Macroeconomics Study Guide Quiz 2
Macroeconomics Study Guide Quiz 2 Econ 1012
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This 8 page Study Guide was uploaded by Kate Notetaker on Tuesday February 23, 2016. The Study Guide belongs to Econ 1012 at George Washington University taught by Dr. John Volpe in Spring 2016. Since its upload, it has received 167 views. For similar materials see Macroeconomics in Economcs at George Washington University.
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Date Created: 02/23/16
Chapter 9 Measuring Unemployment o Labor Force The sum of employed and unemployed workers in the economy o Unemployment rate the percentage of the labor force that is unemployed (Number of unemployed/Labor force) x 100 = unemployment rate Discouraged workers o People available for work, but not looking for a job because they believe no jobs are available for them o Haven’t looked for a job for four weeks Labor Force Participation Rate o 16 yrs of age or older considered available for work denominator o Number of people looking and people actually working (unemployed + employed) nominator o Rate going down in US Number currently is low Getting lower because the baby boomers are retiring Also getting lower because younger people are not working as much as they used to be More people are in school Some young people do not have the skills/education/experience o How to get the rate up: Induce people to get back into the workforce by making them healthier Small increase in number of people that work Increase birth rates Family sizes are getting smaller and smaller Import people Number of illegal immigrants is presumably 11 million people o Number has stayed the same for 6-7 years Developing countries with large population sizes and not enough employment o They go to countries where they can find this employment Frictional unemployment short term unemployment that arises from the process of matching workers with jobs o Occurs mostly because of job search or being between jobs o Also occurs because of seasonal unemployment o Some frictional unemployment actually increases economic efficiency by allowing for better job matches Structural Unemployment unemployment that arises from a persistent mismatch between skills and attributes of workers and requirements of jobs o Associated with longer unemployment spells Cyclical unemployment caused by a business cycle recession o When all unemployment is due to frictional and structural factors full employment o There will always be some unemployment in the economy Some government policies probably increase unemployment o Unemployment insurance o Minimum wage laws Okun’s Law o If you reduce the unemployment rate by 1%, you can get a 2 and a half % increase in the nations gross domestic product (GDP). Inflation o Everyone is impacted by inflation o Inflation is a steady persistent increase in the general level of prices Deflation is the opposite o Disinflation is when the inflation rate falls Efficiency wages o An above-market wage that a firm pays to increase workers’ productivity o The idea that paying workers a relatively high wage will make them motivated to perform well in order to keep their job o These wages are probably another reason why unemployment exists Even when cyclical unemployment is zero Consumer price index measure of the average change over time in prices of typical urban family of four pays for goods or services o (Expenditures in the current year/Expenditures in the base year) x 100 Nominal interest rate o Stated interest rate on a loan Real interest rate o Nominal interest rate minus the inflation rate Chapter 10 Human capital knowledge and skills workers acquire from education and training or from their life experiences o Ex. Worker gets a college degree What leads to long-run economic growth? o Increase in the capital stock o Technological change o Improved labor productivity Technological progress is affected by o New software developments o Investment in capital o Private property rights o Entrepreneurship Potential GDP o Increases over time as technological change occurs o Increases over time as the labor force grows Rule of 70 Number of years to double = 70/Growth rate Growth rate ((RGDP year2 RGDP year1/RGDP year1 x 100 NBER (National Bureau of Economic Research) agency that identifies a recession During expansion phase of business cycle o Production, employment and income increase During recession phase of the business cycle o Production, employment and income decrease Leads to shorter recessions, longer expansions and less severe fluctuations in real GDP o A service-based economy o Unemployment insurance o Fiscal policy Budget surplus tax revenue exceeds government spending Balanced budget tax revenue equals government spending Budget deficit tax revenue is less than government spending Economic growth can be defined as either long-run increases in real GDP or long run increases in real GDP per capita o Real GDP per capita = real GDP / population Measuring economic growth o The growth rate of the economy is the annual rate of change of real GDP or of real GDP per capita Annual rate of change o (value in some year) – (value in the previous year) / (value in the previous year) When real GDP per capita rises, we say the economy is better off and vice versa In the long run, small differences in economic growth rates result in big differences in living standards Economic Growth Model o Explain growth rates in real GDP per capita over the long run o Key to this is labor productivity quantity of goods and services that can be produced by one worker or by one hour of work o Two main factors affect labor productivity Quantity of capital per hour worked Level of technology o Technological change change in quantity of output a firm can produce using a given quantity of inputs Technological Change o Better machinery and equipment o Increases in human capital Accumulated knowledge and skills o Better means of organizing and managing production Per-worker production function o Relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant o Subsequent increases would result in diminishing returns New growth theory o Model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system Knowledge capital o Key determinant of economic growth o Results from