Principles of Macroeconomics 6th edition chapters 12-15 – Flashcards
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productivity
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the quantity of goods and services produced from each unit of labor input
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physical capital
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the stock of equipment and structures that are used to produce goods and services
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human capital
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the knowledge and skills that workers acquire through education, training, and experience
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natural resources
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the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
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technological knowledge
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society's understanding of the best ways to produce goods and services
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diminishing returns
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the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
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catch-up effect
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the property whereby countries that start off poor tend to grow more rapidly that countries that start off rich
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economic growth rate
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the annual percentage change of real GDP
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growth rate of real GDP
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tells us how rapidly the economy is expanding
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real GDP per capita
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real GDP / population
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growth rate of real GDP per capita
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((real GDP per capita in current year - real GDP per capita in previous year) / real GDP per capita in previous year) x 100
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rule of 70
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tells us the number of years that will take for the level of any variable to double (70 / annual percentage growth rate of a variable)
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aggregate hours
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increase in the labor force due to population growth. population growth brings economic growth because aggregate hours increase when the population increases.
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labor productivity
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the quantity of level GDP produced by one hour of labor
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growth of labor depends on 3 things
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1. savings and investing in physical capital 2. expansion of human capital 3. discovery of new technologies
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classical economic growth theories
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population increases and resources become scarce. also known as Malthusian theory and Doomsday theory . growth will come to an end
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neoclassical growth theory
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real GDP per person will continue to increase as long as technology continues to advance
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new growth theory
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the theory that our unlimited wants will lead us to ever greater productivity and perpetual economic growth
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financial capital
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the funds that firms use to buy and operate physical capital
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gross investment
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the total amount spent on new capital goods
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net investment
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the change in the quantity of capital - equals gross investment minus depreciation (change in the market value)
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wealth
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the value of all of the things that you own - not the same as income
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saving
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the amount of income that is not paid in taxes or spent on consumption of goods and services. savings adds to wealth
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capital gains
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when the market value of capital increases. capital gains increase wealth
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financial system
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the group of institutions in the economy that help to match one person's saving with another person's investment
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financial markets
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financial institutions through which savers can directly provide funds to borrowers
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bond
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a certificate of indebtedness
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stock
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a claim to partial ownership in a firm
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financial intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
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mutual fund
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an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
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national saving
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the total income in the economy that remains after paying for consumption and government purchases
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private saving
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the income that households have left after paying for taxes and consumption
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public saving
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the tax revenue that the government has left after paying for its spending
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budget surplus
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an excess of tax revenue over government spending
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budget deficit
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a shortfall of tax revenue from government spending
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market for loanable funds
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the market in which those who want to save supply funds and those who want to borrow to invest demand funds
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crowding out
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a decrease in investment that results from government borrowing
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finance
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the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
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present value
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the amount of money today that would be needed, using prevailing interest rates, to produce a given futur amount of money
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future value
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the amount of money in the future that an amount of money today will yield, given prevailing interest rates
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compounding
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the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
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risk aversion
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a dislike of uncertainty
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diversification
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the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks
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firm-specific risk
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the risk that affects only a single company
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market risk
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risk that affects all companies in the stock market
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fundamental analysis
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the study of a company's accounting statements and future prospects to determine its value
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efficient markets hypothesis
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the theory that asset prices reflect all publicly available information about the value of an asset
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informational efficiency
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the description of asset prices that rationally reflect all available information
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random walk
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the path of a variable whose changes are impossible to predict
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labor force
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the total number of workers, including both the employed and the unemployed
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unemployment rate
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the percentage of the labor force that is unemployed
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labor-force participation rate
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the percentage of the adult population that is in the labor force
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natural rate of unemployment
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the normal rate of unemployment around which the unemployment rate fluctuates
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cyclical unemployment
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the deviation of unemployment from its natural rate
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discouraged workers
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individuals who would like to work but have given up looking for a job
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frictional unemployment
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unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
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structural unemployment
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unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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job search
