Principles of Macroeconomics

==Wertverminderung/Abschreibung

Capital is often assumed to depreciate at a constant rate: D=dK

the difference between Investments (I) and Depreciation is called net investments.

Steady-state equilibrium is the point in a growing economy where investment spending is the same as spending on depreciation and the capital-output ratio remains constant.

At a given saving rate, with positive net investment, the capital stock (and hence output) will grow until D=I

If the saving rate is increased, the capital stock and output grow further, again until D=I

Once D=I, the growth rate will be zero.

The economy’s output is used for saving (investment) or consumption

Long-run (steady state) consumption is the difference between steady state output and steady state depreciation (investment).

There’s a unique saving rate that maximizes the difference between output and investment.

So far, the growth rate in the steady state is zero (A is constant).

This is no longer the case if we allow for technological progress.

As the stock of capital rises,
the extra output produced from an additional unit of capital falls; this property is called diminishing returns.

Because of diminishing returns,
an increase in the saving rate leads to higher growth only for a while.

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.

The catch-up effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.

K/L ratio important:

if small --> grows faster like korea or china, but also means lower living standarts and productivity

if big --> growth percentage smaller, higher living standart

Government policies can try to influence the economy’s growth rate in many ways: by encouraging saving and investment, encouraging investment from abroad, fostering education, maintaining property rights and political stability, allowing free trade, promoting the research and development of new technologies, and controlling population growth

Endogenous growth theory is a theory of long-run economic growth which results from the creation of new knowledge and technology which impacts on everyone and makes them more productive as a result.

• Production function: Y = A K, where A is the amount of output for each unit of capital (A is exogenous & constant)
•  Key difference between this model & Solow: Marginal product of capital is constant here, while it diminishes in the Solow model.
•  As in the Solow model: Investment = sY and Depreciation = δK

 Equation of motion for total capital: ΔK = sY - δK or ΔK/K = sA – δ

If sA > δ, then income will grow forever, and investment is the “engine of growth”.

Here, the permanent growth rate depends on s. In the Solow model, it does not.

(number of unemployed/labour force)*100

Employed:A person with a job is considered as employed.

Unemployed: A person is considered as unemployed, if that person does not have a job and(!) is able and available (willing) to work at current wage rates.

Labour Force: The labour force is the total number of workers and is equal to the number of employed and unemployed:

labour-force participation rate is the percentage of the adult population that is in the labour force

Labour-Force Participation Rate = (Number of persons in the labour force / Adult population) x 100

 Where any person aged 16 or older counts to the adult population.

results from the time that it takes for match workers with jobs that fit there skills als tastes. explains rlatively short terms of unemployement

Structural unemployment is the unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one (labour supply exceeds labour demand). It is often thought to explain longer spells of unemployment.

• frictional unemployment due to job search

structural unemployement due to:

• minimum wage laws, unemployement benefits
• labour unions
• efficieny wages (above equilibrium wages paid by firms in order to increase productivity)

A union is a worker association that bargains with employers over wages, benefits and working conditions.

• A union is a type of cartel attempting to exert its market power. Workers in a union act as a group when discussing their wages, benefits, and working conditions with their employers.
• The process by which unions and firms agree on the terms of employment is called collective bargaining.

a financial institution where savers can directly provide funds to borrowers.

bond market (Rentenmarkt): bond=verbrieftes schuldverschreiben, The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market

stock market: (Aktienmarkt) stock=aktie, is a partial ownership of a firm and is therefore a claim to the profit that the firm makes.

The sale of stock to raise money is called equity financing.

• Banks
• A mutual fund/investment funds is an institution that sells shares to the public and uses the proceeds to buy a portfolio, of various types of stocks, bonds, or both. Mutual funds allow people with small amounts of money to easily diversify. 
• Other Financial Institutions:  Credit unions, Pension funds, Insurance companies, Loan sharks

National saving is the total income in the economy that remains after paying for consumption and government purchases.

Assume a closed economy – one that does not engage in international trade (X=M=NX=0): Y=C+I+G

Y–C–G=I=S (The 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).

S = (Y – T – C) + (T – G) (where T stands for Taxes)

Private saving is the amount of income that households have left after paying their taxes and paying for their consumption.

Private saving = (Y – T – C)

Public saving is the amount of tax revenue that the government has left after paying for its spending.

Public saving = (T – G)

Loanable funds refers to all income that people have chosen to save and lend out, rather than use for their own consumption.

• Saving incentives: a tax decrease is an incentive for households to save--> supply curve to the right  -->lower interest rate --> raises equilibrium quantitiy of loanable funds.
• Investment incentives: investment tax credit raises supply and of loanable funds --> shifts demand curve to the right --> raises equilibrium interest rate --> raises equilibrium quantity of loanable funds.
• Government budget deficit and surpluses (nochmal anschauen)

• Medium of exchange
• unit of account
• store of value

Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange.

commodity money: money with intrinsic value: gold, silver

fiat money: used as money because of goverment decree, no intrinsic value: coins, currency, check deposits

A central bank is an institution designed to oversee the banking system and regulate the quantity of money in the economy.

 Whenever an economy relies on fiat money, there must be some agency that regulates the system.

 Two Primary Functions of Central Banks
 Act as a banker’s bank, making loans to banks and as a lender of last resort. Conducts monetary policy

 by controlling the money supply
 by controlling the internal value of the currency (price stability)
 by controlling the external value of the currency (exchange rate)

Open-Market Operations
 The CB conducts open-market operations when it buys government bonds from or sells government

bonds to the public:
 When the CB buys government bonds, the money supply increases. The money supply decreases when the CB sells government bonds.

 Reserve Requirements
 Reserve requirements are regulations on the minimum amount of reserves that banks must hold against

deposits.
 Increasing the reserve requirement decreases the money supply. Decreasing the reserve requirement increases the money supply.

 The Discount Rate
 The discount rate is the interest rate the CB charges banks for loans.

 Increasing the discount rate decreases the money supply. Decreasing the discount rate increases the money supply.

In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.

is the fraction of deposits that banks hold as reserves.

the reciprocal of the reserve ratio.

Original deposit = $100.00

•  1st Natl. Lending = 90.00 (=.9 x $100.00)

•  2nd Natl. Lending = 81.00 (=.9 x $ 90.00)

•  3rd Natl. Lending = 72.90 (=.9 x $ 81.00)

•  ... and on until there are just pennies left to lend!

 Total money created by this $100.00 deposit in the banking sector is $900.00 (= 1/0.10 x $100.00 - $100.00)
 Total money in the system is $1’000.00

• A government budget deficit represents negative public saving and, therefore, reduces national saving and the supply of loanable funds.

• When a government budget deficit crowds out investment, it reduces the growth of productivity and GDP.

Quantitative easing is when the central bank injects money into banks in order to encourage lending.