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1、THE REAL ECONOMY IN THE LONG RUN,Production and Growth,Saving,Investment,and the Financial System,Unemployment and Its Natural Rate,Production and Growth,A countrys standard of living depends on its ability to produce goods and services.,Economic Growth around the World,Living standards,as measured
2、by real GDP per person,vary significantly among nations.,Within a country there are large changes in the standard of living over time.,To understand the large differences in living standards across countries,the production of goods and services must be focused on.,Productivity:Its Role and Determina
3、nts,Productivity plays a key role in determining living standards for all nations in the world.,Productivity refers to the amount of goods and services produced from each unit of inputs.,How productivity is determined?,The factors of production directly determine productivity.the inputs used to prod
4、uce goods and services,Physical capitalHuman capitalNatural resourcesTechnological knowledge,Physical Capital,is a produced factor of production.,is the stock of equipment and structures that are used to produce goods and services.,Tools used to build or repair automobiles,build furniture,Office bui
5、ldings,schools,etc.,It is an input into the production process that in the past was an output from the production process.,is the economists term for the knowledge and skills that workers acquire through education,training,and experience.,Human Capital,Human resourcesHuman investment,Natural Resourc
6、es,inputs used in production that are provided by nature,such as land,rivers,and mineral deposits.,can be important but are not necessary for an economy to be highly productive in producing goods and services.,renewable resources nonrenewable resources,societys understanding of the best ways to prod
7、uce goods and services.Application of technological knowledge plays the key role in jumping out of Neo-Malthusian Model of population trap.,Technological Knowledge,Economic Growth and Public Policy,Governments can do many things to raise productivity and living standards.,Encourage saving and invest
8、ment.Encourage investment from abroad.Encourage education and training.Establish secure property rights and maintain political stability.Promote free trade.Promote research and development.,Government Policies which raise productivity and living standards.,The Importance of Saving and Investment,One
9、 way to raise future productivity is to invest more current resources in the production of capital.,Harrod-Domar model（1）g=s/V（2）Y/Y=s（Y/K）Karl Marx g=s Vicious Cycle of Poverty Paradox of Thrifty,The relationship between S and g,(,a,),G,r,o,w,t,h,R,a,t,e,1,9,6,0,1991,(,b,),I,n,v,e,s,t,m,e,n,t,1,9,6
10、,0,1991,South Korea,Singapore,Japan,Israel,Canada,Brazil,West Germany,Mexico,United Kingdom,Nigeria,United States,India,Bangladesh,Chile,Rwanda,South Korea,Singapore,Japan,Israel,Canada,Brazil,West Germany,Mexico,United Kingdom,Nigeria,United States,India,Bangladesh,Chile,Rwanda,Investment(percent o
11、f GDP),Growth Rate(percent),0,1,2,3,4,5,6,7,0,10,20,30,40,The relationship between I and g,Rostovian take-off model(the theory of stage of economic growth)RosensteinRodan:The theory of the big-pushDiminishing Returns As the stock of capital rises,the extra output produced from an additional unit of
12、capital falls.,High growth rate High level of growth,In the long run,the higher saving rate leads to a higher level of productivity and income,but not to higher growth in these areas.,Because of diminishing returns,an increase in the saving rate leads to higher growth only for a while.,The catch-up
13、effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.,the most improved one the best one,Late-development Advantage,Investment from Abroad,Governments can increase capital accumulation and long-term economic growth by encour
14、aging investment from foreign sources.,Foreign aidForeign investmentForeign debt,TheoreticalSource,Two-gap Model,IS=MX,Investment from abroad takes several forms:Foreign Portfolio InvestmentInvestments financed with foreign money but operated by domestic residents.Foreign Direct InvestmentCapital in
15、vestment owned and operated by a foreign entity.Transnational Corporations/BOT,Education,For a countrys long-run growth,education is at least as important as investment in physical capital.Analysis of education based upon Cost Benefit,An educated person might generate new ideas about how best to pro