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the process by which workers find appropriate jobs given their tastes and skills
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unemployment insurance
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a government program that partially protects workers' incomes when they become unemployed
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union
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a worker association that bargains with employers over wages, benefits, and working conditions
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collective bargaining
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the process by which unions and firms agree on the terms of employment
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strike
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the organized withdrawal of labor from a firm by a union
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efficiency wages
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above equilibrium wages paid by firms to increase worker productivity
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standard of living
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depends on productivity
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GDP is represented by
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Y = quantity of output produced
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Quantity of labor is represented by
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L = the quantity of labor
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K/L
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capital per worker
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productivity is higher when the average worker has
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more capital
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H/L
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the average worker's human capital
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productivity is higher when the average worker has
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more human capital
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Natural resources is represented by
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N
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if a country has more N than it can produce more
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Y
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an increase in N/L
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causes and increase in Y/L
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countries do not need
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N to be rich
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any advance in knowledge that boosts productivity allowing society to
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get more ouput from it's resources
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production function
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a graph or equation showing the relationship between input and outputs
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Y =
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A F( L, K, H, N)
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A
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equals the level of tech
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constant returns to scale
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changing all inputs by the same percentage causes output to change by that percentage
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economic growth and public policy
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savings and investment, investment from abroad, education, health and nutrition, property rights and political stability, free trade, research and development
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producing more capital requires producing
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less consumption goods
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current consumption
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equals increasing saving
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if the gov't implements policies that raise saving and investment
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K will rise causing productivity and living standards to rise
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foreign direct investment
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a capital investment that is owned and operated by a foreign entity
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foreign portfolio investment
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a capital investment financed with foreign money but operated by domestic residents
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political instability creates
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confusion over whether property rights will be protected in the future
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inward oriented policies
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aim to raise the living standards by avoiding interaction with other countries
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outward oriented policies
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promote integration with the world economy
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policies that promote technological progress
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patent laws, tax incentives or direct support for private sector R&D, grants for basic research at universities
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bigger population
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= higher L = less N/L
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bigger population
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= higher L = less per K/L per worker = Y/L & living standards
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private saving
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the portion of households' income that is not used for consumption or paying taxes (Y-T-C)
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public saving
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tax revenue less government spending (T-G)
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national saving
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private saving + public saving = (Y-T-C) + (T-G)
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closed economies
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do not interact with trade (N/X)
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budget deficit does not
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influence the amount that households and firms want to borrow to finance investment at any given interest rate, it does not altar demand for loanable funds
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loanable funds
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flow of resources available from private saving
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national saving
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the source of the supply of loanable funds is composed of private and public saving
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higher interest rates
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change the behavior of households and firms that participate in the loan market
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budget surplus
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can be used to repay some of the gov't debt
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budget deficit
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borrowing from the bond market
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budget debt
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is an accumulation of past gov't borrowing
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private saving
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the income that is remaining after the households pay their taxes and pay for consumption
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what a household can do with savings
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buy corporate bonds or equities, purchase a certificate of deposit at the bank, buy shares of a mutual fund, let accumulate in saving or checking accounts
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investment
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is the purchase of new capital (in this case physical)
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supply of loanable funds comes from
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income that people save and loan
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public saving
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adds to national saving and the supply of loanable funds if positive vice versa if negative
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an increase in the interest rate makes saving more attractive which
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increases the quantity of loanable funds supplied
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demand for loanable funds comes from
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households who wish to borrow to make investments
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firms borrow the
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funds they need to pay for new capital
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households borrow the
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funds they need to purchase new houses
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a fall in the interest rate reduces the cost of borrowing
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which raises the quantity of loanable funds demanded
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tax incentives for saving
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increases the supply of loanable funds
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tax incentives for saving
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decrease the equilibrium interest rate and increase the equilibrium quantity of loanable funds
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better saving rates =
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higher GDP = better living standards
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if the tax laws encourage greater savings
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there would be lower interest rates and greater investment
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an investment tax incentive credit change
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the demand for loanable funds
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investment incentives
