ECON113-Final Exam

Extensive (Malthusian) Growth

Growth resulting from increased availability of resources (e.g., land, labor, natural resources).

Solowvian Growth

Growth stemming from increases in capital per worker and improvements in productivity.

Economic Growth

Sustained increases in per capita income or living standards without significant structural changes.

Economic Development

Sustained increases in per capita income accompanied by structural changes (e.g., transitioning from agriculture to manufacturing).

Primary Sector

Focuses on raw commodities (e.g., agriculture, fishing, mining).

Secondary Sector

Involves manufacturing and industrial production.

Tertiary Sector

Includes services like healthcare, education, and retail.

Gross Domestic Product (GDP)

The monetary value of all goods and services produced within a country's borders.

Technology in Economics

Defined as any advancement that increases output using the same amount of inputs.

Scarce Resources

Includes land, labor, and capital; does not include money as it is a medium of exchange, not a production input.

Cobb-Douglas Production Function

In intensive form: y=Af(k), where y is per capita output, A represents technology, and K is the capital-labor ratio.

Diminishing Returns

As the capital-labor ratio increases, the marginal product of capital declines.

Technological Advancements

Increase per capita output by shifting the production function upward for any given capital-labor ratio.

Economic History

The application of economic tools to analyze historical events and understand incentives driving historical outcomes.

Analogical Reasoning

Using historical events to inform responses to similar current events, aiding in decision-making.

Long-Term Goals in Economics

The central issue in long-term economic study is understanding the mechanisms and policies that drive economic growth.

Smithian Growth

Arises from increases in division of labor and specialization.

Malthusian Growth

Growth due to increases in resources (land, labor, capital) without technological advancements.

Gross Domestic Product (GDP)

Money value of all goods and services produced within a country.

Gross National Product (GNP)

Measures output produced by a country's factors of production globally.

Real GDP

Adjusted for changes in price level (inflation or deflation).

Best Measure of Living Standards

Real per capita GDP.

Post-Independence Decline and Recovery

Initial decline due to hyperinflation from war finance, loss of trade relationships, and lack of a developed financial system.

Recovery in the 1790s

Development of a financial system based on Alexander Hamilton's proposals and restoration of trade relationships.

Colonial U.S. Economy

Primary sector (agriculture, raw commodities).

U.S. Constitution's Economic Impacts

Established a common market, reduced uncertainty, spurring investment, and encouraged specialization and Smithian growth.

Cobb-Douglas Production Function

Exhibits diminishing returns to scale.

Role of Technology (A)

Includes effects of legal systems, financial systems, inventions, and climate conditions.

Historical Contributor to GDP Growth

Historically, the largest contributor to per capita GDP growth has been technological advancements.

Inclusive Institutions (as per Acemoglu)

Promote economic growth by ensuring property rights, political stability, and fair markets.

Extractive Institutions

Limit participation (e.g., restricted voting rights) and contributed to the decline of New World countries compared to the U.S.

Economic Development

Sustained per capita GDP increases accompanied by structural changes (e.g., transition to manufacturing or services).

Economic Growth

Sustained increases in per capita GDP without significant structural changes.

1790s U.S. Economic Recovery

Restored trade relationships and adoption of the Constitution fostered investment and specialization.

Other New World Economies

Fell behind due to extractive institutions and restricted political rights.

Comparative GDP in 1800

Argentina had per capita GDP equal to that of the U.S.

Labor Productivity

Can be increased by improving the capital-labor ratio (e.g., adding machinery or infrastructure).

Key Determinants of Productivity

Technology, capital investments, and efficient institutions.

Challenges of the Articles of Confederation

Excessive state-issued paper money led to inflation and lack of cohesive financial systems hindered growth.

Financial Intermediaries

Entities that facilitate indirect finance between savers and borrowers.

De Facto Regulators

Banks acting as informal regulators of state-chartered banks.

