Chapter 7 (Textbook Information) Flashcards
In a market economy, scarcity is reflected in _____ _____.
In a market economy, scarcity is reflected in MARKET PRICES.
a) What is happening to the prices of most natural resources (adjusted for overall inflation)?
b) What does this mean?
a) The prices of most natural resources (adjusted for overall inflations) are stable or falling
b) Our ability to conserve natural resources is growing more rapidly than our supplies are dwindling (market prices give us no reason to believe that natural resources are limiting economic growth).
What does a society’s standard of living depend on?
Its ability to produce goods and services
What does a society’s productivity depend upon? (five factors)
1) Technology (A)
2) Workers (L)
3) Physical Capital (K)
4) Natural Resources (N)
5) Human Capital (H)
What is one way to raise future productivity?
Invest more current resources in the production of capital
What must happen in order for a society to invest more in capital?
Society must consume less and save more of its current income
What ultimately caused the financial crisis of 2007 to 2009?
People and firms lost faith in the transparency of financial markets
In the opinion of many economists, what ensured recovery from the financial crisis of 2007 to 2009?
Dramatic public policy responses
Since the crisis of 2007 to 2009, what have economists paid closer attention to?
The design of financial institutions and the regulations that guide them
What are two important ways that a government can encourage economic growth and, in the long run, raise the economy’s standard of living?
1) Encourage saving and investment
2) Maintain well-functioning and carefully regulated financial markets (in a transparent way)
Saving rate
Percentage of GDP devoted to saving rather than consumption
What are three direct results of a nation saving more?
1) Fewer resources are needed to make consumption goods
2) More resources are available to make capital goods
3) Capital stock increases
What are two results from an increase in capital stock lead to?
1) Rising productivity
2) More rapid growth in GDP
The traditional view of the production process is that capital is subject to _____ _____.
The traditional view of the production process is that capital is subject to DIMINISHING RETURNS.
Diminishing returns
The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
a) Assuming that the saving rate remains at its new higher level, does the growth rate of GDP stay high indefinitely or only for a period of time?
b) Why?
a) Only for a while
b) Because of diminishing returns as the higher saving rate allows more capital to be accumulated, the benefits from additional capital become smaller over time, and so growth slows down.
In the long run, the higher saving rate leads to a _____ level of productivity and income,
but NOT to _____ growth in these variables.
In the long run, the higher saving rate leads to a HIGHER level of
productivity and income, but NOT to HIGHER growth in these variables.
Other things equal, it is easier for a country to grow fast if it starts out relatively _____.
Other things equal, it is easier for a country to grow fast if it starts out relatively POOR.
Catch-up effect
The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
What are two ways to increase a country’s saving rate / invest in new capital?
1) Saving by domestic residents
2) Investment by foreigners
Foreign direct investment
Capital investment that is owned and operated by a foreign entity
i.e. A Canadian company building a plant to assemble airplanes in Ireland
Foreign portfolio investment
An investment that is financed with foreign money but operated by domestic residents
i.e. A Canadian company buying stocks in an Irish corporation; the Irish corporation using the proceeds from the stock sale to build a new factory
Why do foreigners invest in a country?
Because they expect to earn a return to their investment
Foreign investment raises income of a country’s citizens _____ than it raises the production of the country.
Foreign investment raises income of a country’s citizens LESS than it raises the production of the country.
What are two reasons economists who advise governments in less-developed economies advocate policies that encourage investment from abroad?
1) Investment increases the economy’s stock of capital which leads to higher productivity and wages
2) One way for poor countries to learn the state-of-the-art technologies developed and used in rich countries
When governments in less-developed economies implement policies that encourage investment from abroad, what do they also often have to do?
Remove restrictions imposed on foreign ownership of domestic capital
What organization tries to encourage the flow of capital to poor countries?
World Bank
What are two roles of the World Bank?
1) Obtain funds from the world’s advanced countries and uses these resources to make loans to less-developed countries so that they can invest in roads, sewer systems, schools, and other types of capital
2) Offer countries advice on how the aforementioned funds might best be used
When was the World Bank and the IMF (its sister organization) formed?
After World War II
Why does every country have an interest in promoting economic prosperity around the world?
Economic distress often leads to political turmoil, international tensions, and military conflict
