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Eco 1102 review

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Claude Théorêt

ECO REVIEW Efficiency: -society’s gets most it can from its scarce resources Equity: -benefits from using resources to produce goods and services are distributed fairly among members Market economy: -allocates resources through decentralized decisions of many firms and households as they interact in markets for goods and services -households decide what to buy and who to work for Market failure: -when markets fail to allocate resources efficiently Causes of Market failure: -presence of externalities -market power Phillips Curve: -illustrates the trade off between inflation and unemployment -decrease in inflation leads to increase in unemployment GDP measures: -total income of everyone in the economy -total expenditure on the economy’s output of goods and services *income must equal expenditure because -every transaction has buyer and seller -every dollar spent by buyer is dollar of income received by a seller Canadian GDP: -total market value of all final goods and services produced within Canada by Canadians and non- Canadians in a given period of time Y= C+I+G+NX C(Consumption) -spending by households on goods and services with the exception of purchases of new housing I(Investment) -spending on capital equipment, inventories, and structures including new housing G(Government Purchases) -spending on goods and services by local state and federal governments -excludes transfer payments because they are not made in exchange for currently produced goods or services NX(Net Exports) -Exports minus imports Canadian GNP: -total market value of all finals goods and services produced y Canadians throughout the world ina given time Saving: -income remaining after consumption expenditures(flow variable) Wealth: -saving accumulated over time (stock variable) Investment: -purchases of productive capital (flow variable) Physical (capital stock) -total physical capital at a point in time Net domestic product (NDP) = GDP – depreciation Personal Income (PI) = Income received by households and non-corporate businesses Nominal GDP: -values production of goods and services at current year prices Real GDP: -values production of goods and services at constant (reference or base-year) prices GDP Deflator: -measure of the price level calculate as the ratio of nominal GDP to real GDP times 100 *higher GDP indicates higher standard of living LECTURES 4&5********************** Inflation: -economy’s overall price level is rise *inflation rate= percentage change in price level from the previous period Causes of inflation: -money supply -exchange rates -cost-push inflation (increases in production costs->higher costs) -demand-pull inflation (demand for goods/services grows faster than their production) Inflation rate in year 2 = (CPI year 1- CPI year 2) / CPI year 1 CPI -measure of overall costs of goods and services bought by a typical consumer -monitors changes in the cost of living over time -falling price level leads to negative inflation rate aka deflation Problems with the CPI: -situation bias -introduction of new goods -unmeasured quality changes -outlet substitution GDP Deflator = Nominal GDP / Real GDP X100 -is monitored to gauge how quickly prices are rising GDP reflects prices of all goods and services produced DOMESTICALLY CPI reflects prices of all goods and service BOUGHT BY CONSUMERS Nominal interest rate: -not corrected for inflation Real interest rate: -nominal interest rate that is corrected for the effects of inflation (measures lenders purchasing power) LECTURES 6 AND 7 ****** Benefits of economic growth: -satisfy essential needs of a growing population -increase life expectancy -increase standard of living (GDP per capita) -decrease world poverty and hunger Productivity: -amount of goods and services a worker can produce from each hour of work -GDP/hour worked -*physical capital= output produced in past, stock of equipment and structures used to currently produce goods and services -*human capital= knowledge, skills workers acquire through education, training and experience. Increase a nation’s ability to produce goods and services -*Natural resources= inputs used in production processes tat are provided by naturerenewable resources are trees and forests, non-renewable are petroleum and coal -*Technological knowledge= society;s understanding of the best ways to produce goods and services, common knowledge and proprietary knowledge -increases in capital -> increased potential production (GDP) Diminishing returns: -as stock of capital rises extra outputs produced from an additional unit of capital -increase in saving rate leads to higher growth only for a while -long run, higher saving rate leads to higher level of productivity an d income but not to higher growth in these areas Catch-up effect: -countries that start off poor tend to grow faster than those that start off rich aka convergence Foreign direct investment: -capital investment owned and operated by a foreignentity Foreign portfolio investment: -investments financed with foreign money operated by domestic residents Education -in Canada raises ones age on average 10% a year *brain drain= emigration of many of the most highly educated workers to rich countires Property rights: -ability of people to exercise authority over the resources they own Free trade: -inward oriented trade policies= avoid interaction with other countries (closed economy) -outward-orientated trade policies encouraging interaction with other countries (open economy) LECTURES 8 AND 9 **** Financial System: -groups institutions in the economy that help to match one person’s saving with another person’s investment -moves scarce resources from savers to borrowers -financial markets -financial intermediaries Financial markets: -institutions where savers can directly provide funds to borrowers -bond market -stock market Financial intermediaries: -institutions where savers can indirectly provide funds to borrowers -banks -mutual funds Bond: -certificate of indebtedness that specifies obligations of the borrower to the holder of the bond *term= length of time until bond matures *credit risk=probability the borrower will fail to pay some of the interest or principal Stock: -claim to partial ownership in a firm -claim to the profits a firm makes -*equity financing= sale of stock to raise money *stocks offer higher risk and potentially higher returns (compared to bonds) Banks: -institutions where savers can indirectly provide funds to borrowers -takes deposits from those who save and use the deposits to make loans to borrowers -pay depositors interest on their deposits -charge borrowers interest on loans Medium of exchange: -item people can easily use to engage in transactions Mutual fund: -sells shares to public and uses the proceeds to buy a portfolio of different types of stocks, bonds or both -allows people with small amounts of money to easily diversify Economies: -private= no government -closed = no exports, imports and international capital flows * does not engage in international trade *Y=C+I+G *I=Y-C-G = NATIONAL SAVING OR JUST SAVINGS because S=I * S=Y-C-G .. =S= (Y-T-C) + (T-G) .. = Private saving + Public saving (in that order *T= net taxes -mixed= private ((businesses) and public (gov) -open= has exports, imports and international capital flows National saving: -total income in economy after paying for consumption and government purchases Private saving: -amount of income households have left after paying their taxes and consumption -Private saving = (Y-T-C) Public Saving: -amount of tax revenue the government has left after paying for its spending Public saving = (T-G) when G= government spending Budget surplus: -when T>G -government receives more than it spends Budget deficit: -when G>T -government spends more than it receives in tax revenue Foreign Saving: -Imports – Exports sooo (M-X) Total Saving= Private + Public + Foreign = (Y-T-C) + (T-G) +(M-X) Loanable Funds: -al income that people have chosen to save and lend out -supply comes from people with extra income who want to save and lend out -demand comes from households and firms that wish to borrow to make investments -financial markets coordinate the economy’s saving and investment in the market for loanable funds Interest rate: -price of the loan -amount borrowers pay and lenders receive -equilibrium for supply and demand for loanable funds determines the real interest rate Saving Incentives: -taxes on interest income reduce future payoff from current saving and reduce the incentive to save -tax decrease increases incentive to save at any given interest rate (supply of loanable funds shift right/equilibrium rate decreases/quantity demanded for loanable funds increases) -change in tax law encourages greater saving, result will be lower interest rates and greater investment Investment Incentives: -increases incentive to borrow -* increases demand for loanable funds, shifts demand curve right -results in higher interest rate, higher quantity saved -change in tax laws encourage greater investment, interest rates will be higher as will saving Government budget deficits and surpluses: -accumulation of past budget deficits is government debt -government borrowing to finance budget deficit reduces supply of loanable funds available to finance investment by households and firms -this refers to crowding out; the deficit borrowing crowds out private borrowers who are trying to finance investments Budget deficit: -decreases supply of loanable funds (Shift left) -increase equilibrium rate -reduces equilibrium quantity of loanable funds Government surpluses (T>G) -increase public saving (thus national saving) -decrease real interest rate -increase investment Government deficits (G>T) -reduce public saving (thus national saving) -increase real interest rate -decrease investment LECTURES 10 AND 11 ****** Unemployed: -without paid employment -wants to work -is actively looking for work ** unemployed person who is willing to work but is not seeking work will be counted amond unemployed if they have found a job and will begin work within 4 weeks, the person has been temporarily laid off in the last 6 months Problems with unemployment: -lost production and incomes, loss of job brings immediate loss of income and production (temporary) -lost human capital, prolonged unemployment can bring permanent damage through the loss of human capital Natural rate of unemployment: -unemployment does not go away even in the long run -amount of unemployed that the economy normally experiences - in Canada natural rate of unemployment is between 6-8% Cyclical Unemployment -year to year fluctuations in unemployment around its natural rate -associated with short term ups and downs of the business cycle Labour Force: -total number of workers including both the employed and unemployed *person is considered an adult if they are over 15 years old *person is employed if they have spent the previous week working at a paid job *person is unemployed if they are on temporary layoff, looking for a job or waiting for the start date of a new job *person who fits neither of those categories like full time student, homemaker or retiree is not in the labour force Unemployment rate= # of unemployed / labour force x100 Participation rate= (Labour force/population 15+) x100 Employment rate = (# of employed / population 15+) x 100 Discouraged workers: -people who would like to work but have given up looking for jobs after an unsuccessful search (NOT CONSIDERED UNEMPLOYED) Frictional Unemployment: -results from the time it takes to match workers with jobs -workers require time to search for jobs that are best suited to their tastes and skills Structural unemployment: -number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one -quantity of labour supplied exceeds quantity demanded -thought to explain longer spells of unemployment Cyclical Unemployment: -arises due to short run economic fluctuations Costs of Unemployment - Economic= loss of production of goods/services -Psychological= born by unemployed workers & families, anger depression, loss of self-esteem, suicidal behaviour -Social= spill-overs from family to society, increased crime rates, domestic violence, drug use, alcoholism, problem that require increased public resources Government run programs -gov-run employment agencies= give out info about job vacancies to match workers and jobs faster -public training programs= aims to ease transition of workers from declining to growing industries and help disadvantaged groups escape poverty Employment Insurance: -intended to ease burden of those who find themselves unemployed by providing temporary income -economists believe EI has reduced incentive to work and increased natural rate of unemployment Minimum wage: -not effective is set below equilibrium -effective if set ABOUT equilibrium wage rate Unions: -worker association that bargains with employers over wages and working conditions -type of cartel attempting to exert its market power *Collective bargaining= process of unions and firms agree on the terms of employment *Strike= union withdrawal of labour from a firm -occurs when union and firms cannot reach an agreement -workers in unions reap benefits of collective bargaining while workers not in the unions bear some of the costs -unions usually achieve above equilibrium wages for the members -union workers earn 10-20% more than non-union workers Efficiency wages: -theory states that firms operate more efficiently if wages are above equilibrium -don’t to increase worker productivity -wage above the full employment equilibrium wage balances the costs and benefits of this higher wage rate to maximize the firm’s profit *direct cost= payment by the employer *indirect benefit= enables firm to attract high-productivity workers, stimulates greater work effort, lowers quit rate and lowers recruiting costs Higher then equilibrium wages preferred because: -worker health -worker turnover -worker effort -worker quality Job rationing: -if real wage is above equilibrium wage = surplus of labour adding to unemployment and increases natural unemployment rate LECTURE 12******* Money -assets people regularly use to buy goods/ services from others -commodities or tokens that are generally acceptable as a means of payment(method of settling debt) 3 functions of money: *medium of exchange: -money acts as medium -barter system -double coincidence of wants *unit of account: -agreed measure of stating the prices of goods and services *store of value: -money can be held and exchanged for goods and services at a later date Liquidity: -ease of which and asset can be converted into the economy’s medium of exchange -conversion must be negligible or no loss in value Types of money: *commodity money: -take form of commodity with intrinsic value (value in use ex gold silver, cigarettes) *fiat money -used as money because of government decree -no intrinsic value -ex coins, currency, bank deposits Money stock: -quantity of money circulating in the economy Currency= paper bills, coins in hands of the public Demand deposits= balances in bank accounts that depositors can access on demand by writing a cheque Money in Canada consists of: -currency held outside banks -deposits at banks and other financial institutions M1: -Currency outside banks + demand deposits at chartered banks -conversion costless -most liquid definition of money M2: -M
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