing total risk by replacing a single risk with a large number of smaller, unrelated risks in a portfolio.

Firm-Specific Risk

Risk that affects only a single company and can be eliminated through portfolio diversification.

Market Risk

Risk that affects all companies in the stock market simultaneously and cannot be eliminated through diversification.

Risk-Return Trade-Off

The principle that higher expected returns compensate investors for bearing greater risk, demonstrated by portfolios with higher proportions of stocks yielding higher average returns alongside greater volatility.

Fundamental Analysis

The study of a company's accounting statements and future prospects to determine the intrinsic value of its stock.

Efficient Markets Hypothesis (EMH)

The theory that asset prices reflect all publicly available information about the value of an asset, which implies that the stock market exhibits informational efficiency.

Random Walk

The path of a variable whose changes cannot be predicted from past values, describing stock price movements under the Efficient Markets Hypothesis.