Simon's class Flashcards
Special Drawing Rights - SDR
Special drawing rights (SDR) refer to an international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing money reserves of member countries.
GDP
measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year). It counts all of the output generated within the borders of a country. GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government.
gross national product, or GNP
counts all the output of the residents of a country. So if a German-owned company has a factory in the United States, the output of this factory would be included in U.S. GDP, but in German GNP.
GDP can be viewed in three different ways
- GDP = Final sales – cost of intermediate production
The production approach sums the “value-added” at each stage of production, where value-added is defined as total sales less the value of intermediate inputs into the production process. - GDP = C + I + G + (X - M)
The expenditure approach adds up the value of purchases made by final users—for example, the consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners. - GDP = Wage income + gross profits + tax paid to the government
The income approach sums the incomes generated by production—for example, the compensation employees receive and the operating surplus of companies (roughly sales less costs)
Debt/GDP
Debt service as % of income
Debt/equity
stock/flow
flow/flow
stock/stock
Financial systems
3 primary functions?
1) Credit flows facilitation
2) Risk transfer (allocation among households and businesses
3) Transaction and payment services
Intermediation problem?
How to connect savers with investors to allow growth?
Agency problem?
How to monitor how the savings are used by investors?
3 ways to link savings to investment
- Friends and family
- Financial system (banks or markets or both)
- The state
The 3-6-3 rule
The 3-6-3 rule describes how bankers would give 3% interest on depositors’ accounts, lend the depositors money at 6% interest, and then be playing golf at 3 PM. This alludes to how a bank’s only form of business during the 1950s, 1960s, and 1970s was lending out money at a higher rate than what it is paying out to its depositors (due to tighter regulations).
Two key economic functions:
- intermediation
2. maturity and liquidity transformation: borrow short & lend long
Commercial bank system pros?
Bank provides security and some growth to savers
Provides supply of funds for companies to invest
Bank develops expertise in analysing creditworthiness
Commercial bank system cons?
but is still inflexible
Lack of diversification: banks can go bust: savers have all their eggs in one basket (hence deposit insurance
Inflexible for borrowers too: tend to be tied to one bank
Banks tend to be conservative: don’t like lending to risky ventures
“Relationship” lending excludes new upstarts
Low returns: savers don’t get very much growth
Shadow banking
A set of institutions and contracts that sources short term and liquid liabilities to fund long term and illiquid assets
No minimum liquidity regulation
No minimum equity regulation
No access to emergency liquidity from central bank
“Insider” system:
- Banks main source of finance/control
- Highly concentrated share ownership
- Germanic system: unidirectional control
- Japanese/Korean system: multi-polar
