Econ 201 - Chapters 9-10
Econ 201 - Chapters 9-10 ECON 201 Macro Economics
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This 6 page Class Notes was uploaded by Courtney Finnigan on Saturday January 30, 2016. The Class Notes belongs to ECON 201 Macro Economics at University of Washington taught by Dennis O'Dea in Fall 2015. Since its upload, it has received 88 views. For similar materials see Introduction to Macroeconomics in Economcs at University of Washington.
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Date Created: 01/30/16
Chapters 910 Econ 201 Chapter 9 (Lecture 7): Long Run Economic Growth: Real GDP per capita = Real GDP/ Population Size ● Economic growth is measured by using real GDP per capita ● Why? ○ Economic progress raises the living standards of the average resident of a country ● Real GDP does not account for growth in number of residents Rule of 70: The time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable’s annual growth rate ● Example: # of years for variable to double = 70/ annual growth rate of variable ● If GDP grows at 2% per year, it will take 35 years to double Labor Productivity: Often referred to as simply productivity output per worker Physical Capital: Consists of humanmade resources such as building and machines Human Capital: Is the improvement in labor created by the education and knowledge embodied in the workforce Technological Progress: Is an advance in the technical means of the production of goods and services Why do countries with low income have a higher growth rate? Aggregate Production: Hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker as well as the state of technology ● GDP per worker: T x (Physical Capital per worker) x (Human Capital per worker) ○ T stands for the estimate of level of technology Year K/L Y/L Investment 1 18,000 10,000 2,000 2 20,000 11,000 2,200 3 22,200 12,000 2,400 4 24,600 12,900 2,800 Aggregate Production Function: Y/L= f(K/L, H/L, T) Capital has diminishing returns because without additional workers, new machinery won’t be useful. Developing country has a lower capital stock and higher returns of capital. Diminishing returns to physical capital: When holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in production Growth accounting: Estimates the contribution of each major factor in the aggregate production function to economic growth Total factor productivity: The amount of output that can be achieved within a given amount of factor inputs Natural resources are less important today than physical and human capital as sources of productivity growth in most economics Four Government Policies: 1. Roads, power lines, ports, info networks and other underpinnings for economic activity are known as infrastructure. 2. Government subsidies to education 3. Government spending to R & D 4. Maintaining a wellfunctioning financial system Convergence hypothesis: International differences in real GDP per capita tend to narrow over time ● Economists believe that countries with relatively low real GDP per capita have higher rates of growth than countries with high GDP per capita ● Eventually, less developed countries will catch up and grow slowly like everyone else ● As technologies spread and returns to capital fall, growth rates will equalize Sustainable longrun economic growth: Long run growth that can continue in the face of the limited supply of natural resources and the impact of growth on the environment ● Long run growth is sustainable if it can continue in the face of the limited supply of natural resources and the impact of growth of the environment Technology, Markets and the New Growth Theory Why Growth Rates Differ: ● Differences in institutions (invest/innovate more) Government Policies: Savings and investment spending foreign investment Chapter 10: Savingsinvestment spending identity: Savings and investment spending are always equal for the economy as a whole GDP = C + I + G + XIM Total Income = Total Spending GDP = C + G + I Total Income = Consumption Spending and Investment Spending C + G + S = C + G+ I Consumption spending + Savings = Consumption Spending + Investment Spending Budget Surplus: Difference between tax revenue and government spending when tax revenue exceeds government spending Budget Deficit: Difference between tax revenue and government spending when government spending exceeds tax revenue Budget Balance: Difference between tax revenue and government spending ((s)govt. = T G TR National Savings: (Closed Economy) Sum of private savings and the budget balance, is the total amount of savings generated within the economy ((s)National = (s)Govt. + (s)private Net Capital Inflow: (Open Economy) Total Inflow of Funds into a country minus the total outflow of funds out of a country Loanable Funds Market: Hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lender ● The interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded (equilibrium interest rate) Crowding Out: Occurs when a government budget deficit drives up the interest rate and leads to reduced investment spending Fisher Effect: An increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged Wealth: The value of its accumulated savings Financial asset: Paper claim that entitles the buyer to future income from the seller Physical Asset: Is a paper claim that entitles the buyer to future income from the seller Liability: Requirement to pay income in the future Transaction Costs: The expenses of negotiating and executing a deal Financial Risk: Uncertainty about the future outcomes that involve financial losses or gains Diversification: Investing in several different things so the possible losses are independent events Liquid: Quickly converted into cash with relatively little loss of value Illiquid: Cannot be quickly converted into cash with relatively little loss of value Loan: Lending agreement between an individual lender and an individual borrower Default: Occurs when a borrower fails to make payments as specified by the loan of bond contract Loanbacked security: An asset created by pooling individual loans and selling shares in that pool Financial intermediary: An institution that transforms the funds it gathers from many individuals into financial assets Mutual funds: Financial intermediary that creates a stock portfolio and then results shares of this portfolio to individual investors Pension fund: Type of mutual fund that holds assets in order to provide retirement income to its members Lifeinsurance company: Sells policies that guarantee a payment to a policy holder’s beneficiaries when the policy holder dies Bank Deposit: Claim on a bank that obliges the bank to give the depositor his or her cash when demanded Bank: Financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers Efficient market hypothesis: Asset prices embody all publicly available info Random walk: Movement over time of an unpredictable variable Present Value: $1 received in a year = $1/ (1 + r) r = interest rate
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