Chapters 7-9 Notes

Chapter 7: Production and Growth

Key Growth Indicators

• GDP per Capita Growth in Canada

  • Grown approximately 2% per year.

  • Implication: Average income doubles every 35 years (Rule of 70).

• Importance of Long-Term Growth

  • Factors influencing long-run growth significantly impact living standards.

  • Productivity explains variations in living standards.

Productivity Determinants

• Definition of Productivity

  • Output of goods/services produced per hour of worker's time.

• Factors affecting Productivity

  • Physical Capital per Worker:

    • Equipment and structures (e.g., computers, tools).

    • More advanced tools increase efficiency.

  • Human Capital per Worker:

    • Skills and knowledge acquired through education and training (e.g., nurses, welders).

  • Natural Resources per Worker:

    • Inputs from nature (e.g., land, minerals).

  • Technological Knowledge:

    • Society's understanding of production efficiency (e.g., software like Office 365).

Factors of Production

• Inputs used to produce goods/services.

  • Includes physical capital generated from previous production efforts.

Chapter 7: Importance of Economic Growth

Saving and Investment

• Scarcity of Resources:

  • Devoting resources to capital requires trade-offs in current consumption.

• Role of Government:

  • Encourages savings and investment, fostering growth and higher living standards.

• Well-Functioning Financial Market:

  • Essential for economic growth.

Diminishing Returns and Growth

• Diminishing Returns:

  • Additional capital yields smaller benefits over time.

• Catch-Up Effect:

  • Poorer countries grow more rapidly than richer ones.

• Foreign Investment:

  • Essential for capital increase, technological advancements, and learning from richer countries.

Education's Impact on Growth

• Investment in Human Capital:

  • Each year of education increases wages by about 10%.

  • Opportunity cost: time spent in education that could have been spent earning money.

Chapter 7: Positive Externalities

Human Capital and Productivity

• Health and Nutrition:

  • Investment leads to healthier, more productive workers.

• Political Stability and Property Rights:

  • Essential for business operation and investment; instability deters investment.

Free Trade and Research

• Benefits of Open Policies:

  • Countries that integrate into the global economy benefit from specialization and efficiency.

• Research and Development (R&D):

  • Technology improvements lead to increased living standards.

  • Knowledge is a public good, and government has an interest in promoting R&D.

Chapter 8: Saving and Investment in the Economy

Financial System Overview

• Role of Financial Institutions:

  • Match savers with borrowers; includes financial markets and intermediaries.

Financial Markets

• Types:

  • Bond Market: Debt financing.

  • Equity Finance: Sale of stock for ownership in a firm.

• Characteristics:

  • Bond terms, credit risk, equity vs. bondholder benefits.

Importance of National Savings

• Private vs. Public Savings:

  • Private: Household income after taxes.

  • Public: Tax revenue remaining after government spending.

Market for Loanable Funds

• Supply and Demand:

  • Saver's supply funds to investors; interest rates balance supply and demand.

Chapter 9: Unemployment and Its Definition

Measuring Unemployment

• Definitions:

  • Employed: Worked at a paid job.

  • Unemployed: On temporary layoff or actively searching for work.

  • Not in the labor force: Full-time students, homemakers, retirees.

• Labor Force Participation Rate

  • Percentage of the adult population that participates in the labor market.

Types of Unemployment

• Cyclical Unemployment:

  • Yearly fluctuations around the natural rate.

• Frictional Unemployment:

  • Result of job searching; often short-term.

Structural Unemployment

• Definition:

  • Occurs when labor supply exceeds labor demand due to rigidity in wages.

• Minimum Wage Laws:

  • Can lead to unemployment, especially among minimum wage earners.

Unions and Collective Bargaining

• Role of Unions:

  • Bargain for higher wages and better conditions; collective bargaining impacts labor market dynamics.

• Efficiency Wages:

  • Above-equilibrium wages can enhance productivity, reduce turnover, and improve worker quality.