EXAM 2 Flashcards
What is the sole explanation for persistently high living standards?
Technological Growth
The Solow model attempts to explain what?
Variation in growth rates across countries
Solow model implies that economic growth is only achieved through changes in what?
exogenous technology
Kaldor’s Stylized Growth Facts
- The shares of national income received by labor and capital are roughly constant over long periods of time
- The rate of growth of the capital stock per worker is roughly constant over long periods of time
- The rate of growth of output per worker is roughly constant over long periods of time.
- The capital to output ratio is roughly constant over long periods of time
- The rate of return on investment (return to capital owners) is roughly constant over time
- There are appreciable variations in the growth of labor productivity and of total output among countries.
Absolute Convergence
-Less well capitalized countries grow faster, as they reap higher MPK’s.
-Well capitalized countries grow slower, due to lower MPK’s and depreciation costs.
-Do we see this?
Germany after WW2, The US after the Civil war
Conditional Convergence
-Countries converge to their own specific steady-states, which are products of underlying factors.
-Differential steady states helps to explain some of the variation in incomes globally.
Golden Rule for saving
-MPK-delta= n+g
-MPK-delta> n+g, below golden rule (not enough saving)
-MPK-delta<n+g, above golden rule (too much saving)
How to increase saving
- budget surpluses (deficits are public dissaving) lower’s interest rates through removing crowding out
- Lower taxes on saving/investment. No unrealized capital gains tax, etc.
What is the tradeoff for reaching the golden rule of capital from below?
Consume less today so that you may consume more tomorrow, and in every period afterwards
Institutions that promote growth
-Legal traditions
-Private property protection
-Intellectual property
-Patents
-Common law vs. Civil code
-Legal protections for shareholders and creditors are stronger under common law countries, and as a result these countries have better developed capital markets
-Transparency in government
-Lack of corruption
-Predation
Besides institutions what promotes growth?
Culture
Creative destruction
Entrepreneurs drive economic growth by inventing new products. Sometimes, these inventions may be so revolutionary that they disrupt or outright replace existing technology, leading to the unemployment of both labor and capital in the affected industries.
4 important points for the economics of ideas
1) Ideas for increasing output are primarily researched, developed, and implemented by profit-seeking firms
2) Ideas can be freely shared, but spillovers mean that ideas are underprovided
3) Government has a role in improving the production of ideas
4) The larger the market, the greater the incentive to research and develop new ideas
How to incentivize producing more ideas
The role of government: Patent Protections (short-term monopoly profit for new inventions, works of art/music), Prizes vs Patents (offering an award that can be claimed by anyone may speed up innovation, relative to patents), Subsidies/Grants (tax breaks for R&D, funding universities)
Okun’s Law
There is a negative relationship between unemployment and real GDP
Procyclical
means that the variable moves with GDP (as GDP increases, the variable also increases)
Countercyclical
means that the variable moves against GDP (as GDP increases, the variables decrease)
Leading
means that the variable moves before we see movements in the overall economy
Coincident
means that the variable moves at the same time as we see movements in the overall economy
Lagging
means that the variable moves after we see movements in the overall economy.
In the long-run we assume that prices are
flexible and can adjust to a new equilibrium in response to changes in supply and demand.
In the short-run we assume that prices are
sticky at some predetermined level
The model of aggregate supply and aggregate demand can be used in order to
Study the implications of sticky prices
Analyze economic fluctuations
Compare stabilization policies
Study both the short-run and long-run
Aggregate Demand
is the relationship between the quantity of goods and services demanded and the aggregate price level.
Factors that shift the aggregate demand curve
Positive Shocks (Increase AD)(= Higher Growth Rate of Spending): a faster money growth rate, confidence, increased wealth, lower taxes, greater growth of government spending, increased export growth, decreased import growth.
Negative Shocks (Decreased AD)(=lower growth rate of spending): a slower money growth rate, fear, reduced wealth, higher taxes, lower growth of gov spending, decreased export growth, increased import growth.
Aggregate Supply
is the relationship between the quantity of goods and services supplied and the aggregate price level.
Short-Run Aggregate Supply (SRAR) Curve
is perfectly elastic (price doesn’t change with output).
Perfect elasticity comes from the assumption that prices are sticky, and don’t change in the short-run.
In the short-run, firms are willing to sell as much as people are willing to buy.
Long-Run Aggregate Supply (LRAS) curve
perfectly inelastic (output doesn’t change with price).
Output is fixed at some (𝑌=𝑌̅=𝐹(𝐾̅,𝐿̅ )), which is the full-employment amount of output in which all an economy’s resources are fully employed, and 𝑌̅ is not dependent on the price level (𝑃).
In the long-run, unemployment is at it’s natural rate (not necessarily zero).
Suppose a fall of aggregate demand in the short-run
Since SRAS is horizontal (perfect elasticity), a fall in AD leads to a lower level of output, while the price level remains the same.
Suppose a fall of aggregate demand in the long-run
Since LRAS is vertical (perfect inelasticity), a fall in AD leads to a lower price level, while output remains the same.
What is the goal of the IS-LM model
is to show what determines national income at a given price level. We can view the model as showing what causes the aggregate demand curve to shift.
IS (Investment-Savings) Curve
equilibrates the market for goods and services.
LM (Liquidity-Money) Curve
equilibrates the market for money balances.
IS-LM model assumptions: In the long-run
(1) Prices are flexible.
(2) Output is determined by factors of production and technology.
(3) Unemployment is at its natural rate.
IS-LM model assumptions in the short-run:
(1) Prices are fixed.
(2) Output is determined by aggregate demand.
(3) Unemployment is negatively related with output.
