Principles of Macroeconomics 6th edition chapters 12-15 Flashcard

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

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