Economic growth and productivity

Sustained increase in Real GDP over time
Sustained increase in Real GDP per Capita over time
 

•Growth leads to greater prosperity for society.

•Lessens the burden of scarcity.

•Increases the general level of well-being.

Conditions for growth 

•Rule of Law

•Sound Legal and Economic Institutions

•Economic Freedom

•Respect for Private Property

•Political & Economic Stability

–Low Inflationary Expectations

•Willingness to sacrifice current consumption in order to grow

•Saving

•Trade

  

Physical Capital

•Tools, machinery, factories, infrastructure

•Physical Capital is the product of Investment.

•Investment is sensitive to interest rates and expected rates of return.

•It takes capital to make capital.

•Capital must be maintained.

 

Technology and productivity 

•Research and development, innovation and invention yield increases in available technology.

•More technology in the hands of workers increases productivity.

•Productivity is output per worker.

•More Productivity = Economic Growth.

  

Human Capital

•People are a country’s most important resource. Therefore human capital must be developed.

•Education

•Economic Freedom

•The right to acquire private property

•Incentives

•Clean Water

•Stable Food Supply

•Access to technology

Unit 7 notes

Unit 7 -international trade

Balance of Payments

-measure of money inflows and outflows between the United States and the Rest of the World (ROW)

-inflows are referred to as credits

-outflows are referred to as Debits

-the balance of payments are divided into 3 accounts

  -current account

  -capital/financial account

  -official reserve accounts

Double entry bookkeeping

-every transaction in the balance of payments is recorded twice in accordance with standard accounting practice

EX: U.S. Manufacturer, John Deere exports $50 million worth of farm equipment to Ireland

  -a credit of 50mil to the current account (-50 million worth of farm equipment or physical assets)

  -a debit of 50 mil to the capital/financial account (+50 million worth of farm equipment or physical assets)

-balance of trade

  -exports of goods/services - imports of goods/services

-export create a credit to the balance of payments

-imports create a debit to the balance payments

-Net foreign income

  -income earned by US owned foreign assets - income paid to foreign held US assets

Ex: interest payments on US owned Brazillian bonds - interest payments on German owned US Treasury bonds

-Net Transfers (tend to be unilateral)

-foreign aid -> a debit to the current account

EX: Mexican migrant workers send money to family in Mexico

Capital/Financial account

-the balance of capital ownership

-includes the purchase of both team and financial assets

-direct investment in the US is a credit to the capital account

  -EX: the toyota factory in San Antonio

-Direct investment by US firms/individuals in a foreign country are debits to the capital account

  EX: the Intel factory in San Jose, California

-purchase of foreign financial assets represents a debit to the capital account

Ex:warren buffet buys stock in petrochina

-Purchase of domestic financial assets by foreigners represents a credit to the capital account

  -the United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ

-Relationship between current and capital account

  -remember double entry bookkeeping?

-the current account and the capital account should zero each other out.             

Absolute and comparative advantage

Absolute advantage vs Comparative advantage 

Absolute: faster and more efficient

                Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time

                National: when a country can produce more of a good/service than another country in the same amount of time

Comparative: lower opportunity cost

                Individual/ National: exist when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation

Input problems:

                The country or individual that uses the least amount of resources, land or time has the absolute advantage 

Output problems:

                The country or individual that can produce the most has the absolute advantage

                The country that has the lower opportunity cost has the comparative advantage in that product

                Deal with production 

Foreign exchange: buying and selling of currency

                Exchange rate is determined in the foreign currency markets

                The exchange rate is the price of a currency

                DO not try to calculate the exact exchange rate