Bank Assets

Include reserves and loans held by banks.

Bank Liabilities

Comprise bank notes and customer deposits.

Solvent Bank

A bank with assets exceeding its liabilities.

First Bank of the U.S.

Federal fiscal agent, ceased operations in 1811.

19th Century Money Supply

Consisted of specie and convertible bank liabilities.

Legal Tender

Currency accepted for settling debts, includes gold and silver.

T-Accounts

Financial statements showing bank assets and liabilities.

Resource Allocation

Efficient distribution of resources in the financial system.

Asymmetric Information

Unequal knowledge among parties in a transaction.

Adverse Selection

Issues arising before a transaction due to information disparity.

Moral Hazard

Risks occurring after a transaction due to information asymmetry.

Bond Market Dynamics

Inverse relationship between bond prices and interest rates.

Return on Equity (ROE)

Banks can enhance ROE by holding riskier assets.

Industrialization Incentives

High wages drove labor-saving technology development.

Protective Tariffs

Government policies boosting domestic industrial growth.

Education's Role

Reduced child labor, increasing overall wages.

Comparative Advantage

U.S. superiority in agricultural commodities during the 19th century.

Railroad Industry

First sector to separate management from ownership.

Funding Act of 1790

Used land as collateral to stabilize government finances.

Discounted Bonds

Bonds sold below face value, indicating interest rates.

Functions of Money

Includes medium of exchange and store of value.

National Bank Act

Established national banks to finance the Civil War.

Government Bonds

Used to fund Civil War expenses through sales.

National Bank Notes

Replaced state bank notes via taxation.

Dual Banking System

Involves both state and national chartered banks.

Reserve Requirements

Minimum reserves banks must hold against deposits.

Reserve City Banks

Required 25% reserves, encouraging riskier loans.

Call Loan Market

Market for short-term loans with volatile rates.

Double Liability

National banks subject to liability for debts.

Free Banking Era

Period with minimal regulation for bank establishment.

Crisis of 1861

Led to suspension of specie payments and inflation.

Greenbacks

Paper currency issued during the Civil War.

Crisis of 1907

Caused by failed stock cornering attempt.

Federal Reserve

Established in 1913 to stabilize the economy.

Elastic Currency

Currency that can expand or contract as needed.

Clearing Houses

Facilitated check clearing and served as lenders.

Macroeconomic Volatility

High before 1950, stabilized thereafter.

19th-Century Money Supply

Included specie and bank liabilities.

Deposit Insurance

Protects depositors through mutual guarantees.

Resumption of Convertibility

Debate over returning to gold standard post-war.

Total Factor Productivity

Fastest growth from 1929 to 1941.

Economic Recessions

Characterized by GDP decline and rising unemployment.

Return on Equity (ROE)

Increased by leveraging and holding riskier assets.

Tax Impact on State Bank Notes

Increased tax reduced reliance on bank-issued notes.

Opposition to Second Bank

Primarily from state banks and Democrats.

Democratic Concerns

Focused on post-war deflation affecting debtors.

Great Inflation

Period of high inflation from 1965 to 1982.

Employment Act

Legislation aimed at maximizing employment levels.

Aggregate Demand

Total demand for goods and services in economy.

Supply-side Inflation

Inflation caused by decreased aggregate supply.

Stagflation

Simultaneous inflation and high unemployment situation.

Phillips Curve

Graph showing trade-off between inflation and unemployment.

Humphrey-Hawkins Act

1978 law mandating Fed to ensure maximum employment.

Inflation Target

2% target seen as balance between goals.

Paul Volcker

Fed Chair focused on controlling inflation.

Federal Funds Rate

Interest rate at which banks lend to each other.

Savings and Loan (S&L)

Institutions specializing in fixed-rate mortgages.

Deposit Outflows

Withdrawal of deposits due to better investment options.

Regulatory Easing

Deregulation leading to riskier lending practices.