16、duce goods and services,which in turn,might enter societys pool of knowledge and provide an external benefit to others.,Problems facing some poor countries includeEducation deepening/knowledge unemploymentBrain drain(external)which means the emigration of many of the most highly educated workers to
17、rich countries.Internal Brain drain 身在曹营心在汉,Property Rights and Political Stability,Property rights refer to the ability of people to exercise authority over the resources they own.An economy-wide respect for property rights is an important prerequisite for the price system to work.It is necessary f
18、or investors to feel that their investments are secure.,Inward-oriented trade policies,avoiding interaction with other countries.primary inward-looking secondary inward-looking(import substitution)Outward-oriented trade policies,encouraging interaction with other countries.primary outward-lookingsec
19、ondary outward-looking(export promotion),Free Trade,Research and Development,R&D is the first stage of technological progress.The advance of technological knowledge has led to higher standards of living.Most technological advance comes from private research by firms and individual inventors.Governme
20、nt can encourage the development of new technologies through research grants,tax breaks,and the patent system.,Technological Progress,R&D,TechnicalInnovation,Technical Diffusion,Acquisition,Transfer,Appropriate technology,Intermediate technology,Population Growth,Economists and other social scientis
21、ts have long debated how population growth affects a society.,Population growth interacts with other factors of production:Stretching natural resources MalthusianPopulationTheory Diluting the capital stock Neo-classicaleconomicgrowthmodel Promoting technological progress,The Financial System,consist
22、s of the group of institutions in the economy that help to match one persons saving with another persons investment,that is,coordinate the actions of savers and borrowers.It moves the economys scarce resources from savers to borrowers.,Financial Institutions in the Economy,Financial institutions can
23、 be grouped into two different categories:financial markets and financial intermediaries.,Financial Markets are the institutions through which savers can directly provide funds to borrowers.Bond MarketStock MarketFinancial Intermediariesare financial institutions through which savers can indirectly
24、provide funds to borrowers.BanksMutual Funds,Bond MarketBond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond.Characteristics of a BondTerm:The length of time until the bond matures.Credit Risk:The probability that the borrower will fail to pay so
25、me of the interest or principal.Tax Treatment:The way in which the tax laws treat the interest on the bond.,Financial Markets,Stock MarketStock represents a claim to partial ownership in a firm and is therefore,a claim to the profits that the firm makes.The sale of stock to raise money is called equ
26、ity financing.Compared to bonds,stocks offer both higher risk and potentially higher returns.,Bankstake deposits from people who want to save and use the deposits to make loans to people who want to borrow.pay depositors interest on their deposits and charge borrowers slightly higher interest on the
27、ir loans.,Financial Intermediaries,Banks help create a medium of exchange by allowing people to write checks against their deposits.A medium of exchanges is an item that people can easily use to engage in transactions.This facilitates the purchases of goods and services.,Mutual Funds is an instituti
28、on that sells shares to the public and uses the proceeds to buy a portfolio,of various types of stocks,bonds,or both.They allow people with small amounts of money to easily diversify.,Other Financial Institutions Credit unionsPension fundsInsurance companiesLoan sharks,Saving and Investment in the N
29、ational Income Accounts,Recall that GDP is both total income in an economy and total expenditure on the economys output of goods and services:Y=C+I+G+NX,Some Important Identities,Assume a closed economy one that does not engage in international trade:Y=C+I+G,Now,subtract C and G from both sides of t
30、he equation:Y C G=IThe left side of the equation is the total income in the economy after paying for consumption and government purchases and is called national saving,or just saving(S).,Substituting S for Y-C-G,the equation can be written as:S=I,National saving,or saving,is equal to:S=IS=Y C G S=(Y
31、 Tn C)+(Tn G),The Meaning of Saving and Investment,National Saving is the total income in the economy that remains after paying for consumption and government purchases.Private Saving=(Y Tn C)is the amount of income that households have left after paying their taxes and paying for their consumption.
