Economics Flashcards
Growth Accounting Equation
States that the growth rate of output equals the rate of technological change plus alpha times the growth rate of capital plus (1-alpha) times the growth rate of labor.
Labor Force
The working age population (ages 16 to 64) that is either employed or available for work but not working.
Labor Force Participation Rate
The percentage of the working age population in the labor force.
Human Capital
The accumulated knowledge and skills that workers acquire from education, training, or life experience.
Carry Trade
Entails going long a high yielding investment and going short a low yielding investment.
Exchange Rate
The price of the base currency expressed in terms of the price currency.
USD/EUR = the EUR is the base currency and costs X USD to buy
Ex Ante Purchasing Power Parity
Countries that are expected to run persistently high inflation rates should expect to see their currencies depreciate over time, while countries that are expected to run relatively low inflation rates on a sustainable basis should expect to see their currencies appreciate over time.
Real Interest Rate Parity
The proposition that real interest rates will converge to the same level across different markets.
The International Fisher Effect
If real interest rates are equal across markets, then it also follows that the foreign-domestic nominal yield spread will be solely determined by the foreign-domestic expected inflation differential.
Macroeconomic Balance Approach
Estimates how much exchange rates need to adjust in order to close the gap between the medium-term expectation for a country’s current account imbalance and that country’s normal (or sustainable) current account imbalance.
External Sustainable Approach
Differs from the macroeconomic balance approach by focusing on stocks of outstanding assets or debt rather than on current account flows. Calculates how much exchange rates would need to adjust to ensure that a country’s net foreign-asset/GDP ratio or net foreign-liability/GDP ratio stabilizes at some benchmark level.
Reduced-Form Econometric Model
Seeks to estimate the equilibrium path that a currency should take in the basis of the trends in several key macroeconomic variables, such as a country’s net foreign asset position, it’s terms of trade, and it’s relative productivity.
Uncovered Interest Parity
The concept that exchange rates must change so that the return on investments with identical risk will be the same in any currency. High-yield currencies are expected to depreciate in value, while low-yield currencies are expected to appreciate in value.
FX Carry Trade
Involves taking on long positions in high-yield currencies and short positions in low-yield currencies.
The Mundell-Fleming Model
Describes how changes in monetary and fiscal policy affect the level of interest rates and economic activity within a country, which in turn leads to changes in the direction and magnitude of trade and capital flows and ultimately to changes in the exchange rate.
Quantity Theory of Money
Money supply changes are the primary determinant of price level changes. An X percent rise in the domestic money supply will produce an X percent rise in the domestic price level.
Unsterilized Intervention
Expanding the monetary base and encouraging short-term interest rates to move lower, only in a situation when there is no inflation threat.
Sterilized Intervention
EM authorities would sell domestic securities to the private sector to mop up any excess liquidity created by its FX intervention activities, only in a situation when inflation is a concern.
Classical Growth Theory
Developed by Thomas Malthus in 1798, is focused on the impact of a growing population in a world with limited resources. The key assumption is that population growth accelerates when the level of per capita income rises above the subsistence income, which is the minimum income needed to maintain life.
Neoclassical Theory of Growth
Devised by Robert Solow in the 1950s, to determine the long-run growth rate of output per capita and relate it to the savings/investment rate, the rate of technological change and population change.
Endogenous Growth Theory
Focus on explaining technological progress rather than treating it as exogenous. Self-sustaining growth emerges as a natural consequence of the model and the economy does not necessarily converge to a steady state of growth.
Absolute Convergence
Developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.
Conditional Convergence
Convergence is conditional on the countries having the same saving rate, population growth rate, and production function.
Club Convergence
Only the rich and middle-income countries that are members of the club are converging to the income level of the richest countries in the world. Poor countries can join the club if they make the appropriate institutional changes.
