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QUICK STUDY NOTES - Ch 7 - 11 - Econ 1BB3

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Bridget O' Shaughnessy

Chapter 7 Productivity, determined by 1. Physical Capital 2. Human Capital 3. Technological Knowledge 4. Natural Resources Catch Up Effect – the property whereby countries that start off poor tend to grow more rapidly Foreign Direct Investment – a capital investment that is owned and operated by a foreign entity Foreign Portfolio Investment – an investment that is financed with foreign money but operated by domestic residence GDP – income earned within a country by both residents and non-residents GNP – income earned by residents of a country both at home or abroad Increase Productivity - Consume less, save more income  invest more resources in production of capital raise future productivity 1. Education a. Opportunity costs b. Positive externalities c. Brain Drain – emigration of highly educated worked to rich countries so that the can enjoy a higher standard of living 2. Health and Nutrition 3. Property Rights a. Corruption b. Political instability c. Higher economic standard of living if: i. Efficient court system ii. Honest government officials iii. Stable constitution 4. Free Trade a. Inward-Oriented Policies b. Outward-Oriented Policies 5. Research and Development a. Technological advances b. Knowledge is a public good c. Patents 6. Population Growth Chapter 8 Financial System – consists of those institutions in the economy that helps match one person saving with another person investment Financial Markets – institutions through which a person who wants to save can directly supply funds to a person who wants to borrow 1. Bond Markets a. Bond – indebtness b. Debt Finance c. Date of Maturity – the time at which the loan will be repaid d. Bond Term – length of time before bond matures e. Perpetuity – interest is paid forever, but principle is never repaid f. Credit Risk – the probability of default i. Default – failure to pay some interest or principle 2. Stock Market a. Stock – ownership b. Equity Finance c. Stock Exchange d. Stock Index e. Demand – reflects perception of corporations future profitability Financial Intermediates – financial institution through which savers can indirectly provide funds to borrowers 1. Banks a. Medium of exchange – item that enables transaction 2. Mutual Funds a. Selection or portfolio of stocks and bonds b. Diversify c. Access to professionals d. Index Funds – buy all stocks in given market; don’t pay professional 3. Pension Funds 4. Credit Unions and Caisses Populaires 5. Insurance Companies 6. Loan Sharks Closed Economy – does not interact with other economies Y = C + I + G Savings = Investment (economy) Saving > Investment (individual bank deposit) Open Economy – does interact with other economies Y = C + I + G + NX Saving < Investment (individual bank withdrawal) Private Savings Spriv Y – T - C Public Savings Spub= T – G Budget Surplus: T > G Budget Deficit: T < G National Savings S = (Y – T – C) + (T – G) = Y – C – G Market for Loanable Funds - Loanable Funds – income that people save or lend out, rather than use to consume - Supply of LF  peoples Savings; buys a bond (direct), deposits in bank which makes loans (indirect) - Demand of LF  people who want to borrow - Interest Rate = Price of the Loan o High Interest Rate – expensive borrowing, saving more attractive Policy 1 – Saving - Eg/ GST, RRSP, TFSA  encourages saving - More saving = more supply (shift R) Policy 2 – Investment Incentives - Investment Tax credit – gives tax advantage to firm investing in building or equipment  encourages investing - Move investment = more demand (shift R) Policy 3 – Government Budget Deficit and Surplus - Government with budget deficit – government needs money; borrows money  reduces supply (shift left) - Crowding Out – a decrease in investment due to government borrowing to finance budget deficit - Vicious Cycle – cycle that results when deficits o  supply of LF -  interest rates – discourages investment – slower econ. growth - tax rev - spending on income support programs  higher budget deficits - Virtuous Cycle – cycle that results when surpluses o  supply of LF - rates of interest – stimulates investment – faster econ. growth –  tax rev - spending on income support programs  higher budget surplus Chapter 9 Natural Rate of Employment – the amount of unemployment that the economy normally experiences Cyclical Unemployment – the year-to-year fluctuations in unemployment around its natural rate Frictional Unemployment – unemployment due to time it takes to match people with jobs that suit skills and interests Structural Unemployment – unemployment due to not enough jobs Employed – person (15+ years) who spent some of the previous week working at a paid job Unemployed – person (15+ years) who is on temp. layoff or looking to work Out of Labour Force Unemployment Rate - % of LF that is unemployed Unemployment Rate = (# unemployed) / (#labour force) x 100% Labour-Force Participation Rate - % of adult pop. in LF LFPR = (#LF) / (#adult pop) x 100% Complications - “Unemployed” – may not try to find work o Temporary layoff o Working under table to qualify for Employment Insurance o Discouraged Searchers – individuals who would like to work but have given up o Part-time workers do not show up on unemployment statistics Employment Insurance – a government program that partially protects workers incomes when they become unemployed - Determinants 1. # of hours worked in past year a. More hours  longer period of time to collect EI 2. Unemployment in area of residence a. Higher local unemployment rate  longer time of collection + fewer hours worked to be eligible - Might cause frictional unemployment o People may be “unemployed” to collect EI o Job duration is affected by EI  Quit jobs earlier to get EI  Employer lays off workers after eligible  benefit for workers who accept low wage o Success finding employment while collecting EI affected by # of weeks and benefits remaining - Allows for a thorough search of jobs Minimum Wage - Causes surplus labour  unemployment - Binding to low wage, least skilled workers Unions - Increases wages about equilibrium  results in unemployment - Highest in public sector, lowest in food and accommodation industry - Cartel – group of sellers acting together in the hope of exerting their joint market power - Collective Bargaining - Strike – organized withdrawal of labour from firm – reduces production – firms likely give in Efficiency Wages - Above equilibrium wages paid in order to increase pr
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