32、Public Saving=(Tn G).is the amount of tax revenue that the government has left after paying for its spending.,If T G,the government runs a budget surplus because it receives more money than it spends.The surplus of T-G represents public saving.If G T,the government runs a budget deficit because it s
33、pends more money than it receives in tax revenue.,Surplus and Deficit,For the economy as a whole,saving must be equal to investment.S=I,The Market for Loanable Funds,Financial markets coordinate the economys saving and investment in the market for loanable funds.,is the market in which those who wan
34、t to save supply funds and those who want to borrow to invest demand funds.,Loanable funds refers to all income that people have chosen to save and lend out,rather than use for their own consumption.,Supply and Demand for Loanable Funds,The supply of loanable funds comes from people who have extra i
35、ncome they want to save and lend out.The demand for loanable funds comes from households and firms that wish to borrow to make investments.,The interest rate is the price of the loan.It represents the amount that borrowers pay for loans and the amount that lenders receive on their saving.The interes
36、t rate in the market for loanable funds is the real interest rate.,Financial markets work much like other markets in the economy.The equilibrium of the supply and demand for loanable funds determines the real interest rate.,Loanable Funds,(in billions of dollars),0,Interest,Rate,The Market for Loana
37、ble Funds,Government policies that affect saving and investmentTaxes and savingTaxes and investmentGovernment budget deficits,Policy 1:Saving Incentives,Taxes on interest income substantially reduce the future payoff from current saving and,as a result,reduce the incentive to save.,A tax decrease in
38、creases the incentive for households to save at any given interest rate.The supply of loanable funds curve shifts to the right.The equilibrium interest rate decreases.The quantity demanded for loanable funds increases,Loanable Funds,(in billions of dollars),0,Interest,Rate,An Increase in the Supply
39、for Loanable Funds,If a change in tax law encourages greater saving,the result will be lower interest rates and greater investment.,Policy 2:Investment Incentives,An investment tax credit increases the incentive to borrow.Increases the demand for loanable funds.Shifts the demand curve to the right.R
40、esults in a higher interest rate and a greater quantity saved.,If a change in tax laws encourages greater investment,the result will be higher interest rates and greater saving.,Loanable Funds,(in billions of dollars),0,Interest,Rate,An Increase in the Demand for Loanable Funds,Policy 3:Government B
41、udget Deficits and Surpluses,When the government spends more than it receives in tax revenues,the short fall is called the budget deficit.The accumulation of past budget deficits is called the government debt.,Government borrowing to finance its budget deficit reduces the supply of loanable funds av
42、ailable to finance investment by households and firms.This fall in investment is referred to as crowding out.The deficit borrowing crowds out private borrowers who are trying to finance investments.,A budget deficit decreases the supply of loanable funds.Shifts the supply curve to the left.Increases
43、 the equilibrium interest rate.Reduces the equilibrium quantity of loanable funds,Loanable Funds,(in billions of dollars),0,Interest,Rate,The Effect of a Government Budget Deficit,When government reduces national saving by running a deficit,the interest rate rises and investment falls.,A budget surp
44、lus increases the supply of loanable funds,reduces the interest rate,and stimulates investment.,Identifying Unemployment,Categories of UnemploymentThe problem of unemployment is usually divided into two categories.the long-run problem and the short-run problem natural unemployment cyclical unemploym
45、ent,is unemployment that does not go away on its own even in the long run.It is the amount of unemployment that the economy normally experiences.,Natural Unemployment,refers to the year-to-year fluctuations in unemployment around its natural rate.It is associated with short-term ups and downs of the
46、 business cycle.,Cyclical Unemployment,Three Basic Questions:How does government measure the economys rate of unemployment?What problems arise in interpreting the unemployment data?How long are the unemployed typically without work?,Describing Unemployment,How is unemployment measured?,Based on the
47、answers to the survey questions,each adult is placed into one of three categories:EmployedUnemployedNot in the labor force,A person is considered as an adult if he or she is over 16 years old.,A person is employed if he or she has spent most of the previous week working at a paid job.,A person is un
48、employed if he or she is on temporary layoff,is looking for a job,or is waiting for the start date of a new job.,A person who fits neither of these categories,such as a full-time student,homemaker,or retiree,is not in the labor force.,The labor force is the total number of workers,including both the
49、 employed and the unemployed.,The unemployment rate is calculated as the percentage of the labor force that is unemployed.,The labor-force participation rate is the percentage of the adult population that is in the labor force.,104.2,105.2,Employed,8.1,7.4,Unemployed,169.5,168.2,Adult,226.5,223.6,Po
50、pulation,2011,2010,Unit:millions,Unemployment rate,labor-force participation rate,112.6,Labor force,2011,2010,112.3,66.9%,66.3%,6.6%,7.2%,labor-force participation rate,169.5,112.3,Does the unemployment rate measure what we want it to?,It is difficult to distinguish between a person who is unemploye
