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Business Cycle
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Alternating periods of economic expansion and economic recession
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Long-run Economic Growth
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The process by which rising productivity increases the average standard of living
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Real GDP Per Capita
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The best measure of the standard of living is real GDP per person
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Labor Productivity
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The quantity of goods and services that can be produced by one worker or by one hour of work
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Economists believe two key factors determine labor productivity:
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The quantity of capital per hour worked and the level of technology
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Economic growth occurs if:
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The quantity of capital per hour worked increases and if technological change occurs
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Capital
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Manufactured goods that are used to produce other goods and services
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Capital Stock
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The total amount of physical capital available in a country
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Human Capital
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The accumulated knowledge and skills workers acquire from education and training or from their life experiences
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Technology
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The process a firm uses to turn inputs into outputs of goods and services
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Potential GDP
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The level of real GDP attained when all firms are producing at capacity
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Retained Earnings
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Profits that are reinvested in the firm rather than paid to the firm's owners
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Financial System
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The system of financial markets and financial intermediaries through which firms acquire funds from households
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Financial Markets
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Markets where financial securities, such as stocks and bonds, are brought and sold
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Financial Security
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A document that states the terms under which funds pass from that buyer of the security to the teller
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Stocks
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Financial securities that represent partial ownership of a firm
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Bonds
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Financial securities that represent promises to repay a fixed amount of funds
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Financial Intermediaries
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Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers
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Mutual Funds
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Sell shares to savers and then use the funds to buy a portfolio of stocks, bonds, mortgages, and other financial securities
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The financial system provides three key services for savers and borrowers:
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Risk sharing, liquidity, and information
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Risk
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The chance that the value of a financial security will change relative to what you expect, allows savers to spread their money among many financial investments
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Liquidity
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A financial security can be exchanged for money, provides savers with markets in which they can sell their holdings of financial securities
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Information
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Facts about borrowers and expectations about returns on financial securities
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National Income Accounting
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The methods that Bureau of Economic Analysis uses to keep track of total production and total income in the economy
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Open Economy
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There is interaction with other economies in terms of both trading of goods and services and borrowing and lending
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Closed Economy
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There is not trading or borrowing and lending with other economies
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Private Saving
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Equal to what households retain of their income after purchasing goods and services
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Public Saving
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Equals the amount of tax revenue the government retains after paying for the government purchases and making transfer payments to households
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Balanced Budget
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When the government spends the same amount that it collects in taxes
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Budget Deficit
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When the government spends more than it collects in taxes
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Dissaving
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Negative saving
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Budget Surplus
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When the government sends less than it collects in taxes
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Market for loanable funds
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The interaction of borrowers and lenders that determines that market interest rate and the quantity of loanable funds exchanged
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The demand for loanable funds is determined by:
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The willingness of firms to borrow money to engage in new investment projects
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To determine whether to borrow funds:
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Firms compare the return they expect to make on an investment with the interest rate they must pay to borrow the necessary funds
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Nominal Interest Rate
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The stated interest rate on a loan
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Real Interest Rate
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Corrects the nominal interest rate for the effect of inflation and is equal to the nominal interest rate minus the inflation rate
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Equilibrium in the market for loanable funds determines:
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The quantity of loanable funds that will flow from lenders to borrowers each period and the real interest rate that lenders will receive and that borrowers must pay
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Crowding Out
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A decline in private expenditures as a result of an increase in government purchases
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Expansion Phase
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Production, employment, and income are increasing
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Business Cycle Peak
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The period of expansion ends
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Recession Phase
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Production, employment, and income are decreasing
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Business Cycle Trough
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Recession comes to an end
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Durables
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Goods that are expected to last for three or more years
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Nondurables
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Goods that are expected to last for fewer than three years
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Price Level
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Measure the average priced of goods and services in the economy
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Inflation Rate
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The percentage increase in the price level from one year to the next
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one determinant of economic growth is??
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the ability of firms to expand their operations, buy addtional equipment, train workers, and adopt new tech
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every period of expansion in US history has been followed by a period of....
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of recession and vice versa
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a persons health depends on
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education, health, spiritual well being, and many other factors that are not included in calculating real GDP
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robert fogel
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made the connection between between long run growth, improvements in technology and improvements in human physiology
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some low income contras that have been able to experience growth have seen
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dramatic increases in life expectancies
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increases in health in low income countries will allow workers to become....
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more productive because they will be able to live longer and produce more for the economy and they will be able to live longer healthier lines and will not be ridden by sickness
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growth rate of real GDP per capita during a particular year
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y2-y1/y1 x 100
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rule of 70
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number of years to double= 70/ growth rate
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rule of 70 example
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GDP growing at 5 percent per year 70/5=14
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small differences in growth rate can have..
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large effects in how rapidly the standard of living in a country increase
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what are the two factors the determine labor productivity
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1. the quantity of capital per hour worked
2. the level of technology
2. the level of technology
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to increase growth one mist....
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upgrade infrastructure, improve proviso of educational and health seven and renew commitment to the rule of law and to market based reforms
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if all firms were operating at capacity...
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the level of total production of final goods and services would equal potential GDP
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total value of saving in the economy must equal?
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total investment
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investment formula
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I=Y-C-G
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private savings formula
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Y+TR-C-T
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Public savings formula
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T-G-TR
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total economy savings
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S=Sprivate +Spublic
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when the government spends the same amount that i collects in taxes there is a...
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balanced budget
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when the government spends more than it recieves from taxes there is a
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budget deficit
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there is a lower level of investment spending in the economy when there is a
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budget defeat than when there is abalancd budget
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a _______ increase public savings and total level of savings in the economy
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budget surplus
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a higher level of savings results in...
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higher level of investment spending
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there is a higher level of investment spending when there is a?
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budget surplus then when there is deficit
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the demand for loanable funds is determined by
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the willingness of firms to borrow money to engage in new investment projects
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the higher the interest rate the greater the reward of saving and the...
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larger the amount that households will save
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therefore the supply curve for loanable funds is upward sloping because
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the higher the intern rate the greater the quantity of saving supplied
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because borrowers and lenders are considered about he real interest rate they receive or pay equilibrium in the market for loanable funds determines....?
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the real interest rate rate ethan the nominal rate
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equilibrium in the market for loanable funds determines...
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the real interest rate and the quantity of lovable funds that will flow from lenders to borrowers
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_______of new investment increases due to tech change or because the gov reduces corporate taxes, firms will increase their demand for loanable funds
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the profitability
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increasing investment increases....?
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capital stock which and the quantity per hour worked, helping increase economic growth
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if the gov decides to increase the budget deficit then this will shift...
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the supply curve for loanable funds to the left
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running a deficit has___
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reduced the level of total saving in the economy and by changing the interest rate has also reduced the level one investment spending by firms
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a budget surplus...
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increase the total amount of savings in the economy, shifting the supply curve to the right
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non durables
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goods such as food and clothing
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as spending decliens during a recessions firms have a more?
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difficult time selling their goods and services and are likely to increase their prices less than they otherwise would have
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recessions cause....?
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the inflation rate to fall but the UR to rise
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