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physical capital
human made goods used to make other g/s
human capital
improvement in labor created by education and knowledge of members in the workforce
technology
technical means for production of g/s
aggregate production function
hypothetical function that shows how productivity depends on quantities of physical capital and human capital per worker and the state of tech
diminishing returns to physical capital
when each successive increase in amount of physical capital per worker leads to smaller increase in productivity when amount of human capital per worker and state of tech is fixed
total factor productivity
amount of output that can be produced with a given amount of factor inputs, measure economic effects of technological progress
convergence hypothesis
difference in rGDP among countries tend to decrease over time bc countries w/ lower rGDP per capita tend to have higher growth rates
why growth rates differ
physical capital, human capital, technological progress
how gov can promote economic growth
build/maintain infrastructure, indirectly affect private investment rate thru strong financial system, paying for education, gov agencies doing r&d
consumer goods
includes everything purchased for consumption by households
investment goods
includes all forms of physical capital
depreciation
when value of an asset is reduced by wear, age, or obsolescence/when a currency becomes less valuable in terms of other currencies (more export less import → increase agg demand)
distinguishing LR growth and SR fluctuation PPC
SR fluctuations due to business cycles = production point inside the PPC, LR growth = PPC shift out
distinguishing LR growth and SR fluctuations AD-AS model
SR fluctuations (of age output around potential output) = shifts in AD or SRAS that lead to short run equilibrium above/below potential output, LR growth = LRAS shifts right, corresponds to increase in potential output
supply side fiscal policies
gov policies that seek to promote economic growth by affecting SR and LRAS, can also affect AD, AS, potential output in the SR and LR.
problem w/ supply side policies when promoting LR economic growth
tax cuts → budget deficit increases → increase potential for crowding out and decreases economic growth
laffer curve
low tax brings in high tax revenue bc ppl more incentivized to work, save, and invest, high tax brings in lower tax revenue bc ppl less incentivized to work, save, invest
key source of growth in potential output
human capital, technology
balance of payments accounts
summary of the country’s transactions with other countries
factor income
payments for the use of factors production owned by residents of other countries (ex. investment income, interest paid on loans overseas, labor income, etc.)
international transfers
funds sent by residents of one country to residents of another
balance of payments on the current account (aka current account)
the balance of payments on g/s + net international transfer payments and factor income
balance of payments on g/s
difference between value of exports and value of imports during a given period
merchandise trade balance (aka trade balance)
difference between country’s exports and imports of goods
balance of payments on the financial account (aka financial/capital account)
difference between sales and purchases of assets to foreigners during a given period (net sale of assets to foreigners)
decrease income leads to
decrease import, more exports
foreign exchange market
where currencies are traded
exchange rates
the prices at which currencies trade
appreciation
when a currency becomes more valuable in terms of other countries (more import less export)
equilibrium exchange rate
the exchange rate at which the quantity of a currency demanded in a foreign exchange market is equal to the quantity supplied
real exchange rates
exchange rates adjusted for international differences in agg price lvls
purchasing power parity
the nominal exchange rate between two countries’ currencies at which a given basket of g/s would cost the same amount in each country
nominal exchange rate determines
price of imports and exports
fixed exchange rate
when the gov keeps the exchange rate against some other currency at or near a particular target
floating exchange rate
when the gov lets the exchange rate go wherever the market takes it
3 ways to support value of geno when value is low, surplus of geno
gov buys geno in foreign exchange market using USD, gov can try shift supply and demand curves for geno in foreign exchange market (usually thru changing monetary policy: raise interest, more capital inflow, increase demand, decrease supply), reduce supply of geno in foreign exchange market by requiring domestic residents who want to buy foreign currency to get a license
foreign exchange controls
licensing systems that limit right of individuals to buy foreign currency
pros and cons for floating exchange rates
pros: easy to do business interstate bc dollar = dollar
cons: international transactions, dollar doesn’t = dollar. uncertainty of future value of dollar can deter trade between two countries
pros and cons for fixed exchange rates
pros: certainty ab future value of currency, country commits itself to not engaging in inflationary policies bc they destabilize exchange rate
cons: need to keep large quantity of foreign currency on hand (usually low-return investment) to stabilize an exchange rate thru intervention. using monetary policies instead means diverting it form other goals like stabilizing economy. foreign exchange controls distort incentives for import/exporting g/s
devaluation
reduction of value of currency that is set é under a fixed exchange rate regime (export increase, import decrease
revaluation
increase isn’t he value of currency that is set under a fixed exchange rate regime (decrease export, increase import)
devaluation and revaluations can be used to
eliminate shortages.surpluses in foreign exchange market, used as tools of macroeconomic policy
during expansion
imports increase, decrease during recessions
protectionism
practice of limiting trade to protect domestic industries
