Chapters 7 and 8 Flashcards
What are classical economic models?
• Economic model that assumes wages and prices adjust freely to changes in demand / supply.
Production function.
- Relationship between the level of output of a good and the factors of productive that are inputs to production.
- Y = f(K, L).
Stock of capital.
- K in the production function.
* All machines, equipments, and buildings to an entire economy.
Real wages.
• The wage rate paid to employees adjusted for changes in the price level.
What is the ideal value combination for labor supply and real wages?
• Where the labor supply function intercepts the labor demand function.
How is the relationship between real wages and labor supply relevant to booms and busts?
- The demand function shifts to the right for booms.
* The supply function shifts to the right for busts.
Real business cycle theory.
• Economic theory which emphasizes how technological advances can cause fluctuations in economic activity.
Crowding out vs. crowding in.
- Crowding out: reduction in investment due to increased gov’t spending.
- Crowding in: increases in investment due to decreases in gov’t spending.
Closed economy vs. open economy.
- Closed economy: one without international trade, where GDP is Y = C + I + G.
- Open economy: one with trade where GDP is Y = C + I + G + NX.
Capital deepening.
• Increases in the stock of capital per worker.
Technological progress.
• More efficient ways of organizing economic affairs that allow economy to increase output without increasing input.
Human capital.
• Knowledge and skill acquired by workers through education and experience.
Real GDP per capita.
- The usual measurement for standard of living.
* GDP per person adjusted for changes in prices.
What is the formula for GDP growth in n years?
• GDP [n years later] = (1+g)^n (100), where g is the growth rate.
Rule of 70.
• Rule of thumb that says output will double in 70/x years where x is the % rate of growth. Years to double = 70/g.
Convergence.
• Process by which poorer countries close the gap with richer countries in terms of real GDP per capita.
What does capital deepening do to the production function?
• The graph is stretched upwards.
Savings.
- Income that is not consumed.
* C + S = Y for personal; C + I = Y for businesses; therefore, S = I.
Net investment.
• Gov’t spending - personal savings.
Growth accounting.
• Measure of economic growth that depends on capital, labor, and technological progress. Y = F(K, L, A).
Labor productivity.
• How much output the avg. worker can produce given the amount of capital in the economy and the technological progress.
Creative destruction.
• View that firms will try to come up with new products and more efficient ways to produce stuff in order to have a monopoly.
What did Adam Smith say regarding the scale of a market and its impact?
• That the larger the market, the larger potential profits margins may be. Thus, larger markets spur innovation.
Induced innovation.
• Innovation that cuts cost.
What are the two ways in which education spurs economic growth?
- Increased knowledge and skill that complement physical capital.
- Education leads to innovation and development of new stuff.
New Growth Theory.
• Modern theories of growth that try to explain the origins of technological progress.
What are the shortcomings of CPI?
- Substitution bias: people tend to buy cheaper stuff.
- Outlet bias: buying at outlet stores vs. typical department stores.
- New good bias: high initial prices for new goods.
- Quality bias: more quality per $ isn’t accounted for.
What is the connection between absence of clear property rights and investment?
• Unclear property rights hinder economic growth as they are disincentives for investment.
Explain the relationship between savings and depreciation.
• The output curve and its subsequent lower curve representing % of output dedicated to savings will intersect the depreciation function which runs linearly at a given point. This point is the idea amount for a company to save.
What will a higher savings rate lead to in the long run?
• A larger stock of capital.
What does technological progress do to the savings function?
• Stretches it upwards, thereby promoting capital deepening.
What are the four facets of the Solow Model?
- Capital deepening occurs as long as savings > depreciation.
- Capital deepening will halt as depreciation catches up to savings.
- Higher savings promote capital deepening.
- Technological progress will promote both capital deepening and output.
