Notes, Weeks 5 and 6
Notes, Weeks 5 and 6 Econ 253-101
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This 6 page Class Notes was uploaded by Kayla Notetaker on Friday October 2, 2015. The Class Notes belongs to Econ 253-101 at Marshall University taught by Dr. Yuanyuan (Catherine) Chen in Fall 2015. Since its upload, it has received 22 views. For similar materials see Principles of Macroeconomics in Economcs at Marshall University.
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Date Created: 10/02/15
Macroeconomics 253 1 Chapter 10 Economic Growth Financial Systems and Business Cycles Economic Growth the ability of firms to expand by means of having up to date equipment hiring workers having new technology Firms acquire funds for these through households 0 Business Cycle the alternation of expansion and recession through an economy considered short term Calculating Growth Rates LongRun Growth rising productivity will result in the increase of the average standard of living 0 The best measure of this is through calculating the Real GDP per capita per person 0 Use Real GDP instead of Nominal GDP to adjust for the changes in price levels Real GDP focuses more on output than price 0 To find the change overtime Real GDPQ Real GDPu Real GDPt1 x 100 Example You are comparing the growth from 1900 to 2000 The Real GDP in 1900 was 6000 while the Real GDP in 2000 was 45000 45000 6000 6000 x 100 A or 650 growth Average Annual Growth Rate For shorter periods of time For example if the average growth rate of 2012 is 21 33 in 2013 and 2 in 2014 21 2012 33 2013 2 2014 247 Annual 3 number of years involved Growth Rate gtM If there would happen to no change you put 0 for the year with no change This does NOT mean that year produced nothing it means that year produced the same amount as the previous year Rule of 70 How many years will it take for real GDP per capita to double uses the Rule of 70 to calculate L Number of Years Growth Rate To Double For instance if the growth rate is 5 70 5 14 Years Macroeconomics 253 2 gt do NOT use 005 for 5 Use the actual percentage number What determines the rate of LongRun Growth Labor Productivity the quantity of goods and services that are produced by one worker or by one hour 0 Two factors determine Labor Productivity 0 Quantity of capital K per hour 0 Technology 0 Capital Stock the total amount of physical capital per hour in other words as capital stock increases so does worker productivity 0 Human Capital the knowledge and skill a worker accumulates through eXperience and training Technological Change increase in the quantity of outputs firms produce using a certain quantity of inputs 0 Technology refers to the processes a firm uses to turn limited inputs into outputs goods and services 0 Most change is focused on new machinery and equipment 0 Entrepreneurs and the government have important in uences o Entrepreneurs bring together factors of production labor capital natural resources to produce the goods and services They make the decisions to introduce new technology 0 Government plays a role in providing property rights for entrepreneurs Side note Potential GDP 0 The level of real GDP attained when all firms are producing at capacity 0 Increases every year as the labor force and capital stock grow and technological change occurs Real GDP 1 Change in technology big component in Potential GDP Time The Business Cycle 0 Alternating periods of eXpansion and recession over time o Expansion increase in production employment and income 0 Recession decrease in production employment and income Idealized Business Cycle Graph Real GDP Peak l Trough Recession Expansion Expansion 1900 2090 Time Remember m Peak Recession Expansion Trough V Leading Indicators of the Business Cycle 0 Average work week of production of workers 0 Average initial weekly claims for unemployment insurance 0 New orders for consumer goods and market adjusted for in ation 0 New orders for non defense related capital goods 0 Index of supplier deliveries 0 New building permits 0 Index of stock prices 0 Index of consumer expectations Macroeconomics 253 3 Macroeconomics 253 4 Business Cycle e ects on In ation Rate 0 In ation usually increases during eXpansions especially near the end 0 Consequently in ation decreases during recession Unemployment Rate 0 Recessions cause unemployment rate to rise rms pro ts decline and lay off more workers 0 The lag in the unemployment rate 0 When recessions are over unemployment continues to rise for a short time o This is because firms are reluctant to hire in the beginning of recovery firms have not yet seen increase in sales Business Cycle Trends