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Ch6 Lecture and Textbook Notes

The document contains lecture notes and textbook notes on topics related to long-run economic growth, saving, investment, and the financial system. It discusses calculating growth rates, factors that determine economic growth like capital investment and technological change, the relationship between GDP, consumption, investment, and government spending, how financial markets and intermediaries connect savers and borrowers, and definitions related to the business cycle.

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41 views

Ch6 Lecture and Textbook Notes

The document contains lecture notes and textbook notes on topics related to long-run economic growth, saving, investment, and the financial system. It discusses calculating growth rates, factors that determine economic growth like capital investment and technological change, the relationship between GDP, consumption, investment, and government spending, how financial markets and intermediaries connect savers and borrowers, and definitions related to the business cycle.

Uploaded by

47fwhvhc6k
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 6 (Lecture Notes and Textbook Notes)


Tuesday, February 14, 2023
Birdget O’Shaughnessy
ECON 1BB3 C02

Lecture Notes (Tuesday, February 14, 2023)


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Textbook Notes (pg 148 – 173)

Introduction
 Financial markets and financial intermediaries make up financial system
 Business cycle = alternating periods of economic expansion and recission
 Expansion = total production and total employment increasing
 Recession = total production and total employment decreasing

6.1 Long-Run Economic Growth


 Process by which rising productivity increases average standard of living
 Best measure of standard of living is real GDP per person aka real GDP per capita
 Comparing performance of one economy over time or performance of different
economies at any particular time

Calculating growth rates and the rule of 70

 Small differences in growth rates can have large effects on how rapidly standard of living in
country increases
 Applies to growth in other variables

What determines rate of long-run growth


 Increases in real GDP per capita depend on increases in labour productivity
 Labour productivity = quantity of goods/services that can be produced by 1 worker or by 1 hr of
work
 Measure like this to avoid effects fluctuation sin length of workday/fraction of
population employed
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 Economists believe quantity of capital/hr worked and level of tech determine labour
productivity
1. Increases in capital/hr worked
 Workers in high-income countries have more physical capital available than workers in
low-income countries
 Capital = manufactured goods used to produce other goods/services
 Total amount of physical capital available in country is capital stock
 Increase = increase in worker productivity
 Human capital = accumulated knowledge and skills workers acquire
2. Technological change
 Come from many sources
 Technology = processes firm uses to turn inputs into outputs of goods/services
 Entrepreneurs important to operate business and bring together factors of production
to decide where to allocate resources
3. Property rights
 Govt must provide secure rights for economic growth

Potential GDP
 Level of real GDP attained when all firms producing at capacity
 Increase over time as labour force grows, new factories, new machinery/equipment, and tech
change
 Output gap = % difference b/t actual GDP and potential GDP

6.2 Saving, Investment, and the Financial System


 Retained earnings = profits reinvested in firm rather than paid to owners
 Not sufficient to finance growth
 Financial system = system of financial markets and financial intermediaries through which firms
acquire funds from households

Overview of financial system


 Financial markets = markets where financial securities are bought/sold
 Financial security = document that states terms under which funds pass from buyer to seller
 Stocks = represent partial ownership of firm
 Bonds = represent promises to repay fixed amount in future
 Financial intermediaries = firms that borrow funds from savers and lend them to borrowers
 Mutual funds sell shares to savers and use funds to buy portfolio of financial securities
 Role in financial system increased over 30yrs
 Services for savers and borrowers
 Risk = chance value of financial asset change relative to what expect
 Seek steady return on savings
 Liquidity = ease w which asset can be converted into different asset
 Usually to money
 Information
 Collection and communication about borrowers and expectations about returns
on financial securities
 Incorporate info into price of financial securities
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Macroeconomics of saving and investment


 Total value of saving in economy must = total value of investment
 Relationship b/t GDP (Y) and components, consumption (C), investment (I), government
purchases (G), and net exports (NX): Y =C + I +G+ NX
 In closed economy, net exports = 0, so rewrite relationship b/t GDP and components as follows:
Y =C + I +G
 Rearrange relationship, have expression for investment in terms of other variables:
I =Y −C−G
 Private saving = to what households retain from income after purchasing goods and services (C)
and paying taxes (T)
 Households receive income by supplying factors of production to firms (Y) and transfers
from govt (TR)
 We can write the resulting relationship b/t private savings as follows:
S private =Y +TR−T −C
 Public saving = amount of tax revenue govt retains after paying for govt purchases and making
transfer payments to households: S public =T −TR−G
 Total savings in closed economy (S) = to private saving + public saving
 S=I
National saving = investment
 Balanced budget = govt spends same amount as collects in taxes
 Budget deficit = govt spends more than collects in taxes
 T > G+TR meaning public savings negative (dissaving)
 Budget surplus = govt spends less than collects in taxes
 Increase public saving
 Results in higher level of investment spending

Market for loanable funds


 Interaction of borrowers and lenders that determines market interest rate and quantity of
loanable funds exchanged

Demand and supply in loanable funds market


 Demand determined by willingness of firms to borrow money to engage in new investment
projects
 Supply determined by willingness of households to save and by extent of govt saving/dissaving

Explaining movements in saving, investment, and interest rates


 Equilibrium in market determines quantity of loanable funds that will flow from lenders to
borrowers each period
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 Determines real interest rate lenders will receive and borrowers must pay
 Increase in demand for loanable funds

 Increase in supply of loanable funds

 Effect of budget deficit on market for loanable funds


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6.3 The Business Cycle


Some basic business cycle definitions
 Cycle illustrated using movements in real GDP
 Expansion phase = production, employment, and income increasing
 Ends w business cycle peak
 Recession phase = production, employment, and income increasing decreasing
 Ends w business cycle trough

How do we know when the economy is in recession


 Statistics Canada produces stats to monitor economy
 No official beginning/ending to recession
 Agreement that recession defined as 2 consecutive quarters of negative real GDP growth

What happens during business cycle


 As economy nears end of expansion, interest rates rising, and wages rising faster than prices
 Profits of firms falling
 Toward end of expansion, both households and firms have increased debts
 Recession begin w decline in spending on capital goods
 Sales of capital goods and consumer durables declining increasing unemployment and
reducing income
 As recession continues, conditions begin to improve
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Effect of business cycle on inflation rate


 Price level measures average prices of goods/services in economy
 Inflation rate is % increase in price level from year to year
 During expansions, inflation rate increases, near end of expansion, and during recessions,
inflation rate decreases

Effect of business cycle on unemployment rate


 Recessions increase unemployment rate

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