Macro 2 Flashcards by Hash Loi

What is the rule of 70?

time to double= 70/ growth rate percentage point

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If growth rate is 7%, time to double is APPROXIMATELY…

10 years

70/7 years (precise is 10.24)

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What is the growth equation?

gRGDP per capita ≈ gProductivity + gAvg. Hrs. + gEPR.

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Given sufficient time, even a ____ difference in annual growth rate of RGDP creates ______ difference in RGDP

small
big

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Why do countries have different growth?

Institutions needed for markets to thrive must be developed for growth

E.g. rule of law, market orientation, openness, stability

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What are examples of the rule of law? And explain?

Private property rights (Right to the proceeds of your effort and investment must be secure against criminal appropriation and govt appropriation(!) )

Enforcement of contracts (Much better to rely on a trustable legal system)

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What is the benefit of central planning?

Central Planning can mobilize resources on massive scale, and is capable of great technological leaps

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What are the problems of central planning?

central planning has often led to serious resource misallocation and mal-investment

INCENNTIVES WERE NOT THERE

PRIVATE PROPERTY NOT USED

NO INFORMATION , DIFFICULT TO PASS UP AND DOWN

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What are market economies better at than central planning?

faster in generating and processing information about needs and constraints

far more adaptive to changes in the economic environment

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What is industrial policy? What are its problems?

govt-directed attempts to grow specific targeted industries

based on protectionism tend to be inefficient

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What are some ways a country can be open?

Trade: Catering to world market gives scope for firms to grow (EOS). FORCE FIRMS TO SHAPE UP

Ideas: Overeseas training, inviting foreign expertise and talent

Foreign investment: Technology transfer, tap other country’s financial resources.

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What kind of stability does countries need for growth?

Macroeconomic: Low, predictable inflation. Stable exchange rate. Avoid economic crises

Political stability: Orderly changes of government, Avoid sectarian conflicts and wars

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What are the conditions needed for growth

Rule of law
Market Orientation
Openness
Stability

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What is the aggregate production function and what are its input?

relationship between an economy’s output (Y) and its resources and technology.

Inputs: labour(L), capital goods(K), natural resources (Land) (not really needed also), technology level(A)

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Why does production function usually omit land?

Lack of natural resources has not been a constraint for growth in many countries

Resource abundance has not helped many countries grow quickly

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Would raw commodity prices rise over time?

Yes implies resource constraints are becoming binding

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__________ looms as the ultimate natural resource constraint

Global warming

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For a given amount of capital, what happens to Y as L increases?

L= LABOUR
Each additional unit of L increases Y, but by smaller and smaller extent

Doubling L –> Less than doubling Y

Economists call this diminishing returns to labour

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Why does increase in labour supply not benefit household?

Increasing labour supply, other things equal, results in falling real wage

Most households obtain much of their incomes from work

Growth by increasing labour supply may not benefit them

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What is the per unit labour version of production function?

Y/L= f( K/L, A)

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What is capital deepening?

raising k/l ratio

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What is net and gross investment equaiton?

Net Investment = Gross Investment - Depreciation

Gross investment = private investment + governemnt investment

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What is depreciation?

loss due to wear and tear, obsolescence

Assumed for simplicity to be a constant fraction δ

What are some policies for capital deepening?

Change incentives to promote investment
(Reduce corporate tax, though with mix result/ grant investment tax credit to firm that invest in new capital like digital)

Change incentives to promote saving (Shift from taxing income to taxing consumption, reduce transfers to elderly and unemployed)

What is fiscal policy?

government’s use of taxes, transfers and expenditures to influence the macroeconomy can be used to foster long-run economic growth or for short-run economic stabilization

What are under human capital?

Workers’ knowledge, skills, discipline, and health

Is spending on human capital included in GDP?

What is the production function with human capital ?

measure human capital per unit of labour Y/L= f( K/L, H/L, A)

What is the cost of capital deepening?

foregone consumption, but higher long run growth

What are elements of catch up growth?

Reduce consumption , to boost investment Invest in health and education to improve human capital Adopt and adapt technology from rest of world

Poor countries with ____ can grow rapidly and catch up to rich countries

solid institutional conditions

Why does productivity growth from capital deepening eventually slow?

Diminimishing return on capital

What causes the diminishing return on capital?

As capital increases, depreciation also increases Thus, more gross investment is needed to replace depreciated capital, leaving less for net investment

Explain technological change

invention and application of new inputs, new products, or new production methods pushing the technological frontier by creating and using new ideas (discovery based growth)

Why do you not divide A by L?

non rival(can be used by one without destroying its availability for use by others) SAME AMOUNT OF ENJOYMENT OF KNOWLEDG PER WORKER

Why are knowledge and ideas key sources of growth/

are not subject to diminishing returns not depreciate non rival, can be used by one without destroying availability

What is the difference between patent and copyright?

Patent to exclude others from, or charge others for, the use of one’s invention, valid for a set period (short 5 20 years) Copyright right to exclude others from, or charge others for, reproducing one’s work, valid for a set period(50-100]

What is the importance of intellectual property rights?

needed to incentivize commercial R&D Otherwise, copycats will reap gains without paying R&D costs

What are the policies for discovery based growth?

Promoting entrepreneurship Government funding for R&D Intellectual property rights

Why are households paid income Y as factor owners?

hosueholds own all factors of production in economy

What is disposable income

Y-T (NET TAXES)

What is the equation for supply of lonable funds ?

saving S = Y – T – C Supply= SAVINGS

Why is supply curve of funds upward sloping ?

If r rises, saving is more lucrative Thus, S rises Thus, supply curve slopes upward

What are the other determinants of supply of lonable funds?

Real interest rate If expected future income rises, less need to save ---> supply curve shifts left

Why planned investment IP used on output eqn instead of actual investment I?

Because there could be unplanned change in inventories unplanned increase in inventories (pilling up of inventories) For simplicity let all changes in inventories be unplanned

What are determinants of Ip? and why?

Real interest rate, r (If r rises, IP is more costly. Thus, IP falls. Thus, business demand curve slopes downward) Expected future profits from new capital (Increased optimism about future profits --> business demand curve shifts right)

What happens if G>T ? What happens if T>G?

G>T: GOVT demand funds as government ahs budget deficit T>G: Govt supply funds as government budget surplus

What is the equation of governmetn demand for loanable funds?

G-T

Government decisions on G and T are ________ to changes in r. Governmetn demand curve is ___________

generally insensitive perfectly inelastic

What is the equation for output involving spending

Hint think about expenditure component Y = C + IP + G output= planned spending

Classical (Long Run) Model focuses on ______ and _______ as determinants of an economy’s ______________________, assuming __________

resource markets technology potential output MARKETS CLEAR (CRUCIAL ASSUMPTION)

What is Say's law?

Spending adjusts to equal output (and not the other way around) If one spending component increases (falls), output does not change. Instead the other spending components fall (increase) by the same extent. This is called 100% crowding out One may not worry about the situation where not enough spending . As when 1 spending category changes, then other categories adjust suh that overall spending matches output

What are the purpose of havign patents?

prevent others from building upon new idea no incentive to innovate and rnd

What are the assumptions in classical model?