research and development and other technological advances o Nonrival and nonexcludable public good o Results in increasing returns at the economy level Physical capital o Rival and excludable private good o Results in its diminishing returns Patents o Governments seek to protect intellectual property o Exclusive right to produce a product for a period of 20 years Copyrights o Similar to patents o Grants the exclusive right to use the creation during and 70 years after the creator’s lifetime Productivity o Measure productivity calculate labor productivity – output per worker o Labor productivity is almost always rising Economic growth model predicts that poor countries will grow faster than rich countries o Effect of additional capital is greater for countries with smaller capital stocks o Greater advances in technology immediately available to poorer countries o Prediction of catch-up Level of GDP per capital in poor countries will grow faster than in rich countries Why are high income countries not catching the US? o US labor markets are relatively flexible Hiring and firing workers is relatively unrestricted by government regulation o The US financial system is relatively efficient and the high volume of trading ensures high liquidity, making the US and attractive place to invest Four key factors in explaining why many low income countries are growing so slowly o Failure to enforce the rule of law Rule of law ability of a government to enforce the laws of the country Government must guarantee property rights Rights individuals or firms have to the exclusive use of their property o Wars and revolutions Makes investment and technological growth difficult o Poor public education and health Workers are less productive o Low rates of saving and investment Undeveloped and insecure financial systems create a “vicious cycle” of low savings and investment, preventing growth Foreign direct investment o Purchase or building by a corporation of a facility in a foreign country Foreign portfolio investment o Purchase by an individual or a firm of stocks or bonds issued in another country Encouraging growth o Enhancing property rights and the rule of law Working toward independent courts and eliminating corruption o Improving health and education Health care and education have increasing returns for a country Benefits spilling over to other members of the country Improvements can help prevent brain drain Highly educated and successful people leave developing countries to go to high-income countries o Policies that promote technological change Encourages foreign direct investment o Policies that promote savings and investment Eliminating corruption people know their assets won’t be seized Once done, governments can encourage savings and investment through tax incentives o Arguments against growth Negative effects on the environment Depletion of natural resources Diminishment of distinctive cultures Long-term, sustained economic growth seems to be the key to improvements in standard of living not short term growth Chapter 11 Why do economic growth rates matter? o High growth rates coincide with improved living standards o When a country sustains high growth rates, life expectancy at birth increases o High levels of sustained economic growth reduce infant mortality Joseph Schumpeter o Developed a growth model that suggests new products unleash a “gale of creative destruction” that drives old products out of the market Causes of increases in long-run labor productivity o Quantity of capital per hour worked o Technological change Technological change is more important for economic growth than additional capital When low income countries begin to experience economic growth, they often do so at rates much higher than current growth rates of industrial nations o Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital The total value of saving in the economy must equal the total value of investment o Closed economy Y = C + I + G Rearrange to I = Y – C – G Investment in a closed economy is equal to income minus consumption and government purchases Savings o Composed of private savings (households) and public savings (government) Private savings all household income that is not spent Household incomes derive from the payments for factors of production and transfer payments Households spend money on consumption and taxes SPrivateY + TR – C – T Government saves whatever it brings in but does not spend SPublicT – G – TR Total saving is: S = S Private Public o If you don’t have savings, then you don’t have investment of physical capitol and human capitol If you don’t have physical capitol and human capitol, then worker’s wages will be low There will be relatively little leftover for savings Then you will have little for investment o You need savings to get investment of sufficient quantities Firms borrow loanable funds from households o Borrow more when households demand a lower return on their money (lower real interest rate) Households supply loanable funds to firms o Provide more when firms offer them a greater reward for delaying consumption (higher real interest rate) Governments through their saving or dissaving o Affects the quantity of funds that “pass through” to firms When technological change occurs o Investments become more profitable for firms o Increase the demand for loanable funds o Real interest rate will rise, as will the quantity of funds loaned Crowding out o Decline in private expenditures as a result of increases in government purchases An increase in… Will shift the… Causing… The government’s Supply of loanable The real interest rate to budget deficit funds curve to the left increase and investment to decrease The desire of Supply of loanable The real interest rate to households to consume funds curve to the left increase and today investment to decrease Tax benefits for saving Supply of loanable The real interest rate to which increase the funds curve to the right decrease and incentive to save investment to increase Expected future profits Demand for loanable The real interest rate funds curve to the right and the level of investment to increase Corporate taxes Demand for loanable The real interest rate funds curve to the left and the level of investment to decrease
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