ECON 1051 1nd Edition Lecture 43 Outline of Last Lecture I. Essay Prompts Outline of Current Lecture I. Main Concepts II. Long-Run Economic Growth III. Economic Growth IV. Dividing the World’s Economy V. What Determines the Rate of Long-Run Growth Saving, Investment and Financial System I. Financial Systems II. Three Key Services for Savers and Buyers Current LectureI. Main Conceptsa. One determinant of economic growth is the ability of firms to expand their operations, buy additional equipment, train workers and adopt new technologies. b. To carry out these activities firms must acquire funds from households, either directly through financial markets or indirectly through financial intermediariesc. Financial markets and financial intermediaries together form the financial systemII. Long-Run Economic Growth a. The process by which rising productivity increases the average standard of livingb. How do we quantify that growth?i. Real GDP per capita ii. Calculating the growth rates and the rule of 70 1. One easy way to calculate approximately how many years will it take real GDP per capita to double is to use the rule of 70:a. Number of years to double = 70/growth rate 2. Example:a. US real GDP: 4% b. China’s: 10% These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.c. Ethiopia’s .5% d. Real GDP will double…i. US: 70/4=17.5 yearsii. China: 70/10=7 years iii. Ethiopia: 70/0.5 = 140 yearsIII. Economic Growth a. 1,000,000 BC to present i. No sustained economic growth between 1,000,000 BC to 1300 ADb. Industrial Revolutioni. The application of mechanical power to the production of goods1. England, 1750 ii. After this, countries experience long-run economic growth with sustainedincreases in real GDP per capita that eventually raised living standards in those countries to the high levels of todayIV. Dividing the World’s Economya. The high-income countries and the developing countries i. In the 1980s and 1990s, a small group of mostly East Asian countries experienced high rates of growth and are sometimes referred to as the newly industrializing countries V. What Determines The Rate of Long-Run Growth a. Labor productivity i. The quantity of goods and services that can be produced by one worker of by one hour of work b. Increases in capital per hour workedi. Capital1. Manufactured goods that are used to produce other goods and services2. Capital stock – total amount of physical capital available in a country 3. Human capital – accumulated knowledge and skills workers acquire from education and training or from their life experiences c. Technological Changei. Economic growth depends more on technological change, an increase in the quantity of output firms can produce, using a given quantity of inputs,than on increases in capital per hour worked. 1. In implementing technological change, entrepreneurs are of crucial importance, as is the government in providing secure property rights Saving, Investment and Financial System I. Financial Systemsa. Financial markets i. Where financial securities such as stocks and bonds are soldb. Financial Intermediariesi. Firms such as banks, mutual funds, pension funds, and insurance companies that borrow funds from savers and lend them to borrowers 1. Mutual funds sell shares to savers and then use the funds to buy aportfolio of stocks, bonds, mortgages and other financial securitiesII. Three Key Services for Savers and Buyers: a. Risk i. Chance that the value of a financial security will change relative to what you expect. The financial system provides risk sharing by allowing savers to spread their money among many financial investments b. Liquidity i. The ease with which a financial security can be exchanged for money. Thefinancial system provides their service of liquidity by providing savers withmarkets in which they can sell their holdings of financial securities c. Information i. The financial system provides the collection and communication of information, or facts about borrowers and expectations about returns on financial securities.ii. This flow of information was disrupted during 2007-2009 crisis. As a resultinvestors stopped
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