ECON 101 - Chapter 6

1. The process by which rising productivity increases the average standard of living. Typically measured by real GDP per capita.

2. The quantity of goods and services that can be produced by one worker or by one hour of work.

3. Manufactured goods that are used to produce other goods and services.



The total amount of physical capital available in a country is known as the country’s capital stock. As the capital stock per hour worked increases, worker productivity increases.

Increases in human capital, the accumulated knowledge and skills workers acquire from education and training or from their life experiences, are particularly important in stimulating economic growth

Same as percentage change from previous year. 

ex. Current GDP - Last Year's GDP / Last Year's GDP x 100

2. Add growth rate from selected years, and divide by number of years selected. 

• ex.GDP growth rate from 2008 - 2010
• -0.2% + (-2.0%) + 2.9% / 3 = 0.23%

3. Rule of 70. 

Number of years to double = 70 / GDP growth rate

1. Increases in labour productivity.

2. Increases in capital per hour worked

3. Technological change

1a. The processes a firm uses to turn inputs into outputs of goods and services.

1b. Entrepeneurs to stimulate research and development.   and

Government policy that provides secure rights to private property

Potential GDP is the level of real GDP attained when all firms are producing at capacity.

The output gap is the difference between actual GDP and potential GDP.

Economic growth is dependent on the ability of firms to:

• 1. expand their operations,
• 2, buy additional equipment,
• 3. train workers, and
• 4. adopt new technologies

Financial system  The system of financial markets and financial intermediaries through which firms acquire funds from households.

Financial markets  Markets where financial securities, such as stocks and bonds, are bought and sold.

Financial securities a document—sometimes in electronic form—that states the terms under which funds pass from the buyer of the security—who is providing funds—to the seller.

Financial intermediaries Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

1. Stocks are financial securities that represent partial ownership of a firm.

2. Bonds are financial securities that represent promises to repay a fixed amount of funds.

Mutual funds sell shares to savers and then use the funds to buy a portfolio of stocks, bonds, mortgages, and other financial securities.

1. Risk sharing Risk is the chance that the value of a financial security will change relative to what you expect. The financial system provides risk sharing by allowing savers to spread their money among many financial investments.

2. Liquidity is the ease with which a financial security can be exchanged for money. The financial system provides the service of liquidity by providing savers with markets in which they can sell their holdings of financial securities.

3. Information The financial system provides the collection and communication of information, or facts about borrowers and expectations about returns on financial securities

1. Using a closed economy for simplicity, Y = C + I + G.

2. When we rearrange the relationship, investment can be written as I = Y  - C - G

3. Private saving (SPrivate) is equal to what households retain of their income after purchasing goods and services (C) and paying taxes (T), and their income is the total labour in the economy which equals Y, as well as the transfer payments they receive from government. (TR). 

Therefore 

SPrivate = Y + TR − C − T

1. Private saving (SPrivate) is equal to what households retain of their income after purchasing goods and services (C) and paying taxes (T), and their income is the total labour in the economy which equals Y, as well as the transfer payments they receive from government. (TR). 

Therefore 

SPrivate = Y + TR − C − T

2. Public saving (SPublic) equals the amount of tax revenue the government retains after paying for government purchases and making transfer payments to households

SPublic = T − G − TR

3. Total saving in the economy (S) is equal to the sum of private saving and public saving

S = SPrivate + SPublic

or

S = (Y + TR − C − T) + (T − G − TR)

• 4. Because we can cancel TR and T out, S = Y - C - G, which is the same calculation for investments. I = Y - C - G. 
• Therefore, S = I. 
• Total savings equals total investment

A balanced budget is when the government spends the same amount that it collects in taxes

A budget deficit is when the government spends more than it collects in taxes, there is a budget deficit (; negative public saving)

In the case of a deficit, T is less than G +TR, which means that public saving is negative.

A budge surplus is when the government spends spends less than it collects in taxes, and therefore there is positive public saving.

1. Market for loanable funds  The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged

2. Investment (I). The demand for loanable funds is determined by the willingness of firms to borrow money to engage in new investment projects. 

3. Savings (S). * Remember * S - savings S supply. The supply of loanable funds is determined by the willingness of households to save (S Private) and by the extent of government saving or dissaving (S Public). 

• 4. Y axis is the interest rate.
• X axis is the quantity of loanable funds.

Equilibrium in the market for loanable funds determines the real interest rate and the quantity of loanable funds exchanged.

An increase in the demand for loanable funds

1. increases the equilibrium interest rate from i1 to i2,

2. it increases the equilibrium quantity of loanable funds from L1 to L2.

3. As a result, saving and investment both increase.

An increase in the supply of loanable funds

1. decreases the interest rate from i 1 to i 2 , and

• 2. it increases the equilibrium quantity of
• loanable funds from L 1 to L 2 .

3. As a result, both saving and investment increase.

1. When the government begins running a

budget deficit, the supply of loanable funds

shifts to the left.

2. The equilibrium interest rate increases from i 1 to i 2 , and

3. the equilibrium quantity of loanable funds falls from L 1 to L 2 .

4. As a result, saving and investment both decline.

Crowding out  A decline in private expenditures as a result of an increase in government purchases. 

Happens when the government is running a budget deficit.

Two consecutive quarters of negative real GDP growth. That is six months of falling real GDP.