By the end of expansion 0 Interest rates will go up 0 Wages will increase 0 Firms prices will fall 0 HH and Firm debt will increase At the beginning of a recession 0 Capital goods spending decreases 0 Spending on durables and houses will decrease 0 Production by firms will slow 0 Profits will fall 0 General spending will decrease When are we in Recession The National Bureau of Economic Research NBER defines recession as 0 Significant decline in economic activity lasting more than a few 3 months 0 Usually announces well after the recession has begun Durables goods that typically last for three or more years generally more eXpensive than nondurables Nondurables goods that typically do not last beyond three years Durables Fluctuates Real GDP Trend Nondurables rather consistent Macroeconomics 253 5 Will the US Economy ever Stabilize In general the US has experienced periods of economic stability due to longer expansions shorter recessions and less severe uctuations in real GDP Some explanations from economists as to how this happened are 0 Increasing importance of services and decreasing importance of goods 0 Overtime services have made up a larger portion of GDP than durables purchases go toward more services than durables o The establishment of unemployment insurance as well as other gov programs that provide funds to unemployed 0 These programs make it possible for the unemployed to still have spending power and can spend more than they could have otherwise Additional spending is thought to shorten recessions 0 Federal policies are enacted to stabilize the economy 0 Use macroeconomic policies to try ending recessions and prolonging expansions 0 Increased stability of financial system 0 Without a stable financial system recessions will be more severe Financial Systems 0 System of financial markets and intermediaries though which firms acquire funds from HHs o Consists of Savers buyers and Borrowers sellers 0 Financial Markets markets where financial securities stocks and bonds are bought and sold I Financial securities documents in paper or electronic states the terms in which funds pass from buyer to seller 0 Stocks represents partial ownership of a firm for a HH saver 0 Bonds represents a promise from the firm borrower to repay a fix amount of the fund FirmsCorporations Assets B011 d8 Liabilities Stocks paid in the form of Dividends Stockholder s Equity 0 Financial Intermediaries firms such as banks mutual funds pension funds and insurances I Acts as a go between for savers and borrowers I Borrow funds from savers and lend to borrowers Insurance example HH 1 Insurance Company car house life Savers gt HH 2 gt etc Investments gt Borrowers Receives Funds HH 3 from HHs Macroeconomics 253 6 Three Key Services Provided By Financial Systems 0 Risk a chance that value of financial security will change relative to what you expect 0 Risksharing allows savers to spread money among financial investments 0 Liquidity how easy a financial security can be exchanges for cash 0 Provides savers with a market in which they can sell holdings for cash 0 Information provides collections and communicates information 0 Includes facts about borrowers and expectations about returns on financial securities The Macroeconomics of Savings and Investments 0 Total value of saving S in economics M equal total value of investments I 0 To recap we know the formula for Calculating GDP Y c I G NX o In an open economy there is interaction with other economies such as trade and borrowing and lending o In a closed economy an economy with no trading or borrowing and lending with other economies NX is 0 and the relationship between GDP and companies is instead I Y c I G 0 Now we rearrange in terms of investment I I Y c G 0 Private Savings Sprivate Cqual to what HHs retain of their income after purchases of goods and services c and after paying taxes T o HHs receive income from supplying factors of production working Y and from the gov in terms of Transfer Payments TR 0 Therefore we calculate Private Savings using the following formula 39 SprivateYTR C T 0 Public Savings Spublic Cqual to the tax revenue that the gov retains after spending on gov purchases and transfer payments 0 We calculate Public Savings using the following formula 39 Spublic T G TR 0 So if we wanted to calculate National Savings S we add together Public and Private Savings 0 S Y TR c T private T G TR public 0 More simply S Y c G 0 Remember national Savings always equals Investment or S I o Spublic gt 0 budget surplus T gt G TR 0 Spublic lt 0 budget deficit T lt G TR 0 Spublic 0 balanced budget T G TR
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