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Chapter 10
Chapter 10: Long-Run Economic Growth
31
Economics
Undergraduate 1
04/25/2009

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Term
Growth Rate
Definition
Long-run economic growth.

The process by which rising productivity increases the average standard of living.
Term
Best measure of standard of living
Definition
Real GDP per person (capita)
Term
Growth rate measured by...
Definition
Increases in real GDP per capita.

Increases in real GDP per capita = Growth Rate
Term
Growth rate of real GDP per capita =
Definition
percentage change from previous year
Term
Rule of 70
Definition
70 divided by growth rate = years it takes to DOUBLE real GDP per capita.
Term
Labor Productivity
Definition
The QUANTITY of goods and services that can be produced by ONE WORKER or by ONE HOUR OF WORK.
Term
GDP per capita increases when _______ increases.
Definition
As labor productivity increases, _________ increases.
Term
Capital
Definition
Manufactured goods USED to produce other goods and services.

Ex: computers, warehouses, tools, etc.
Term
Labor productivity increases when...
Definition
The quantity of CAPITAL PER HOUR WORKED and the LEVEL OF TECHNOLOGY

INCREASES
Term
Hierarchy of growth; one above increases as one below increases.
Definition
I. GDP per capita
II. Labor productivity
III. Capital/Technology
Term
Technology
Definition
The processes a firm uses to turn inputs into outputs of goods and services.
Term
Technological change
Definition
An INCREASE in the QUANTITY of OUTPUT firms can PRODUCE using a given number of INPUTS.
Term
Technology's connotation
Definition
Quality based.

For instance, an increase in technology results in an increase of the amount of outputs produced from a given amount of inputs, which results in increased labor productivity which further results in possible real GDP per capita growth, hence an increasing growth rate, hence an increase in productivity and consequently, living standards.
Term
Amount of physical capital available
Definition
Capital stock
Term
Human capital
Definition
The accumulated knowledge and skills workers acquire from education and training of from life experiences.
Term
Capital's connotation
Definition
Quantity based.

For instance, an increase in capital would be an increased in the amount of goods used to produce other goods and services.
Term
High rates of economic growth cannot be sustained without...
Definition
the accompaniment of technological change.

An increase in only capital does not ensure economic growth. Economic growth requires technological change as well.
Term
How does the government play a role in economic growth?
Definition
The government can secure rights to private property.

The government can help the market work and aid economic growth by establishing an independent court system that enforces contracts between private individuals.

SUPPORTIVE GOVERNMENT POLICIES
Term
A financial system is composed of...
Definition
Financial markets (stock and bond markets)

Financial intermediaries (banks)
Term
How does the financial system play a role in economic growth?
Definition
Without a well-functioning financial system, firms cannot expand and adopt new technologies.
Term
Retained earnings
Definition
Profit made by firms that is reinvested in the firm rather than paid to its workers.

Firms can use these earnings to help expand, buy additional equipment, train workers, and adopt new technologies.
Term
Financial markets channel...
Definition
funds from savers to borrowers and channels returns on the borrowed funds to savers.
Term
Financial markets raise funds by
Definition
selling financial securities, such as stocks and bonds, directly to savers.

Funds from savers --> Borrowers
Returns from borrowers --> Savers
Term
Financial securities.
Definition
Sold in financial markets.

They are documents that state the terms under which funds pass from the buyer of the security to the seller.
Term
Stocks
Definition
A financial security representing partial ownership of a firm.
Term
Bonds
Definition
Financial securities that represent promised to repay a fixed amount of funds.
Term
Financial intermediaries
Definition
INTERMEDIARIES between savers and borrowers. Firms include banks, mutual funds, pension funds, and insurance companies. They borrow funds from savers and lend them to borrowers.
Term
Financial intermediaries raise funds by
Definition
Paying savers for the use of their funds; and make profit by lending money to borrowers and charging interest rates on loans.
Term
Mutual funds
Definition
Sells shares to savers and uses these funds to buy a portfolio of stocks, bonds, and other financial securities.
Term
Closed-end mutual funds
Definition
Mutual fund companies which issue shares that investors may buy and sell in financial markets, like stocks of corporations.
Term
Open-end mutual funds
Definition
More common. Issues shares that the mutual fund companies will buy back at a price that represents the underlying value of the financial securities owned by the fund.
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