Macroeconomics (test 2)

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Income per Capita
GDP/Total population
Purchasing power parity
constructs the cost of a representative bundle of commodities in each country and adjusts GDP so that a dollar in each country can purchase this representative bundle
Income per worker
GDP/number of people in employment
The value of goods and services that a worker generates for each hour of work
One dollar a day per person poverty line
A measure of absolute poverty. Living on $1.25 a day per person (Dem. Rep of the congo is poorest)
Human Capital
A person stock of skills to produce output or economic value
Physical Capital
Any good (machines, equipment, buildings) used for production
Uses labor and capital more efficiently and achieves high productivity
What determines how productive a worker is?
Human capital, physical capital, and technology
Aggregate production function
All of GDP, determines why production varies
Y=A x F(K,H)
Total efficiency units of labor (H)
Product of the total number of workers and the average human capital.
H=L x h
Law of Diminishing Marginal Product
The marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production
Factors that affect the level of technology
1. Knowledge
2. Efficiency of Production- The ability of a society to produce the maximal amount of output at a given cost
3. Entrepreneurship
Economic Growth
Increase in GDP per capita of an economy
Growth Rate
Exponential Growth
Process by which a quantity grows at an approximately constant growth rate
Catch-up growth
Nations are catching up with the world leaders in income and technology
Sustained Growth
Positive and relativity steady growth rate in every 50 year period
Saving Rate
Total saving/GDP
Technological Change
Process of new technology, goods, and services that are being invented, introduced, and used in the economy
Malthusian Cycle
Increase in aggregate income….increase income/capita…population growth…decreasing aggregate income and it continues
(Industrial revolution broke the cycle)
What is the only thing that sustains GDP growth?
Proximate causes of prosperity
Link high levels of prosperity to high levels of the inputs to production, but without providing an explanation for why the levels of inputs are so high (human capital, technology, physical capital)
Fundamental causes of prosperity
Causes that are the root of the differences in the proximate causes of prosperity (Culture, institution, geography)
Geography Hypothesis
Differences in geography, climate, and ecology ultimately determine the large differences in prosperity around the world
Culture Hypothesis
Different societies respond differently to incentives
The formal and informal rules governing the organization of a society, including its laws and regulations
Elements that define and institutions
1. Determined by individuals as members of a society
2. Place constraints of behavior
3. Shape behavior by determine incentives
Institution hypothesis
The differences in the way that humans have chosen to organize their societies
Economic institutions
Aspects of a society`s rules that concern economic transactions
Inclusive vs. Extractive
America vs North Korea
Political Institutions
Determines who holds political power and what types of constraints exist on the exercise of that power
Creative destruction
Process in which new things replacing old ones and therefore many companies are hurt by the new ideas shutting all the old profitable ones down
Political creative destruction
Process in which economic growth destabilizes existing regimes and reduces the political power of the ruler
Does foreign aid solve the solution to world poverty?
No, most of the aid is taken by politically corrupt leaders
Potential Workers
Everyone except
1. Children under 16
2. Institutionalized people
3. Active duty military
Those holding full time or part time jobs
1. Do not have a paid job
2. Actively looked 4 weeks prior
3. Currently available for work
Labor force
Unemployment rate
unemployed/labor force
Labor force participation rate
labor force/potential workers
Labor demand curve
-Downward sloping
Cause shifts:
1. Changing output prices
2. Changing demand for the output of good or service
3. Changing technology
4. Changing input prices
Labor supply curve
-Upward sloping
Cause shifts:
1. Changing tastes
2. Changing opportunity cost of time
3. Changes in population
Market clearing wage
Competitive equilibrium wage
Frictional unemployment
Resulting from imperfect information about available jobs and from the time consuming process of job search
Structural unemployment
Labor supplied is greater than labor demanded
Wage rigidity
Wages are fixed above the competitive equilibrium level
Downward wage rigidity
Workers are highly averse to work for a reduction in their wage
Efficiency wage
Paying wages above the wage workers were willing to accept, creating more efficiency and profitability
Categories: Geography