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raise the equilibrium interest rate and increases the equilibrium quantity of loanable funds
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if the reform of the tax laws encouraged
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greater investment, the result would be higher interest rates and greater saving
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a budget deficit
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decreases national saving and the supply of loanable funds
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budget deficit
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raises the equilibrium interest rate and decreases the equilibrium quantity of loanable funds
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when the gov't reduces national savings by running a budget deficit
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the interest rate rises and investment falls
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budget surplus
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increases national saving and the supply of loanable funds
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budget surplus
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decreases equilibrium interest rate and raises the equilibrium quantity of loanable funds
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increases the supply of loanable funds
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reduces the interest rate, and stimulates investment
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the government finances deficits by
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borrowing (selling government bonds)
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saving incentive curves apply to the
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supply curve
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investment incentive curves apply to the
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demand curve
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gov't budget deficit and surplus apply to the
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supply curve
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saving incentives, investment incentives, gov't budget deficit and surpluses are all examples of
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policies
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all policies exemplify
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shifts in their specific curves
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employed
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paid employees, self employed, and unpaid workers in a family business
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unemployed
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people not working who have looked for work during previous 4 weeks
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not in the labor force
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everyone else
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labor force is comprised of
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the employed and unemployed added together
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unemployment rate =
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#of people unemployed / labor force x 100
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labor force participation rate
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labor force / adult population rate x 100
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u-rate excludes
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discouraged workers, does not distinguish between full-time and part-time workers, or people working part time because full-time jobs are not available, some people misreport their work status in the BLS survey
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natural rate of unemployment
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the normal rate of unemployment around which the actual unemployment rate fluctuates (explained in the chapter)
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cyclical unemployment
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the deviation of unemployment from its natural rate that is associated with business cycles (explained the the chapter)
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teens have lower rates of labor force participation and
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much higher rates of unemployment than older workers
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BLS
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Bureau of labor statistics
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blacks 20 years and older have
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similar rates of labor force participation as white, but have much higher rates of unemployment
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women ages 20 and older have
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lower rates of labor force participation than men - once in the labor force they have somewhat lower rates of unemployment
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natural rate of unemployment
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is estimated by economists at the congressional budget office
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are there more short term or long term unemployed
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short term, but more long term unemployed are observed
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unemployment never falls to
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zero percent
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labor markets wages
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adjust to balance the quantity of labor supplied and the quantity of labor supplied and the quantity of labor demanded
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what is a good longer term determinant of a nation's productivity?
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savings
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u rate does not include
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discouraged workers, does not distinguish between full time and part time work, or people working part time because full time jobs are not available, people misreport their work status in the BLS survey
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structural unemployment
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occurs when there are fewer jobs than workers
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sectoral shifts
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are changes in the composition of demand across industries or regions of the country
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efficient market hypothesis
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making decisions off of the value of the stocks and it's prices
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sectoral shifts will
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temporarily unemploy some workers, who must search for new jobs appropriate for their skills and tastes
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structural unemployment is inevitable because
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the economy is always changing
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new jobs
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increase productivity but cause unemployment
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government employment agencies
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provide information about job vacancies to speed up the matching of workers with jobs
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public training programs
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aim to equip workers displaced from declining industries with the skills needed in growing industries
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unemployment insurance
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a government program that partially protects workers' incomes when they become unemployed
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UI benefits end when a worker takes a job
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workers have less incentive to search or take jobs while eligible to receive benefits
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UI benefits give
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the unemployed more time to search, resulting in more job matches a thus higher productivity
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structural unemployment
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occurs when wage is kept above equilibrium
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minimum wage may exceed the equilibrium wage for the least skilled or
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experienced workers, causing structural unemployment
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unions exert their market power to
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negotiate higher wages for workers - collective bargaining; strikes
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the typical union worker earns
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10-20% more than the wages of an nonunion worker for the same type of work
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insiders are
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workers who remain employed, they are benefitting from union wages
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outsiders are
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workers who lose their jobs, they are not getting union jobs or wages
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efficiency wages
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firms voluntarily pay above equilibrium wages to boost worker productivity
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different versions of efficiency wage theory suggest different reasons why firms pay high wages
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worker health, worker turnover, worker quality, worker effort
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worker health
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higher wages = better nutrition = better health = more productive
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worker turnover
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hiring and training new workers is not as productive as hiring experienced workers - paying high wages gives workers more incentive to stay reducing turnover
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worker quality
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offering higher wages attracts more job applicants, lowering quality of the firm's workforce
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work effort
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workers can work hard or shirk - shirkers are fired if caught
