ECO 2307 EXAM 2 Flashcards
National Spending Equation
= C+I+G
Net Exports Equation
NX = Y - (C+I+G)
A trade deficit is when
A country is spending more than it is lending, imports>exports, NX<0
A trade surplus is when:
A country is lending more than it is borrowing, exports>imports, NX>0
Balanced trade is when
Exports and imports are perfectly equal, NX=0
Factors that influence NX:
(PEPCIT) Preference of goods, prices of goods, exchange rates, income levels, costs of transportation, trade policies
NCO definition:
Purchase of foreign ASSETS from domestic residents minus the purchase of domestic ASSETS by foreigners
NCO equals:
NX
National Savings Equations (2)
= I + NX, = (Y-T-C) + (T-G)
Appreciation of a dollar:
$1 buys MORE after exchange, I>E, exchange rate rises
Depreciation of a dollar
$1 buys LESS after exchange, E>I, exchange rate falls
Real Exchange Rate Formula:
(Nominal Exchange Rate x Domestic Price)/(Foreign Price)
PPP states that:
One unit of currency should be able to purchase the same in another country
Limitations of PPP (2):
Many goods are not easily traded, not always perfect substitutions
Arbitrage:
Purchase and then sale of an asset for more than it was purchased for (marking up)
Financial Systems:
Match one person’s saving to another’s investment
Financial Markets are:
A DIRECT way to supply savings to someone who wants to borrow
2 Financial Markets:
Bond market, stock market
Financial Intermediaries are:
An INDIRECT way for savers to lend to borrowers (through banks, mutual funds)
Public Saving Equation:
= T-G
Private Savings Equation:
= Y-T-C
Govt Surplus:
T>G
Govt Deficit:
G>T
Crowding Out Effect:
An increase in G or a decrease in T: raises “r” and decreases I
Supply for LF comes from:
Savers (aka lenders)
Demand for LF comes from:
Investors (aka borrowers)
If QD falls, IR and QS:
Rises
If QS falls, IR and QD
Falls; Rises
Foreign Direct Investment Example:
Punch Pizza opens shop in Italy
Foreign Portfolio Investment Example:
I buy stock in Dirty Hit
Factors that influence NCO:
(RRG) RER on foreign/domestic assets, risks of holding assets abroad, govt policies
What shifts the savings curve outward?
(CIGG) Consumption decreases, Income Tax Rate Increase, GDP increases, Govt Purchases Decreases
Ricardian Equivalence:
Only apply to tax cuts not associated w govt spending
Investment tax credit/subsidies make:
I shift outward
What shifts the investment curve outward?
Marginal taxes on firms decline, expected future capital increases
Determinants of Productivity:
Physical Capital, Human Capital, Natural Resources, Technological Knowledge
Cobb Douglas Function:
= A x K^alpha x L^1-alpha, 0≤alpha≤1
Rule of 70 Formula:
= 70/percentage GDP is growing by
Diminishing Marginal Product States:
The benefit of one extra unit of output decreases as input increases by one unit
Labor Productivity Function:
(A x K^alpha x L^1-alpha)/L
Neoclassical model concludes that (pt1):
Diminishing MPK implies that the economy will
eventually reach a steady state where capital, income, and consumption per worker is constant
Neoclassical model concludes that (pt2):
Differences in capital per worker can explain differences
in income per worker across countries
Neoclassical model concludes that (pt3):
Low-income nations can take advantage of large gains to
capital accumulation relative to high-income nations and
eventually catch up (i.e. convergence!)
Neoclassical model concludes that (pt4):
Differences in savings rates can explain differences in
income per worker, but cannot explain long-run difference
in the growth rate
Neoclassical model concludes that (pt5):
Productivity growth overcomes diminishing MPK,
allowing countries to growth indefinitely
Endogenous Growth Theory:
Technological progress and government policies can offset diminishing returns to capital
Horizontal innovation
Expand the variety of products/inputs
Vertical innovation
Increase the quality of products/inputs
Factors that impact growth (6):
(PEHPFR)Education, health, property rights, political stability, free trade, R&D
St Equation:
= s x Yt
Ct Equation:
= (I - S)Yt
Capital Accumulation Function:
= Kt+1 - Kt = sYt - dKt
If there is an increase in income-tax rates, savings will shift:
Left
If there is an income-tax rate cut, savings will move:
Right
