Chapters 23-26 ECON 201
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Date Created: 10/25/15
10192015 CH 23 The following diagram presents a circular ow model of a simple economy The outer set of arrows shown in green shows the ow of dollars and the inner set of arrows shown in red shows the corresponding ow of inputs and outputs Based on this model households earn income when rms purchase resources in resource markets In the circular ow model of an economy households own all the resources Households earn their income when rms purchase or rent these resources to use them to produce goods and services Firms in turn earn revenue when households buy goods and services Expenditures must equal income The gross domestic product GDP of the United States is de ned as the market value of all nal goods and services produced by resources within the United States in a given period of time Net exports are equal to exports minus imports GDP ClGXM C Consumption Investment G Govt consumption expenditures and gross investment XM Exports imports Pencils Erasers Price Quantity Price Quantity 2008 1 145 2 195 2009 2 165 4 225 2010 3 110 4 165 Nominal GDP 2008 11452195 535 2009 21654225 1230 2010 31104165 990 Real GDP Base year 2008 so use prices of 2008 GDP de ator is a measure of the price level calculated by dividing nominal GDP by real GDP and multiplying by 100 CH 24 Because there isn39t one single measure of in ation the government and researchers use a variety of methods to get the most balanced picture of how prices uctuate in the economy Two of the most commonly used price indexes are the consumer price index CPI and the GDP de ator The GDP de ator for this year is calculated by dividing the value of all goods and services produced in the economy this year using this year s prices by the value of all goods and services produced in the economy this year using the base year s prices and multiplying by 100 However the CPI re ects only the prices of all goods and services bought by consumers CH 25 Suppose you want to project what the real GDP per person will be in each country 100 years from now The following formula shows how to compute the average income in n years where g represents the growth rate of real GDP per person in decimal form that is 14 is entered as 0014 and n represents the number of years Average income in n years Current average income 1g Note that in the real word the growth rate of real GDP per person is not constant every year Some years it rises faster while other years it slows down or falls Because of differences in growth rates the ranking of countries by income changes substantially over time Human capital is the knowledge and skills that workers acquire through training education and experience Human capital is distinct from technological knowledge which is society39s understanding of how the world works Human capital measures the resources expended years of training education or experience transmitting society s technological knowledge to workers Natural resources are the inputs into the production of goods and services that are provided by nature such as land bodies of water forests and mineral deposits Physical capital is the stock of tools machinery equipment and structures that are used to produce goods and services Physical capital per worker is equal to the ratio of physical capital to labor An economy s labor productivity is equal to the ratio of output to labor hours devoted to the production of the output The disparity in the growth of productivity re ects the fact that capital is subject to diminishing returns that is the increase in output generated by an increase in capital is less than the increase in output generated by previous increases in capital ln Gribinez where workers have relatively few tools to work with additional tools substantially increase productivity In Hermes workers already have a relatively large quantity of tools to work with so adding more tools results in more modest productivity growthThis hypothetical example illustrates a realworld phenomenon known as the catchup effect The catchup effect is when higher productivity growth in countries with less capital per person helps those countries grow faster and catch up to the percapita incomes of countries with more capital per person Foreign direct investment refers to a capital investment that is owned and operated by a foreign entity Foreign portfolio investment refers to an investment that is nanced with foreign money but operated by domestic residents Therefore this is an example of foreign direct investment CH 26 Suppose Lorenzo would like to invest 3000 of his savings One way of investing is to purchase stock or bonds from a private company Suppose NanoSpeck a biotechnology rm is selling bonds to raise money for a new lab a practice known as debt nance Buying a bond issued by NanoSpeck would give Lorenzo an IOU or promise to pay from the rm In the event that NanoSpeck runs into nancial dif culty Lorenzo and the other bondholders will be paid rst Debt nance is the sale of bonds to raise funds Equity nance is the sale of stock When a rm encounters nancial dif culty the rm is obligated to pay off bondholders before giving anything to stockholders Stockholders however stand to gain more if a rm is pro table A bond39s term the length of time until maturity affects the interest rate on the bond Shortterm bonds are less risky than longterm bonds because the bondholders receive the principal payment sooner To compensate for the additional risk associated with waiting longer for repayment longterm bonds tend to offer higher interest rates
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