Chapter 7- production and growth
Type of productivities:
Physical capital- the stock of equipment and structures that are used to produce goods and services.
Human capital- the knowledge and skills that workers acquire through education, training, and
Natural resources- the inputs into the production of goods and services that are provided by nature,
such as land, rivers, and mineral deposits.
Technological knowledge- society’s understanding of the best ways to produce goods and services.
Diminishing returns- the property whereby the benefits from an extra unit of an input declines as the
quantity of the input increases.
Catch-up effect-the property whereby countries that start off poor tend to grow more rapidly than
countries that start off rich.
Foreign direct investment- a capital investment that is owned and operated by a foreign entity.
Foreign portfolio investment- An the investment that is financed with foreign money but operated by
Government policy to raise productivity:
1. Encourage saving- consume less and save more. (eg. Impose a consumption tax)
2. Allow foreign investment- foreign some profit from foreign direct investment (FDI) would be
brought home and would help boost the economy (only pertain to rich country)
3. Spend on education- more educated individuals = more ideas for society. Brain drain problem:
emigration of highly educated people to rich standard of living
4. Improve property rights and reduce political instability
5. Free trade- can be a substitute for technology
6. Research and development- grants ( eg. Funded research at universities), patent system
(enhances the incentives for individuals and firms to engage in research)
Production function: shows how we combine inputs to produce output.
- Y= A x F (K, L, H, N)
Chapter 8- Saving, investment, and the financial system
Financial system- the group of institutions in the economy that help to match one person’s saving with
another person’s investment. Financial markets- financial institutions through which savers can directly provide funds to borrowers.
-Bond market – involves loans. When you buy a bond you are making a loan to a company or
-Stock market – purchasing part ownership of the firm. When the firm makes profits, you get
share of that profit (this is called dividend).
Bond- a certificate of indebtedness
Stock- a claim to partial ownership in a firm
Financial intermediaries- financial institutions through which savers can indirectly provide funds to
-Banks- provide loans and take deposits from savers.
-Mutual funds- takes money from people with small amounts who are interested in buying
stocks and bonds; pool all the money and purchase stocks and bonds issued by individual companies.
Mutual fund- an institution that sells shares to the public and uses the proceeds to buy a portfolio of
stocks and bonds.
Calculation of GDP: Y= C + I + G + NX
C= consumption, I = investment, G = government purchases, NX= net exports, Y= GDP
Without international trade GDP : Y = C + I + G
National saving- the total income in the economy that remains after paying for consumption and
government purchases. ( S = I ) ( S = Y - C- G )
Private saving- the income that households have left after paying for taxes and consumption.
Public saving- the tax revenue that the government has left after paying for its spending.
Budget surplus- an excess of tax revenue over government spending
Budget deficit - a shortfall of tax revenue from government spending
Market for loanable funds- the market in which those who want to save surplus funds and those who
want to borrow to invest demand funds.
Government debt- the sum of all past budget deficits and surpluses.
Crowding out- a decrease in investment that results from government borrowing. Vicious circle – cycle that results when deficits reduce the supply of loanable funds, increase interest
rates, discourage investment, and result in slower growth leads to lower tax revenue and higher
spending on income-support programs, and the result can be even higher budget deficits.
Virtuous circle- cycle results when surpluses increase the supply of loanable funds, reduce interest rates,
stimulate investment, and result in faster economic growth; faster growth leads to higher tax revenue
and lower spending on income-support programs, and the result can be even higher budget surpluses.
Government net debt- the difference between the value of government financial liabilities and financial
Equity finance- the sale of stock to raise money
Debt finance- the sale of bonds
Chapter 9- Unemployment and its natural rate
Labour force- the total number of workers, including both the employed and the unemployed
Labour force = number of employed + number of unemployed
Unemployment rate- the percentage of the labour force that is unemployed
Unemployment rate= number of unemployed/ labour force X 100