Macroeconomic Principles ECO 2013
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Date Created: 10/12/15
Chapter 7 Economic Growth Dr Bosshardt Chapter 7 Measuring Economic Growth III Real or Nominal GDP III Economic growth is usually measured by the percentage change in real GDP III Issues I Real GDP per capita I Potential GDP growth Dr Bosshardt Chapter 7 Real and the Base Year Real Gross Domestic Product 1 Decimal GDPCl Gross Domestic Product 1 Decimal GDP 16000 15000 14000 13000 12000 11000 10000 X l l I l 2000 2002 2004 2006 2008 2010 2012 Shaded areas indicate US recessions GDP 2013 researchstluuisfedorg GDP Billions of Chained 2005 Dollars Billlons of Dollars 3911 ll39l39l U Dr Bosshardt Chapter 7 Measuring growth Reel Gross Domestic Product 1 Decimal GDPCl Source Us Department Of Commerce Bureau of Economic Analysis 1 II 1 Wt m I l I I l I l I 150 125 r E mu L lt E g 75 r E 2 50 1U E u 25 L J U E on b E g 25 r 50 1940 1950 1960 1970 1980 1990 2000 2010 2020 Shaded areas indicate US recessions 2013 researchstlouisfed org Dr Bosshardt Chapter 6 Measuring growth Real GDP per Capita in the United States USARGDPC Source US Department of Labor Bureau of Labor Statistics i I i W quot NM 75 A 50 O 5quot i m 3 2 5 E O 4 a I 00 39 In J U E E 25 e 3950 1960 1970 1980 1990 2000 2010 2020 Shaded areas indicate US recessions 2013 researchstlouisfed org Dr Bosshardt Chapter 6 The importance of growth III Compounding growth Rule of 72 If economy grows at 2 the economy will double in size in 722 36 years If economy grows at 3 the economy will double in size in 723 24 years If economy grows at 5 the economy will double in size in 725 144 years If economy grows at 10 the economy will double in size in 7210 70 years Dr Bosshardt Chapter 6 Production Function III Potential GDP fLabor Capital Technology I Potential GDP is real GDP at full employment of resources I How much labor capital is available Dr Bosshardt Chapter 6 National Labor Market III Real wage converted to a base year III Quantity of hours worked in economy Dr Bosshardt Chapter 7 National Labor Market Demand III Demand for Labor By firms who maximize profit III Why is it downward sloping l Law of Diminishing Returns means that as more workers hired productivity decreases ceteris paribus l Workers paid according to productivity Dr Bosshardt Chapter 6 Shifts in Demand for Labor III What increases labor productivity I Capital individual vs overall I Human Capital I Technology individual vs overall Dr Bosshardt Chapter 6 National Labor Market Supply III Supply of Labor By households I Why is it upward sloping I Higher real wage means III Increases hours by people El But more workers in force Labor Force Participation Dr Bosshardt Chapter 6 Supply of Labor cont III Shifts in Supply of Labor l Change in population size working age population I Social attitudes Dr Bosshardt Chapter 6 Equilibrium III LS and LD intersect to give real wage and quantity of labor at full employment III Quantity of labor impacts the potential level of GDP Dr Bosshardt Chapter 6 Comparing Changes III Change in population LS shifts III Change in labor productivity LD shifts Dr Bosshardt Chapter 6 Conclusions III Labor demand and labor supply determine level of labor at full employment III Labor demand depends on the productivity of the workers III Labor supply depends on the working age population and work culture Dr Bosshardt Chapter 6 Financial Markets III Finance I Where do business get the financing to fund investment I Physical capital vs financial capital Dr Bosshardt Chapter 7 Financial Markets III Firms need funds for investment III Households can provide savings for investment III Households save gt firms invest III Financial markets facilitate this transfer of funds Dr Bosshardt Chapter 7 Types of Financial Markets III Loan markets Businesses borrow from banks Households also borrow for mortgages III Bond markets Businesses issue bonds IOUs Governments also issue bonds III Stock Markets Businesses issue stock ownership in their businesses Funds from the IPO are used to purchase capital equipment and fund expansion of businesses Dr Bosshardt Chapter 7 Financial Institutions III Institutions that both borrow and lend funds Investment banks Commercial banks Governmentsponsored mortgage lenders Pension funds Insurance companies Dr Bosshardt Chapter 7 Price of Using the Funds III We save because we expect a reward for waiting to consume III The price paid for use of funds is the interest rate III Example I Bonds pay a fixed interest rate I 10000 face value 5 500 a year Dr Bosshardt Chapter 7 The Loanable Funds Market III Circular Flow Diagram diagram III Where do funds come from I Private Saving S l Government Budget Surplus T G l Borrowing from rest of world world is saving M X Dr Bosshardt Chapter 7 HOUSEHOLDS Gavernmem borrowing repaymeni surplus Lending in the rest of the world of the world Firms borrowin The Loanable Funds Market III Where do funds go I Business Investment I l Gov t Budget Deficit l International Investment lending to foreign sources Dr Bosshardt Chapter 7 Demand for Loanable funds firms III Demand Downward sloping since more projects become profitable at lower interest rates III Shifts in investment demand expected profit I Phase of business cycle I Advances in technology I Animal spirits I Tax policies Dr Bosshardt Chapter 7 Supply and Demand for Loanable Funds Graph Supply of Loanable funds III Supply Upward sloping opportunity cost of consumption increases with interest rate give up more III Shifts I Disposable income I Real Wealth I Expected Future Income I Default risk Dr Bosshardt Chapter 7 Loanable Funds Market Equilibrium III Equilibrium in US market I Increase in demand technology I Increase in supply Fed example III Zero Lower Bound Dr Bosshardt Chapter 7 Conclusions III Supply and demand determine available funds in economy III These funds are key to private investment III Interest rate is determined III Will use with fiscal policy Dr Bosshardt Chapter 7 Conclusions III Financial markets important III Link saving by households to investment by firms Dr Bosshardt Chapter 7 Sources of Growth III Potential GDP fLabor Capital Technology I Increase in labor III Improved human capital I Increase in capital I Improved technology III GDP Labor x Labor productivity I What improves labor productivity Dr Bosshardt Chapter 7 Sources of Growth Other In uences III Public capital infrastructure I Increased productivity III Production of property rights I Increased incentives III Enforcement of contracts III Stable Financial System I Easier supply of loanable funds III Economic Freedom Dr Bosshardt Chapter 7