ECO EXAM 2

real GDP per capita

real GDP/population

• measures living standard

real GDP per worker

Y/L

• measures productivity

Rule of 70

estimate of how many years it takes for a variable to double

70/annual growth rate of variable

K

physical capital

man made productive assets (does not include natural resources)

ex.) factories, houses, equipment, roads

H

human capital

knowledge and skills of workforce

ex.) education, on the job training

T

technology

knowledge available for use in production

ex.) touchscreen, just in time production

aggregate production function

Y/L = T x (K/L)^0.4 x (H/L)^0.6

diminishing returns

holding H/L and T constant, increase productivity will get smaller as a worker gets more physical capital

growth accounting

look at contribution of K/L, H/L, and T to productivity growth

total factor productivity

contribution of T in productivity growth

higher TFP means K and H are being used more efficiently, so output per worker rises

catch up effect

due to diminishing returns, poor countries tend to grow more rapidly than rich ones

conditional convergence

faster growth is possible only if poor countries are able to increase K, H, and T simutaneously

promoting sustained growth

1. political stability

2. protection of property rights

   1. various policies aimed at increasing K, H, and T ex.) infrastrucure, education, basic research, savings

savings - Investment Spending Identity

an accounting fact for a closed economy, S=I

based on GDP

standing between S and I is the financial system

GDP - C - G = I

national savings

GDP - C -G

private + government

private savings

GDP - T - C

government savings

T - G

budget balance

• T > G, budget surplus

• T < G, budget deficit

• T = G, balanced budget

investment spending

spending on new physical capital

• increases amount of physical capital in economy

making an investment

buying something for possible future gains

• does not always create new capital for the economy

demand for loanable funds

demand slopes down

demand at each r, how much L.F. will be borrowed

supply for loanable funds

supply slopes upward

comes from private savings

at each r, how much L.F. is saved

market equilibrium

at the right r, Qsaved = Qborrowed

r too high, surplus

r too low, shortage

change in supply

changes in private savings ex.) consumer sentiment, tax policy toward savings

savings from abroad flows in and out

change in demand

changes in perceived business opportunity ex.) business confidence, new tech, tax policy towards investment

change in government borrowing

crowding out

drive up interest rate and reduce private investment

budget deficit

increases demand for loanable funds, shifting demand curves out

financial intermediary

a financial institution through which savers indirectly provide funds to borrowers

financial market

a “place” where savers directly provide funds to borrowers

bond

legal promise to repay a debt

bond issuer

borrower (gov., non-profit, firms)

bondholder

lenders

default risk

bond issuers fail to repay interest and principal as promised

stock

a claim to partial ownership to a firm

issuer

firms

stockholders

can vote on certain decisions

receive dividend for each share they own

primary market

where bonds and stocks are sold for the first time by issuers

ex.) IPO, sale of new treasury bond

• money raised in market goes to issuers

secondary market

where previously issued bonds and stocks are traded among investors

ex.) NYSE, OTC market for treasury bond

• issuers do not raise new money from market

reducing transaction costs

expenses involved in making a transaction

risk

uncertainty of future income

risk averse

dont want to take risk

providing liquidity

how easy an asset can be turned into cash without much loss of value

cash > deposits > bonds/stocks > physical assets

future value

invest money now at a rate of r for N years

X * (1 + r)^N

present value

current value of a future sum of money at a specified interest rate

X / (1 + r)^N

NPV

= PV of revenue - PV of costs

good news

firm deemed more profitable, demand for shares go up, stock prices go up

bad news

firm deemed less profitable, demand for shares go down, stock prices go down

central bank action

Fed decides to cut benchmark rate, stock prices rise

interest rate on bonds

bonds offer lower interest rate, stock more attractive, stock prices rise