Week 6 Flashcards
Elements of Balance of Payments account and categorization private and official sector
- CA: current account, private
- KA: financial and capital account, private
- Reserves account: official
The receipts and payments of KA
receipts (+) from the sale of assets to foreigners
payments (-) for assets from foreigners (investment by our country in foreign country)
totale: net investment in our country
Reminder: private sector
implications of surplus and deficit KA
KA in surplus (KA>0), receipts> payments, net international borrrower
KA in deficit (KA<0), receipts< payments, net international lender
Implications of surplus and deficit in reserve assets
Decrease of reserve assets, official sector (CB), more of a net borrower (receipts > payments)
Increase of reserve assets , official sector (CB) more of a net lender (receipts< payments)
Net borrower
receipts > payments (as FDI is in your country)
Net lender
Receipts< payments (you invest in other country)
Philips curve
Theory that claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.
Wages rise faster the lower the unemployment rate
Relationship behind inflation in AS-AD model
y-axis: inflation rate
x-axis: unemployment rate
AS-AD model & multiplier in short run
SRAS: the type of AD and AS shocks determine the new SRAS
new SRAS and AD intersect, not in equilibrium with LRAS
Business cycle theory & keynesian view, three reasons of equilibria
• Disequilibria (from potential) exist because prices are sticky
• Disequilibria (from potential) exist due to over-/underinvestment
• Disequilibria (from potential) exist because actors or not strictly rational
(e.g. “animal spirits” or “spontaneous urge to action” or the lack thereof)
Two formulas to calculate unemployment rate
- number of people unemployed/ workforce x 100
workforce: Ls= number employed (= Ld) + number unemployed
Number of people employed (Ld)= national income/ labour productivity
2. ((labour productivity* available labour)-national income)/ (labour productivity* available labour) *100
Formula determining the size of AD curve shift
change in AE * multiplier
Implications steepness of slope of SAS curve
the steeper the slope of SAS curve, the larger the increase in price level and the smaller is the ultiplier effect on real GDP
Two approaches to Business cycle
- mainstream business cycle theory
potential GDP grows at steady rate while AD grows at fluctuating rate. As money wage rate is sticky, if AD grows faster than potential GDP, real GDP exceeds potential GDP as well and inflationary gap emerges - real business cycle theory (RBC theory)
random fluctuations in productivity as main source of economic fluctuations
Fluctuations of productivity can result from fluctuations in pace of technological development, internationaldisturbances, climate fluctuations, natural disasters
RBC impulse generated mainly by R&D that leads to the creation and use of new technologies
Two sources of inflation cycles
- demand-pull inflation: inflation that results from an initial increase in AD
- initial effect of an AD rise
- money wage response
- demand-pull inflation process - cost-push inflation: inflation kicked of by an increase in costs
two main sources of an increase in costs
- increase in money wage rate
- increase in money price
Capital accumulation
growth of capital resources, i.e. human capital
Two main purposes of use of real GDP
- compare standard of living over time
2. compare standards of living across countries
Lucas wedge
measure of loss of potential GDP when economy doesn’t grow as fast as optimal situation
Business cycle and its two phases
periodic but irregular up-and-down movement of total production and other measures of economic activity.
unpredictable but two phases
- Expansion: period during which real GDP increases
- Recession: period during which real GDP decreases, growth rate is negative
Formula real GDP growth rate
(real GDP current year- real GDP previous year)/ real GDP previous year *100
Two reasons for increase in real GDP
- return to full employment in an expansionary phase of business cycle (taking up slack from last recession)
-> no economic growth
movement from inside production possibility frontier to point on PPF - potential GDP increase -> economic growth
outward movement of PPF to new PPF curve
PPF
production possibility frontier
Compound interest formula
rule of 70 to calculate the number of years for a variable to double approximately
70/ annual growth rate of variable
Determination of potential GDP: model with two components
- Aggregate production function: relationship that tells how real GDP changes as quantity of labour changes
y-axis: real GDP
x-axis: labour - Aggregate labour market: LD, LS and labour market equilibrium
y-axis: real wage
x-axis labour
real wage rate: money wage rate/ price level
Growth of potential GDP by two categories
- growth of supply of labour
effect: real wage rate falls and equilibrium quantity increases, potential GDP increases
! use of two models - growth in labour productivity
labour productivity rises> expansion production possibilities> firms demand for labour increases
! use of two models
Preconditions for labour productivity growth
incentive system created by firms, markets, property rights and money
these elements enable trade and specialization
