Concepts

Net Domestic Product (NDP)

GDP - depreciation

Three ways of measuring GDP: Income approach

Sum all factor income

Production - income, given all goods are sold, paid out as either income or profit

market prices - what households pay

factor prices - what firms receive

Compensation of employees - wages, bonuses etc

Three ways of measuring GDP: Production approach

Sum of all value added

Only final sales of g / s that counts towards GDP

Only new production counts, however counts if profit by selling in second-hand

Value added - revenue generated by each producer (value of intermediate products)

Intermediate products - g / s consumed as inputs in production process (excl. electricity)

Three ways of measuring GDP: Expenditure approach

Sum of all expenses for final use

Expenditures are divided according to their purpose

GDP (Y)

Imports (IM)

Consumption (C)

Government (G)

Investments (I)

Exports (EX)

Net exports (NX) - Exports - imports

Y + IM = C + G + I + EX

Government purchase involves new production and are recorded as GDP

Government spending does not necessarily generate a flow of GDP

(G. purchase is a part of G. spending)

Limitations of GDP

Does not take health into account

Does not include changes in environmental resources

Nominal GDP

Price level * Real GDP

Real GDP - Only quantity

Convergence

When country catcher up to another

Precise meaning of growth

Exact rate of change in GDP per capita

Costs of economic growth

Environmental problems - often worse in early stages of development, gets gradually better

Increased income inequality, across and within countries

Technological advancements can lead to loss of certain jobs and industries

Reasons for differences in productivity

Human capital - Skills individuals accumulate to make machines more productive

Technology - Different countries produce with different technologies

Institutions - Differences in government policies, rules, regulations

Misallocation - Misallocation of labour and capital among firms

Increasing returns to education

How much wage increases per year if completing a certain type of education

Stock

Quantity that survives from period to period, ex. facilities, vehicles

Flow

Quantity that lasts for single period

Change in stock is a flow

Transition dynamics

Economy grow faster the further below steady state, vice versa

Implies rich will grow slow and poor fast

Rich and poor does however grow at same speed

Implies both have reached steady state

Solow model: Strengths

Provides theory for determining how rich a country is in the long run (steady state)

Principle of transition dynamics (understand differences in growth rates)

Solow model: Weaknesses

Does not provide theory for long-run growth

Does not explain why countries have different productivity levels and investment rates

Main mechanism is investment in physical capital, however this only explains a small fraction of differences in income

Object vs. ideas

Objects - Most goods, capital, labour

Ideas - Instructions / recipes; designs for making objects

Non-rivalry

Ideas are non-rival, one persons use does not limit another

Are however excludability, i.e. extent to which someone has property rights over a good, possibly idea

2 measurements of quantity of labour

Ratio of employment to the population
Unemployment rate

labor force

Sum of employed and unemployed

Dynamic nature of labor market

Large quantities of jobs are created and destroyed each month, thus most unemployment spells are relatively short

Natural rate of unemployment

Rate that would prevail if economy is neither doing very well or very bad

Frictional unemployment

Part of natural rate of unemployment

Results when workers are changing jobs in a dynamic economy (jobs created and destroyed)

Structural unemployment

Part of natural rate of unemployment

Results from labor market institutions that march workers and firms

Cyclical unemployment

Difference between actual rate and natural rate

Explanations for increase in demand for highly educated workers

Skill-biased technical change - New technologies that disproportionately improve productivity of skilled workers

Globalisation - Highly skilled workers scarce on global level

Substitution effect of higher interest rate

Current consumption becomes more expensive as saving leads to more consumption in future reducing consumption today

Income effect of higher interest rate

Consumers are richer since saving leads to more income in future, wants to consume more today

Implication from neoclassical model: Permanent-income hypothesis

Consumption depends on avg. value of income, rather than current income

Consumption depends on PDV of income

Since in neoclassical model, consumption is proportional to overall wealth, it supports this hypothesis

Implication from neoclassical model: Borrowing constraint

If individuals cannot borrow / freely save at market interest rate

Inter-temporal budget constraint does not hold, thus use borrowing constraint

Implication from neoclassical model: Random walk view of consumption

Implication arising when income is uncertain

People hedge against possibility of large decrease in income (precautionary saving)

Since it is accounted for in total wealth, consumption decreases in ways going against the model