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Scroll to the section below that matches your station. If you want to look at another topic, move to the station that matches that topic. Section 7: Economic Growth and Productivity Although short, this section stresses the importance of long-run economic growth. It examines the determinants of growth and government policies to promote economic growth 1. Define economic growth and list the factors that stimulate growth. 2. Assess the role of productivit y in raising real output and standard of living. Economic Growth… An economy’s productive capacity, potential output, or potential GDP Set by the quantity and quality of resources and the state of technology Graphically shown by the production possibilities curve Is fixed in the short term but can occur in the long run when resource and technology and improved The determinants of productive capacity include… Human resources – “investment” in human capital (education and skill levels) Natural resources Investment in capital goods Technological progress Public policy – taxes, infrastructure, property rights which can either impede or encourage efficient markets and entrepreneurial endeavors => increased spending of C + I + G Growth of real GDP per capita occurs only when the rate of productivity (real output per worker) increases. Check for understanding: http://www.quia.com/quiz/5039870.html?AP_rand=1052535132 3. Suggest how public policies stimulate economic growth. Expansionary => Shift AD to the right *Increased investment in human and human resources can lead to economic growth. Contractionary => Shift AD to the right Monetary Policy Increase money supply: 1) Open-market operations: buy bonds 2) Decrease reserve requirement 3) Decrease discount rate Fiscal Policy 1) Increase government spending 2) Decrease taxes Decrease MS: 1) OMO: sell bonds 2) Increase res. req. 3) Increase dis. Rate 4) Decrease G 5) Decrease T 4. Using graphical and tabular analysis, show the benefit of employing comparativ e advantage. A description of comparative advantage: Library of Economics and Liberty Practice problem: http://www.quia.com/quiz/5039891.html (same as below, but with answers) Section 8: Open Economy: International Trade and Finance This section of the course stresses the effect of world trade, capital flows, and the determination of foreign exchange rates. 5. Explain how the balance of payments accounts are recorded. Helpful reading: International Finance and the BOP 6. Explain the effect of trade restrictions . The effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer. When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses. A tariff—a tax on imports—moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Although some of these arguments have some merit in some cases, economists believe that free trade is usually the better policy. 7. List the factors that influence equilibrium foreign exchange rates. Fiscal 8. Using demand/su pply analysis, show how market forces and public policy affect currency demand and currency supply. Flexible exchange-rate system: rates at which national currencies are exchanged for one another are determined by demand and supply and in which no government intervention occurs. Expansionary policy => higher domestic interest rate => increased foreign demand for dollars => dollar appreciates => net exports decline => balance of trade becomes less “favorable” Contractionary policy => lower domestic interest rate => decreased foreign demand for dollars => dollar depreciates => net exports increase => balance of trade becomes more “favorable” Monetary Easy money policy => decreased foreign demand for dollars => dollar depreciates => net exports increase => balance of trade becomes more “favorable” Tight money policy => increased foreign demand for dollars => dollar appreciates => net exports decrease => balance of trade becomes less “favorable” Fixed exchange-rate system: governments determine rates at which currencies are exchanged and make necessary adjustments in their economies to ensure that these rates continue 9. Define currency appreciatio n and depreciatio n and relate both to graphical analysis. 10. State the effects of appreciatio n and depreciatio n on a country’s net exports. 11. Understan d how changes in net exports and capital If exports exceed imports, you get a trade surplus which is considered a “favorable balance of trade”. If imports exceed exports, you get a trade deficit which is considered an “unfavorable balance of trade”. A “favorable” balance of trade is not entirely good, however. We cannot buy as much foreign goods now (since our dollar is worth less) so foreign companies flows affect financial and goods markets. don’t get as much business from us. However, when foreign prices rise, Americans turn to American companies to buy things from, helping American companies make more money. Likewise, an “unfavorable” balance of trade isn’t entirely bad either. Since our dollar has grown in value, we can buy more foreign goods, so foreign companies get more money. However, because of cheaper foreign goods, American companies won’t get as much business (or they have to lower prices), so they don’t get as much money.