Week 5 Flashcards
There are 3 Key facts about the wealth of nations and economics growth. Name all 3
Fact one: GDP per Capita varies enormously among Nations
Fact two: Everyone used to be poor
Fact three: There are Growth Miracles and Growth Disasters
Explain Economic growth
By economic growth, we mean the growth rate of real GDP per capita.
Whats the rule of 70
The rule of 70 is a mathematical approximation.
If you only have 1% of growth every year, but year after year, it will take you 70 years to double your GDP
Define Physical capital
Economists refer to physical capital as tools in the broadest sense of the word: pencils, desks, computers, hammers, shovels, etc.
Define human capital
By human capital economists mean the tools in the mind, or the stuff in people’s heads that makes them productive
What are the factors of production
Physical capital
Human capital
Technical knowledge
Organisation (org ties it all together)
How come some countries have more physical and human capital than others?
Because poor countries like North Korea not only have less physical and human capital than rich countries, but they also fail to organize the capital that they do have in the most productive ways
What are the most important insititutions?
- Property rights
- Honest governments
- Political stability
- A dependable legal system
- Competitive and Open Markets
Define Saving
Saving is income that is not spent on consumption goods
Define Investment
Investment is the purchase of new capital, things like tools, machinery, and factories
What are the four major factors when it comes to the supply of savings?
- Smoothing consumption
- impatience
- marketing and psychological factors
- and interest rates
What is time preference?
Time preference reflects the fact that today feels more real than tomorrow.
Explain the market for loanable funds
Supply of savings and the demand to borrow put together
Whats an investment tax credit?
An investment tax credit gives firms that invest in plants and equipment a tax break
How is an equilibrium achieved in the markets for lendable funds?
Equilibrium is brought about with the assistance of financial intermediaries, such as banks, bond markets, and stock markets.
Define a financial intermediary
A financial intermediary is an institution that helps to bring about the equilibriul and to direct resources to more highly valued uses
Define a bond
When a member of the public lends money to a corporation, the corporation acknowledges its debt by issuing a bond.
Whats an advantage of a bond?
One of the advantages of bond finance is that large sums of money can be raised now and invested in long-lived assets such as railroad tracks.
What are default risks?
All bonds carry the risk that the borrower will no longer be able to pay when the payments become due.
What is collateral?
Something of value that by agreement becomes the property of the lender if the borrower defaults (for example a house)
Explain the term “crowded out”
Crowding out is the decrease in private consumption and investments that occurs when the government borrows more.
Give the formula for ‘rate of return for a zero coupon bond’
((Face value - price) / Price) x100
Interest rates and bond prices move in _______ directions.
opposite
Define stocks
Stocks are shares of ownership in a corporation.
Define an IPO
An IPO is the first time a stock is sold to the public
What happens when intermediation fails?
There is no economic growth without savings, and those savings have to be processed and mediated through banks, bond markets, stock exchanges, etc. Countries without these institutions have smaller markets for loans, use their savings less effectively, and make fewer good investments.
How can the bridge that connects savers and borrowers be broken?
- unsafe property rights
- Inflation and interest rate control
- politicized loans
- massive bank failures
- panics
These problems break the bridge by
1. Reducing the supply of savings
2. Raising the cost of intermediation
3. Reducing the effectiveness of lending
What are “usury laws”
laws that specify the maximum legal interest rate at which loans can be made
explain the leverage ratio
In the financial world, the debt/equity ratio is called the leverage ratio
What is securitization?
The seller of a securitized asset receives cash in advance, while the buter is entitled to a flow of future payments
Why might banks wish to sell or “securitize” their loans?
+ Bank gets more liquid cash
+ makes its balance sheet safer
+ Securitized assets can be help as investments by institutions with a long-term perspective
Whats the difference between investment banks and commercial banks?
In a commercial bank, the money comes from depositors. In an Investment bank, the money comes from investors. Deposits are government-guaranteed but investments are not, so investors are more prone to panic and withdraw their short-term funding in times of crisis
In Investment banking, what’s a fire sale?
Without the short-term loans, the investment bank no longer has enough operating funds and it is forced to sell off assets quickly in what is often called a “fire sale.”
In Investment banking, what’s a firestorm?
Now the bank has to sell its assets, which decreases the value of other financial assets which brings other banks into trouble, they have to sell their assets and so on and on. This is called a firestorm.
Define Gross Domestic Product
The market value of all final goods and services produced within a country in a year
What does GDP measure?
- Production
- Final goods and services
- Final physical capital
- Goods produced locally in the country
