Macro Economics, Week8 Notes
Macro Economics, Week8 Notes ECON 2220-004
Popular in Principles of Economics-Macro
verified elite notetaker
Popular in Department
This 9 page Class Notes was uploaded by Johanna Glaser on Wednesday October 12, 2016. The Class Notes belongs to ECON 2220-004 at University of Nebraska at Omaha taught by R. Metz in Fall 2016. Since its upload, it has received 15 views.
Reviews for Macro Economics, Week8 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/12/16
Week 8 Investment from Abroad Investment from abroad o Another way for a country to invest in new capital o Foreign direct investment Capital investment that is owned and operated by a foreign entity o Foreign portfolio investment Investment financed with foreign money but operated by domestic residents Benefits from investment o Some flow back to the foreign capital owners o Increase the economy’s stock of capital o Higher productivity o Higher wages o State-of-the-art technologies World Bank o Encourages flow of capital to poor countries o Funds from world’s advanced countries World bank and the international monetary fund o Set up after ww2 o Economic distress leads to: Political turmoil, international tensions Education Education o Investment in human capital o Gap between wages of educated and uneducated workers o Opportunity cost: wages forgone o Conveys positive externalities o Public education- large subsidies to human-capital investment o Problem for poor countries: Brain drain Health and Nutrition Humana capital o Education o Expenditures that lead to a healthier population Healthier workers o More productive Wages o Reflect a worker’s productivity Right investments in the health of the population o Increase productivity o Raise living standards Vicious circle in poor countries o Poor countries are poor Because their populations are not healthy Populations are not healthy To foster economic growth o Protect property rights Ability of people to exercise authority over the resources they own Courts-enforce property rights o Promote political stability Property rights o Prerequisite for the price system to work Lack of property rights o Major problem o Contracts are hard to enforce o Fraud goes unpunished o Corruption Free Trade Inward-oriented policies o Avoid interaction with the rest of the world o Infant-industry argument Tariffs Other trade restrictions o Adverse effect on economic growth Outward-oriented policies o Integrate into the world economy o International trade in goods and services o Economic growth Amount of trade-determined by o Government policy o Geography Easier to trade for countries with natural seaports Research and Development Knowledge-public good o Government-encourages research and development Farming methods Aerospace research (Air Force; NASA) Research grants National Science Foundation National Institutes of Health Tax breaks Patent system Population Growth Large population o More workers to produce goods and services Larger total output of goods and services o More consumers Stretching natural resources o Malthus: an ever-increasing population Strain society’s ability to provide for itself Mankind- doomed to forever live in poverty Diluting the capital stock o High population growth Spread the capital stock more thinly Lower productivity per worker Lower GDP per worker Promoting technological progress o World population growth Engine for technological progress and economic prosperity More people= more scientists, more inventors, more engineers Anti-Growth Argument o Not sustainable o Pollution o Resources are consumed and returned to the environment as waste o Growth does not solve sociological problems such as poverty, homelessness and discrimination o Higher standard of living comes with stress, angst, and anomie Social instability resulting from a breakdown of standards and values; ALSO: personal unrest, alienation, and uncertainty that comes from a lack of purpose or ideals o Summarized by “Gee, the world is not perfect or fair” Pro-Growth Argument o Path to higher standard of living o More education, recreation, travel, medical care, pollution abatement, equipment, better designed buildings, etc. o More art, music, drama, etc. o Only way to alleviate poverty There is little political stomach for redistribution o Better equipment to work with, better work conditions o More leisure allows more time for self-fulfillment o Price system assures resource availability for growth o Growth is primarily derived through expansion of human knowledge thus assuring sustainability Chapter 13: Saving, Investment & the Financial System Financial Markets Financial Markets o Savers can directly provide funds to borrowers o The bond market Bond- certificate of indebtedness Time of maturity- the loan will be repaid Rate of interest Principal- amount borrowed Term-length of time until maturity Credit risk- probability of default Tax treatment o The stock market Stock-claim to partial ownership in a firm Organized stock exchanges Stock prices: demand & supply Equity Finance Sale of stock to raise money Stock index Average of a group of stock prices Financial Intermediaries Banks o Take in deposits from savers Banks pay interest o Make loans to borrowers Banks charge interest o Facilitate purchases of goods and services Mutual funds o Institution that sells shares to the public o Uses the proceeds to buy a portfolio of stocks and bonds o Advantages Diversification Access to professional money managers National Income