Chapter 6: Economic Growth, the Financial System, and business Cycles Flashcards
Long-Run Economic Growth
The process by which rising productivity increases the average standard of living
Growth rate of real GDP in a particular year
equal to the percentage change from the previous year
Average annual growth rate
Compute the annual growth rate that would result in the change that occur across that time frame
- for shorter periods of time averaging the growth rate for each year can approximate
Rule of 70
Judges how fast an economic variable is growing by calculating the number of years it would take to double
= 70/ growth rate
Labor Productivity
The quantity of goods and services that can be produced by one worker or by one hour of work
- Measured in output per hour of work
What factors determine labor productivity
The quantity of capital per hour worked and the level of technology
Capital
Manufactured goods that are used to produce other goods and services
Capital stock
The total amount of physical capital available in a country
Human Capital
The accumulated knowledge and skills workers acquire from education, training, or life experience
Technology
The processes a firm uses to turn inputs into outputs of goods and services
Technology change
An increase in the quantity of output firms can produce using a given quantity of inputs
Entrepreneurs role in a market economy
- Make crucial decisions about whether to introduce new technology to produce better or lower-cost products
- whether to allocate the firm’s resources to research and development that can result in new technologies
Potential GDP
The level of real GDP attained when all firms are producing at capacity
- Measured by production when operating on normal hours using a normal workforce
Output gap
The percentage difference between actual GDP and potential GDP
Retained Earnings
Profits that are reinvested in the firm rather than paid to the firm’s owners
Financial System
The system of financial markets and financial intermediaries through which firms acquire funds from households
Financial Markets
Markets where financial securities, such as stocks and bonds are bought and sold
Financial Security
A document that states the terms under which funds pass from the buyer of the security to the seller
Stocks
Financial securities that represent partial ownership of a firm
Bonds
Financial securities that represent promise to repay a fixed amount in the future
Financial Intermediaries
Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers
Mutual Funds
Sell shares to savers and then use the funs to buy a portfolio of stocks, bonds, mortgages and other financial securities
What are the 3 key services a financial system provides for savers and borrowers
- Risk sharing
- liquidity
- Information
Risk
The chance that the value of a financial asset will change relative to what you expect
