Important but not critical-Ex: Nigeria: lots of resources, poor. Japan- Few resources, rich
Land is fixed, population is ever growing; eventually there will not be enough land to feed people- Starvation
Possible reasons for slow down of the 70's
1. Not yet fully adjusted to computer revolution
2. Baby boomers enter workforce, reducing ave. age+ experience levels.
3. OPEC: quadrupled oil prices in 1973
GDP per Capita=
GDP/Pop. Size= Common measure of living standards.
Medium American Family household income
1900: $6,100.. / 2010: $50,000
What causes your country's growth rate to increase?
Increasing labor productivity. Increasing the amount of " stuff "- Goods and Services produced by each worker
3 ways to increase labor productivity
1. Increase physical capital ( Give shoemakers shoe machines)
2. Increase Human Capital ( Education and Knowledge)
3. Increased technological progress
Aggregate Production Function
GDP= ( Capital, Labor, Tech. Progress )
Equipment makes big difference in productivity. It increases output per worker
Japan and Mexico growth rate
In 1820, Mexico was wealthier tun Japan, now just the opposite
Why do different nations grow at diff. rates
1. Savings- Money you can save can be used to buy investment goods ( Machinery ) which increases worker income by increasing worker productivity.
3. Research+ Development
The role of government in promoting economic growth.
1. Infrastructure Subsidies: Bridges, Roads, Water
2. Education Subsidies: gov. pays for the great bulk of primary and secondary education
3. R+D Subsidies: technological progress done by gov. agencies
4. Maintain a sound financial system
5. Protect Property Rights: Gov. has to protect intellectual property rights
6. Political Stability/ good governance
Success Since WWII
Germany+Japan ( Rebuilding )
The East Asian Tigers: S. Korea, Taiwan, Hong Kong, Singapore. Because of savings, education and technology adoption.
Failures Since WWII
Latin America, Subsaharan Africa
Reasons for failure in Latin America
Low Savings, Little investment in education, and political turmoil
Reasons for failure in Sub-Saharan Africa
1. Political Instability: Civil
2. War- Causes destruction of infrastructure, education facilities
3. Property Rights Violated- ( Productive business socialized or taxed to death, removing incentive to invest to increase the productivity of the economy.
4. Tropical Diseases: Reduce ability to work.
Jeffery Sachs: Poverty causes the reasons for failure not vice-versa
Seems to be a turn around. More political stability- More demand for African produced goods
Firms that create physical capital
( Fabrics, Machine, office buildings, houses )
They usually do it with other peoples money- Savings
Savings + Investment
They are always equal. This is called the savings- investment- spending identity
Total Production, Total Spending
What can be done with your total income?
Spend part on consumer goods. You pay part in taxes- Govt. purchases goods with taxes.
You also save part
Our International trade balance is
How many loans people will want at different interest rates. ( How much they want to borrow )
Shifts in Demand for Loanable Funds
1) Changes in business opportunities
2) Changes in government borrowing
What is the major factor that causes interest rates to go up and down?
Nominal Interest Rate
What you see advertised in the paper
Real Interest Rate
What banker need to earn to cover expenses
Changes in expected inflation changes nominal interest but not Real rates
What does inflation to to both supply and demand
It cause them both to shift
Places households invest current savings and accumulated savings wealth
Can be in financial assists ( Stocks, Bonds ) or physical assets ( buying a house )
Assests for the bank ( they own it ) Liabilities for the borrower ( they owe it )
3 tasks of any financial system
1) Transaction costs
3) Illiquidity of investments ( difficulty selling for cash )
Can be quickly converted to cash
Can't be quickly converted
Reducing Transaction Costs
Time spent negotiating a deal. Verifying Borrower's credit and ability to pay back.
Drawing up legal documents
Reducing Risk- Most people are...
Losses bother them more then ( equal ) gains make them feel good.
To get people to invest their money you have to
Find ways to reduce the risk
Don't put your money in one thing
Lending agreements between a single lender and borrower. ( Student loan, car, house. )
An I.O.U. issued by a borrower- indicates a fixed rate of interests to be paid, loan repayment becomes due.
Which is easier to sell, bonds or individual loans?
Loan Backed Securities
" Bundels " of mortgages, student loans, are to back bonds. Issued by banks, to get more money to lend off
The guarantee the bonds interest + principal will be repaid depends on...
How likely the underlying loans will be paid off
A share in the ownership of a company. It is your assetif you own it. It is the company managements liability. ( Same thing they owe to others ). They pay higher returns over time then bonds. Riskier then bonds.
Bonds have a
1st LIEN on company revenue
Professional investors pick a portfolio of the stocks/ bonds they think will pay off the best. You then buy shares in their mutual fund.
Each share gives you a partial ownership of hundreds of stock shares.
Diversification professional stock selection ( for a fee )
Pension funds, life insurance funds
Work like mutual funds: You pay premiums, but professional investors use them to buy stocks/bonds. Out of investment earnings they pay you pension or death benefits.
Take money from deposits, invest in, mostly by making individual loans,some from investment in Gov't bonds.
Liquidity ( now deposits everyday, so bank doesn't mind if you withdraw. Also, low transaction costs.
Technicality on Gov.
Gov. spends $ on more than just goods and services. It also spends $ on Transfers/ ( Social Security pension payments ).
Total gov spending
G: g+S + G: transfers
For U.S. to import more than it exports, U.S. has to
1. Borrow foreign money.
2. Get foreign money by selling assists( Rockefeller center in NYC.) ( Net flow of foreign savings into U.S. )
If U.S. wants to sell more to foreign countries than it buys from them, U.S. must
1. Lend $ to foreigners
2. Buy assets owned by foreigners ( Buy down town Tokyo. ) ( Net outflow of U.S. savings from the U.S. )
What drives spending on consumer goods
1. Disposable income
2. Wealth- If your wealth goes up you spend more.
Consumption function =
C= $ amount * ( y-t ) + wealth
After WWII, what did the consumption function do
Shifted upward, b/c of interest in wealth during the war.
What did cheap interest rates do during 1998-2006
Caused the housing boom
What do interest rates affect
You investment decision through Opp. cost, even if you save for you new car or factory.
The effect of GDP/ income growth on investment. : The more business see income growing, the more they think it will result in Increased demand for their product, so the more new factories they build ( investment ) to supply the product
The closed factories are to operating at full capacity, the more a change in income, ( the accelerator effect ) will increase investment
C=I. also GDP= Total income= Disposable income ( Y-D )
Consumption function also equals
C= A + MPC * ( YD )
Balance sheet economic effects
Debits $100- Increase your income. Credits $100- Increase in GDP. Causes increase in demand
What does the increase in demand have
A multiplier effect
Depends on how much of your income you normally consume
MPC formal definition
Marginal propensity to consume. The % of any increase in disposable income you spend. ( Rather then save )
Shifts in autonomous consumption can...
Can shift the consumption function
( y-t ) =
Changes in you expected income can lead to...
Can lead to changes in your " c " now.
The lower interest rates are, the more you can afford to borrow to finance a new home or factory
Suppose businesses planned to spend $500 on investment ( machines, factories )