EC112 CH 21 & CH 22 – Flashcards
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Business Cycle
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Alternating periods of economic expansion and economic recession
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Long-Run Economic Growth
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The process by which rising productivity increases the average standard of living
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Real GDP per capita
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= Standard of Living
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Labor Productivity
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The quality of goods and services that can be produced by one worker or by one hour of work
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Labor productivity is affected by two factors..
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1. Capital per hour worked 2. Technological change
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Capital per hour worked
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Refers to the manufactured goods that are used to produce other goods and services, such as computers, factory buildings, machine tools, and warehouses.
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Technological Change
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Technology refers to the processes a firm uses to turn inputs into outputs of goods and services. Technological change is the increase in the quantity of output that firms can produce given a quantity of inputs.
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Labor productivity leads to long-run economic growth from..
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1) Increase in capital stock 2) Improved labor productivity 3) Technological change NOT increase in average wages
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Capital
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Manufactured goods that are used to produce other goods and services
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Human Capital
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The accumulated knowledge and skills workers acquire form education or training or from their life experiences
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Potential GDP
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The level of real GDP attained when all firms are producing at capacity. 1) Increases over time as technological change occurs 2) Increases over time as the labor force grow
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A plants capacity is measured by
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Its production when operating on normal hours, using a normal workforce.
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The Rule of 70
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Approximates how many year it will take RGDP per capita to double. 70/Growth Rate
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Growth Rate
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= RGDP in year 2 - RGDP in year 1/RGDP in year 1 *100
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Financial System
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The system of financial markets and financial intermediaries through which firms acquire funds from households.
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Financial Intermediaries
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Banks, mutual funds, pension funds, and insurance companies that borrow funds from savers and lend funds to borrowers
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Financial Markets
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Markets where financial securities, such as stocks and bonds, are bought and sold.
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Firms that act as financial intermediaries match households that have excess funds with firms that want to borrow funds. Other key services the financial systems provides to savers and lenders are..
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1) Allows savers to sooner their money among many financial investments. 2) Collects and communicates information about borrowers to savers. 3) Provides an easy method of exchanging a financial security for money.
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"Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else"
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Is an incorrect statement. The supply of loanable funds is determine by household saving.
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Market for loanable funds
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The interaction of borrowers and lenders that determines the maker interest rate and the quantity of loanable funds exchanged.
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Crowding out
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A decline in private expenditure as a result of an increase in government purchases.
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Relationship Between GDP and its components is
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Y = C + I + G + NX
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In a closed economy, net exports (NX) are zero
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Y = C + I + G
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Rearranged, investment spending on the part of business is
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I = Y - C - G
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Private saving is equal to what households retain of their income after paying taxes and consumption. Households also receive income in the form of transfer payments
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S private = Y + TR - C - T
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We refer to government saving as public saving. It is what remains of tax revenue after the government pays transfers and conducts purchases. When public saving is negative, there is a budget deficit. When the value of public saving is positive, there is a budget surplus.
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S public = T - G - TR
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Investment equals private savings plus public savings
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I = S private + S public and S public = I - S private
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Inconsistent movements in real GDP around the business cycle peak can mean..
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That the beginning and ending of a recession may not be clear-cut. In fact, some economist have argues that the recession of 2001 actually began with the fall in real GDP during the third quarter of 2000.
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Figure 21.7 The Effect on the Business Cycle and Boeing
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The graphs show that the effects of the recessions on the Boeing are more dramatic than the effects on the economy as a whole.
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Figure 21.8 The Effect of Recession on the Inflation Rate
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An important fact about the business cycle is that during economic expansions, the inflation rate usually increases, particularly neat the end of the expansion and during recessions, the inflation rate usually decreases
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Figure 21.9 How Recessions Affect the Unemployment Rate
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The graph shows that as the recession began in March 2001, the unemployment rate stated to rise. The rate continued to rise even after the end of the recession in November 2001.
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Figure 21.10 Fluctuations in Real GDP
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The graph below shoes the year-to-year percentage changes in real GDP since 1900, illustrates a striking change in fluctuation in real GDP beginning around 1950. Before 1950, real GDP went through much greater year-to-year fluctuations than it has since that time.
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What is the general relationship between the business cycle and unemployment and inflation?
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During an expansion, unemployment falls and inflation increases.
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During the expansion phase of the business cycle, production, employment and income..
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increase
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During the recession phase of the business cycle, employment, and income..
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decrease