Accounts Important identities o An equation that must be true because of the way the variable in the equation are defined o Clarify how different variables are related to one another Accounting Identities o Gross Domestic Product (GDP) Total income Total expenditure o Y= C + I + G + Xn Y=GDP o Closed economy Doesn’t interact with other economies Xn=0 o Open economy Interact with other economies o Assumption: close economy: Xn=0 Y= C + I +G o National saving, (S) Total income in the economy that remains after paying for consumption and government purchases In a closed economy Y=C+I+G I=Y-C-G S=Y-C-G Savings = Investments ** T= taxes minus transfer payments Private saving, Y-T-C Income that households have left after paying for taxes and consumption Public saving, T-G Tax revenue that the government has left after paying for its spending Budget surplus: T-G>0 Excess of tax revenue over government spending Budget deficit: T-G<0 Shortfall of tax revenue from government spending o Macro Identities Aggregate expenditures= real GDP Leakages: dollars of income that are not used to create demand for new domestic output Ex. Personal Savings, imports, taxes Leakages = injections Injections: dollars of spending in addition to consumption spending Ex. Investment spending, exports, government spending o Savings= Investment For the economy as a whole One person’s savings can finance another person’s investment The Market for Loanable Funds Market for Loanable Funds o Market Those who want to save supply funds Those who want to borrow to invest demand funds o One Interest Rate Return to saving Cost of borrowing o Assumption Single financial market Supply & Demand of Loanable Funds o Source of the supply of loanable funds Saving o Source of the demand for loanable funds Investment o Price of a loan= real interest rate Borrowers pay for a loan Lenders receive on their savings o As interest rate rises Quantity demanded declines Quantity supplied increases o Demand curve Slopes downward o Supply curve Slopes upward Government policies o Can affect the economy’s saving and investment Saving incentives Tax free bonds Investment incentives Tax credits (wind power) Government budget deficits and surpluses Policy 1: Saving Incentives o Shelter some saving from taxation Affect supply of loanable funds Increase in supply Supply curve shifts right New equilibrium Lower interest rate Higher quantity of loanable funds o Greater investment Policy 2: Investment Incentives o Investment tax credit Affect demand for loanable funds Increase in demand Demand curve shifts right New equilibrium Higher interest rate Higher quantity of loanable funds o Greater saving Policy 3: Government Budget Deficits & Surpluses o Government- starts with balanced budget Then starts running a budget deficit Change in supply of loanable funds Decrease in supply o Supply curve shifts left New equilibrium o Higher interest rate o Smaller quantity of loanable funds o Crowding out Decrease in investment Results from government borrowing o Government- budget deficit Interest rate rises Investment falls o Government- budget surplus Increase supply of loanable funds Reduce interest rate Stimulates investments o Budget deficit: the amount by which govt. expenditures exceeds govt. revenues in a given year o Budget surplus: the amount by which govt. revenues exceeds govt. expenditure in a given year o Public debt: “the total accumulation of deficits (minus surpluses) the federal govt. has incurred through time.” Chapter 14: The Basic Tools of Finance Managing Risk The markets for insurance o Person facing a risk Pays a fee to insurance company o Insurance company Accepts all or a part of risk Insurance contract- gamble o You may not face the risk o Pay the insurance premium o Receive: peace of mind Role of insurance o Not to eliminate the risks o Spread the risks around more efficiently Market for insurance- problems: o Adverse selection High-risk person- more likely to apply for insurance Ex. Both of Susan’s parents lost their teeth to gum disease, so Susan buys dental insurance o Moral hazard More hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost Ex. Joe takes up sky diving after buying life insurance Policy: TARP- protects large financial institutions from failure. They will behave more recklessly because they are protected from adverse outcomes Diversification o Reduction of risk o By replacing a single risk with a large number of smaller, unrelated risks o Can eliminate firm-specific risk o Cannot eliminate market risk Risk o Can be measured statistically Uncertainty o Cannot be measured. Profit Risk of a portfolio of stocks o Depends on number of stocks in the portfolio Firm- specific risk o Affects only a single market Market risk o Affects all companies in the stock market Risk-return trade-off o 2 types of assets Diversified group 8% return 20% standard deviation Safe alternative 3% return 0% standard deviation Asset Valuation The efficient markets hypothesis o asset prices reflect all publicly available information about the value of an asset Stock markets o exhibit informational efficiency Informational efficiency o description of asset prices o rationally reflect all available information Implication of efficient market hypothesis o stock priced should follow a random walk Market Irrationality Many believe that sock price movements are partly psychological o J.M. Keynes: stock prices driven by “animal spirits”
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'