Macro quiz 3 Flashcards
Productivity
amount of goods and services produced for each hour of work, explains why standards of living vary so much
Determinants of productivity
physical capital, human capital, natural resources, and technological knowledge
Physical capital per worker
stock of equipment and structures used to produce goods and services ex. saws, lathes, drill presses
Human capital per worker
knowledge and skills that workers acquire through education, training, and experience
Natural resources per worker
land, rivers, mineral deposits, and other resources provided by nature and used as inputs into production
renewable and nonrenewable
Technological knowledge
understanding of the best ways to produce goods and services
Diminishing returns
as the stock of capital rises, the extra output produced from an additional unit of capital falls
Higher saving rate in long run
In the long run, the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables
Catch-up effect
controlling for other variables, such as percentage of GDP devoted to investment, poor countries tend to grow at faster rates than rich countries
Foreign direct investment
capital investment that is owned and operated by a foreign entity
Foreign portfolio investment
investment financed with foreign money but operated by domestic residents
externality
effect of one person’s actions on the well-being of a bystander
barin drain
emigration of highly educated workers to rich countries, where these workers can earn more
Property rights
ability of people to exercise authority over the resources they own, need to be respected for this process to work 567567
Inward-oriented policies
aim to increase productivity and living standards by avoiding interaction with the rest of the world
Outward-oriented policies
integrate these countries into the world economy
Public good
once one person discovers an idea, it enters society’s pool of knowledge, and other people can freely use it
Affects of large labor force
large population means more workers are available to produce goods and services
Determinants of standard of living
saving/investment, diminishing returns/catch-up effect, investment from abroad, education, health/nutrition, property rights/political stability, free trade, research and development, population growth
Financial system
consists of the institutions that help match one person’s saving with another person’s investment
-move scare resource from savers (people who spend less than they earn) to borrowers (people who spend more than they earn)
Financial markets
institutions through which a person who wants to save can directly supply funds to a person who wants to borrow
Bond
certificate of indebtedness that specifies the obligations of the borrower to the buyer of the bond
Date of maturity
time at which the loan will be repaid
Principal
buyers of the bond give their money in exchange for the promise of interest and eventual repayment
Term and perpetuities
term: length of time until the bond matures
perpetuities: bonds that never mature
credit risk, default, high-yield bond
credit risk: probability that the borrower will fail to pay some of the interest or principal
default: the failure of payment
high-yield bonds: raise money since its pays high interest
Tax treatment and municipal bonds
tax treatment: way the tax laws treat the interest earned on it
municipal bonds: bond owners are not required to pay federal income tax on th interest income and, income cases, may not need to pay state and local taxes either
Inflation protection
Treasury Inflation-protected securities which generally pay a lower interest rate than similar bonds without this feature
stock, equity finance, debt finance, stock index
stock: represents partial ownership in a firm and is a claim to some of the profits the firm makes
equity finance: sale of stock to raise money
debt finance: sale of bonds
stock index: tack overall level of stock prices, computed as an average of a group of stock prices
Financial intermediaries
financial institutions through which savers can indirectly provide funds to borrowers ex. banks and mutual funds
Banks
take in deposits from people who want to save and use these deposits to make loans to people who want to
medium of exchange: special asset that people use to engage in transactions
store of value: wealth that people have accumulated in past saving in stocks and bonds
Mutual fund
institution that sells shares to the public and uses the proceeds to buy a selection or portfolio of various types of stocks, bonds, or both
advantage: allow people with small amounts of money to diversify their holdings, give ordinary people access to the skills of professional money managers,
Index funds
buy all the stock in a stock index, perform somewhat better on average than mutual funds that take advantage of active trading by professional money managers
Main goal of financial institutions
directing the resources of savers into the hands of borrowers
Accounting
refers to the way in which various numbers are defined and added up
Closed economy and open economy
one that does not interact with other economies and one that interacts with other economies around the world
Closed economy equation
Y = C + I + G (closed, so no trade, so cut exports)
National saving
Y - C - G = I
(Y - C - G) -> total income in economy after paying for consumption and government purchases -> substitute S = I
Two components of national saving
private saving (Y - T - C): amount of income that households have left after paying their taxes and paying for their consumption
public saving (T - G): amount of tax revenue that the government has left after paying for its spending
Budget surplus and budget deficit
surplus: (T - G) is positive
deficit: (T - G) is negative
saving vs. investment
saving: income exceeds consumption so purchasing stock or bonds
investment: refers to the purchase of new capital such as equipment or buildings
Market for loanable funds
income that people have chosen to save and lend out rather than use for their own consumption and to the amount that investors have chosen to borrow to fund new investment projects
governed by supply and demand
saving is the source of the supply for loanable funds
Demand for loanable funds
comes from households and firms that wish to borrow to make investments
investment is the source of the demand for loanable funds
quantity of loanable funds supplied rises as the interest rate rises
Affects of reform on tax laws saving and investing
saving incentive: encourage greater saving, the result is lower interest rates and greater investment
investment incentive:encourage greater investment, the result is higher interest rates and greater saving
Investment tax credit
gives tax advantage to any firm building a new factory or buying a new piece of equipment
Balanced budget
government spending = tax revenue
Crowding out
fall in investment caused by government borrowing represented by the movement along the demand curve
Effects on supply and demand for loanable funds on budget deficit
when government reduces national saving by running a budget deficit, the interest rate rises, and investment falls, reduce economy’s growth rate
Flow of resources available to fund private investment
government budget deficit reduces the supply of loanable funds
flow of resources available from private saving
government budget deficit would increase demand rather than reduce supply
