Macro 2 Flashcards
What is the rule of 70?
time to double= 70/ growth rate percentage point
If growth rate is 7%, time to double is APPROXIMATELY…
10 years
70/7 years (precise is 10.24)
What is the growth equation?
gRGDP per capita ≈ gProductivity + gAvg. Hrs. + gEPR.
Given sufficient time, even a ____ difference in annual growth rate of RGDP creates ______ difference in RGDP
small
big
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
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)
What is the benefit of central planning?
Central Planning can mobilize resources on massive scale, and is capable of great technological leaps
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
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
What is industrial policy? What are its problems?
govt-directed attempts to grow specific targeted industries
based on protectionism tend to be inefficient
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.
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
What are the conditions needed for growth
Rule of law
Market Orientation
Openness
Stability
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)
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
Would raw commodity prices rise over time?
Yes implies resource constraints are becoming binding
__________ looms as the ultimate natural resource constraint
Global warming
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
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
What is the per unit labour version of production function?
Y/L= f( K/L, A)
What is capital deepening?
raising k/l ratio
What is net and gross investment equaiton?
Net Investment = Gross Investment - Depreciation
Gross investment = private investment + governemnt investment
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?
NO
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?
