Econ 210 Final Exam

econ 210 final exam terms

Protectionism

Policy that burdens foreign producers but not domestic producers

Tariff

Tax on imports

Cost of Protectionism

Wastes resources by moving production from low cost producers to high cost producers

GDP

Market value of all finished goods and services produced in a country in a year

GDP per Capita

GDP/Population

GNP

Labor and property supplied by the citizens of a country wherever they might be in the world

Growth Rate

(GDP_n-GDP_o)/GDP_o * 100

Nominal GDP

GDP not adjusted for inflation

Real GDP

GDP adjusted for inflation

GDP Deflator

Nominal / Real * 100

Best Reflection of Changing Living Standards

Real GDP per Capita

Recessions

Significant declines in real GDP and employment

Business Cycles

Fluctuations of real GDP around its long term trend

National Spending Approach to GDP

Y = C + I + G + (Exports - Imports)

Factor Income Approach to GDP

Y = Employee Compensation + Rent + Interest + Profit

What GDP Doesn’t Count

• Underground Economy

• Nonpriced Production

• Environmental Costs

• Health of Nations

• Distribution of Income

Consumption

Private spending on finished goods and services

Investment

Private spending on tools and equipment used to produce future output

Government Purchases

Spending by all levels of the government on finished goods and services

Economic Growth

Growth rate of real per capita GDP

Rule of 70

GDP per capita will double every 70/(growth rate) years

Factors of Production

• Physical Capital

• Human Capital

• Technological Knowledge

Causes of Increase in GDP per Capita

• Institutions

• Incentives

• Organization

Physical Capital

Tools in the broadest sense

Human Capital

Things that make people productive

Technological Knowledge

Knowledge about how the world works

Institutions

Laws, regulations, customs, practices that shape human interaction and structure economic incentives within a society

Important Institution Types

• Property Rights

• Honest Government

• Political Stability

• Dependable Legal System

• Competitive and Open Marketes

Free Ride

When people are not properly incentivized to work, they just take advantage of the work of other people

Economies of Scale

The advantages of large scale production that reduce average cost as quantity increases

Solow Model

Y = F(A, K, eL)

Y = GDP

A = Ideas

K = Physical Capital

eL = Human Capital

Solow Model Investent

Countries with higher rates of investment will be wealthierr

Conditional Convergence

The tendency for poorer countries to grow faster than richer countries and for the poorer and the richer countries will converge in income

Cutting Edge Growth

Countries that grow through idea generation. This is much harder

Catching Up Growth

Countries that grow by adopting ideas that were developed in other countries. This is much easier

Patent

Government grant of temporary monopoly rights

Nonrival

When one person’s consumption of the good does not limit another person’s consumption

Measure of Technological Progress

Ideas = Populations x Incentives x Ideas per hour

Lessons from Solow Model

• Countries that invest more will be wealthier

• Growth will be faster the father away a country’s capital stock is from its steady state value

• Capital accumulation cannot explain long run economic growth

Saving

Income that is not spent on consumption goods

Investment

Purchase of new capital

Consumption Smoothing Theory of Saving

Creating a balance between spending and saving during the different phases of our lives to achieve a higher overall standard of living

Time Preference

The desire to have goods and services sooner rather than later

Interest Rate

How much savers are paid to save

Market for Loanable Funds

The market where savers trade with borrows, and determine the equilibrium interest rate

Financial Intermediaries

Banks, bond markets, stock markets

Bond

When a member of the public lends money to a corporation

Collateral

Something of value that helps secure a loan

Crowding out

The decrease in private consumption and borrowing when the government borrows more

Arbitrage

The practice of taking advantage of price differences of the same good in different markets by buying low in one market and selling high in another

Relationship between Interest Rates and Bond Prices

Inverse (they move in opposite directions)

Stocks

Shares of ownership in a corporation

IPO

When new stocks are issued

Leverage Ratio

Ratio of debt to equity

Insolvency

When debts and liabilities exceed assets

Federal Reserve

Bank for the government and other banks

Money

Widely accepted means of payment

Liquid Asset

Asset that can be used for payment, or can be converted into a form that can be used for payment quickly without loss of value

Monetary Base

Currency and total reserves held at the Fed

M1

Currency and checkable deposits

M2

M1 plus savings deposits, money market mutual finds and small time deposits

Fractional Reserve Banking

A system in which banks only hold a portion of the deposits in reserve, lending the rest

Reserve Ratio

Ration of reserves to deposits

Money Multiplier

Inverse of the Reserve Ratio

Change in Money Supply

Money Supply = Change in Reserves * Money Multiplier

Open Market Operation

When the fed tries to change the money supply by buying and selling government bonds

Federal Funds Rate

Overnight rate for a loan from one major bank to another

Quantitative Easing

Situation that occurs when the Fed buys long term bonds and other securities

Quantitative Tightening

Situation that occurs when the Fed sells long term bonds and other securities

Liquidity Trap

Situation in which interest rates are close to 0, so pushing them lower is not possible at increasing aggregate demand

Illiquid Asset

An asset that cannot be quickly converted into cash without a large loss in value

Systemic Risk

The risk that the failure of one financial institution can bring down other institutions

Moral Hazard

The idea that people who are insulated from risk will tend to take on more risk

Things that the Fed must Predict and Monitor

• Will banks lend out all the new reserves?

• How quickly will increases in the monetary base translate into new bank loans?

• Do businesses want to borrow?

• Will business hold their borrowed money or use it for labor and capital?