Macroeconomics Final Study Guide REVIEW IN CLASS What Exam Will Look Like Look at material after midterm Chapter 12 Production and Growth Chapter 13 Loanable Funds Chapter 16 Monetary System Chapter 17 Money and Inflation Chapter 18 Foreign Exchange Market Chapter 19 Open Economy Chapter 20 Real Economics Real Economy Chapter 21 Effects on Economy through Aggregate Demand Chapter 22 Trade Offs The Production Function Y A F L K H N F a function that shows how inputs are combined to produce output A the level of technology A multiples the function F so improvements in technology increases in A allow more output Y to be produced from any given combination of inputs CHAPTER 12 Constant Returns to Scale changing all inputs by the same percentage causes output to change by that percentage Ex doubling all inputs causes output to double 2Y A F 2L 2K 2H 2N Productivity the amount of goods and services produced for each hour of a worker s time Standard of living is determined by productivity of its workers Y real GDP quantity of output produced L quantity of labor Productivity Y L output worker GDP measures two things at once total income earned by everyone in the economy and the total expenditure on the economy s output of goods and services Economy s income is the economy s output Determinants of Productivity Physical Capital K the stock of equipment and structures that are used to produce goods and services Workers are more productive if they have tools to work with Capital is a produced factor of production K L capital per worker Human Capital H the knowledge and skills that workers acquire through education training and experiences H L average workers human capital Natural Resources N the inputs into the production of goods and services that are provided by nature such as land rivers and mineral deposits Take two forms renewable and nonrenewable Natural resources are responsible for differences in standard of living More N allows more Y Technological Knowledge society s understanding of the best ways to produce goods and services Some is common knowledge that everyone becomes aware of other is proprietary and known only by company that discovers it Boost productivity by increasing K which requires investment Since resources scare producing more capital requires producing fewer consumption goods Reducing consumption increasing saving This extra saving funds production of investment goods There is a tradeoff between current and future consumption Diminishing Returns as the stock of capital rises the extra output produced from an additional unit of capital falls o When workers already have a large quantity of capital to use in producing goods and services giving them an additional unit of capital increases their productivity only slightly In the short run increase in the saving rate leads to higher growth In the long run the higher saving rate leads to a higher productivity and income but NOT to higher growth in these variables Catch up Effect where countries that start off poor tend to grow more rapidly then countries that start off rich Capital investment has a large effect on productivity in poor countries Investment from Abroad to raise K L Foreign Direct Investment capital investment that is owned and operated by a foreign entity Ex Ford building a car factory in Mexico Foreign Portfolio Investment investment that is financed with foreign money but operated by domestic residents Ex American buying a stock in a Mexican corporation and then that corporation uses the stock proceeds to build a new factory Education Government can promote education through investment in human capital H By investing in H involves tradeoff between present and future Spending a year in school requires sacrificing a year s wages now to have higher wages later Brain Drain emigration of many of the most highly educated workers to rich countries where there s a higher standard of living Reduces poor countries stock of human capital Property Rights the ability of people to exercise authority over the resources they own Courts enforce property rights Lack of them discourages domestic saving and investment from abroad Markets are usually a good way to organize economic activity Price system allocates resources for their most efficient uses Free Trade Inward oriented policies attempt to increase productivity and living standards in a country by avoiding interaction with the rest of the world Let policymakers in poor countries to impose tariffs and trade restrictions Generally fail to create growth Outward oriented policies integrate developing countries into the world economy Elimination of restrictions on trade and foreign investment Often succeed in growing CHAPTER 13 Financial System The group of institutions that helps match the saving of one person with the investment of another Financial Markets Institutions through which savers can directly provide funds to borrowers Ex Stocks and Bond Markets Bond certificate of indebtedness o Date of maturity time when the loan will be repaid Stock a claim to partial ownership in a firm Financial Intermediaries Institutions through which savers can indirectly provide funds to borrowers Ex Banks and Mutual Funds Mutual Funds Institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds Different Kinds of Saving Private saving The portion of the households income that is not used for consumption or paying taxes Y T C Public saving Tax revenue less government spending T G National saving Private saving Public saving Y T C T G Y C G The portion of national income that is not used for consumption or government purchases Saving and Investment Y C I G NX Saving Investment in a closed economy Private Saving is the income remaining after households pay their taxes and pay for consumption Households can buy corporate bonds or equities buy shares of a mutual find or let it accumulate in saving and checking accounts Investment is the purchase of new capital Investment is NOT the purchase of stocks and bonds Budget Deficits and Surpluses Budget Surplus an excess of tax revenue over government spending T G public saving G T Budget Deficit an excess of government spending over tax revenue G T public saving Market for Loanable Funds The supply of loanable funds comes from saving Investment is the source of demand for loanable funds Depend on real interest rate not nominal Households with extra income can loan it out to earn interest Public saving
View Full Document
Unlocking...