Exam 1 Flashcards
Endogenous versus exogeneous
exogenous = external numbers/ factors
endogenous: numbers/variables that your model explains
Macroeconomics deals with
overall performance of the economy
Price that macro deals with (3):
wage rate, interest rate, CPI
monetary policy versus fiscal policy:
monetary is the central bank managing the money supply: adjusting interest rates, issuing bonds, etc.
fiscal policy: how money should be spent in the government i.e., gov’t expenditures
Inflation since late 1970s has been
Roughyl 2-3%
Flow variable measures:
the (dollar amount of goods) over a period of time
Personal consumption is: (and isn’t)
Haircuts, food, etc. NOT HOMES
Net imports of goods and services is:
net imports = imports - exports
Depreciation is:
when capital reduces in value, efficiency, or is destroyed.
Issues with the CPI (2):
Quality bias: our ‘basket’ of goods gets better over time
Representation: Doesn’t represent certain populations very well, like students and old people.
Diminishing product of labor:
as you have more labor, the output Y (GDP) increases slow, and eventually can even decrease (too many cooks in the kitchen)
In the production function Y = A*F(K,L) if A doubles, then Y:
also doubles
Diminishing marginal product of capital means:
As K increases, the delY/delK decreases, so the Y increases with K, but will grow at a slower and slower rate.
Economy reaches optimal k*:
over a period of time
Solow growth model shows the growth rate of REAL GDP per worker is equal to (2 terms)
delta_y/y = alpha * delta_k/k,
What is the delta_k/k AKA growth rate of capital per worker?
delta_k/k = (y/k)s - s*d - n
How to derive y/k?
From production function Y = A * K^0.5 * L^0.5, we get to
y/k = A/k^0.5
What is the steady state of capital (no tech change)?
k* = [ ( As / sd+n ) ]^ 1/beta
from the delta_k/k function, which you then simplify down to solve for k
What is the steady state output per worker? And how to derive?
Steady state is when delta_k/k is zero, so once you find the steady state kapital k, you plug that number into the production function which simplifies to:
y = Ak*^0.5
With technological growth, what is the steady state requirement?
It is when the change in GDP per person is equal to the change in kapital per person.
AKA
delta_y/y = delta_k/k
With technological advancement, what is the steady state, change in production per person.
delta_y/y = g + alpha*[ delta_k/k ]
AKA
delta_y/y = g/(1-alpha)
Exogenous growth models, tech progress comes:
From outside of the model
Governments incentivize R&D through:
patents, anti-trust exemptions, and land grants
Problems with real GDP per cpaita for welfare measurement (3)
Doesnt count leisure time,
Doesn’t say anything about distribution of wealth
Counts bad things as well
Misses non market transactions
If savings is positive, why would kapital per work not rise over time?
depreciation rate or population increase may outpace it
Absolute convergence vs. conditional convergence:
Absolute convergence: poor countries grow fast until all economies eventually converge
Conditional convergence: similar economies converge, so if they have same A, n, d and s.
Before/After WWII, avg GDP growth is about the same, what is different?
It was much less volatile after the war.
Explain 3 approaches for measuring real GDP:
Expenditure: separate by spender and aggregate all goods made
Income: Income earned by different factors of production, only counting value added
Production: Separate by scetion and aggregate how much is produced
What is constant returns to scale?
If you double all inputs, then the output doubles.
Variables to evaluate performance of economy ? (3)
Unemployment, inflation, GDP
What happened to price level after WWII?
Price level increased a lot. Probably due to changing from gold standard to fiat currency.
What do you count when measuring GDP (price or quantity)
you measure quantity of items, because price is variable due to a lot of other factors.
Typical range of unemployment last 20 years:
4-6%
Average growth rate:
Around 2% for rich countries
What is the delta_y/y equal to (in regards to two delta big letters with a minus sign?
delta_y/y = delta_Y/Y - delta_L/L
What is the change in kapital K?
delta_K = s(Y-dK) where d is depreciation rate.
What is the BIG K change equation (with s, Y/K, d)
delta_K/K = s(Y/K) - sd
d = depreciation rate
when subtracting n from both sides, we get the left equals:
delta_k/k, and then we get our whole original equation thing.
