• Why CPI is not a perfect index? (3 reason)
    • substitution effect
  • Indexation

    making the purchasing power constant = real income () Overestimation : the purchasign power goes up

Production and Growth

Growth equation => higher productivity leads to richer country (higher standard of living = readl GDP per person)

  • Productivity
    • the amount of goods and services produce for each hour of a workers time
    • stagnant growth
  • EPR: employment population ration
    • Productivity = (total gdp = total output) / (total hours)
    • Average hours = (total hours) / (total employment)
    • EPR = (total employment) / (population)

      Real GDP = Productivity * Avg Hours * EPR * Population (Real GDP per capita) = Productivity * Avg Hours * EPR

      • equations on delta!!!: just sum up
  • Production function: factors of production
    • Y = A * f(K, L, H, R)

    • Yield = Output = Tech * f(Physical capital, Labor, Human capital, Natural resources)

    • Physical capital
    • Human capital: individual knowledge and skills, educaiton, training, experience
    • Natural resources: inputs provided by nature (land, rivers, mineral deposits)

    • Technology: societal understanding of best ways to produce

    • Constant RTS => leads to productivity per person
    • Diminishing return to sclae <=> marginal product of capital is decreasing (concave)

Saving, Investment, and the FInancial System => K/L in the production function

F = markets = intermdeiaries + financial institutions

market: directly provide fund to borrowers (bond / stock) bond => need to pay back stock => equity finacne (자기자본조달 vs 타인자본조달) - PER (price earnings ratio)

**PER = Price Eraning ratio***
- price per hsares/  Earnings per share
  • intermediaries -> indirect provision of fund (bank, mutual funds)
    • sell shares to the public: buy a portfolio of stocks/bonds
  • National income accounts
    • Assume NX = 0 (closed economy: GDP = GNP)
    • Y = C + I + G
    • Savings: (income) - (consumption) => (S) := (Y - C - G) (Definition)
    • (I + NX = S) by the equation
    • Savings S = (Y - T - C) + (T - G)
      • Public Saving Sg
  • Private Saving Sp (household’s saving)
  • Public Saving Sg (government’s saving)

    Changes in indogenous variableresults change along the curve Changes in exdogenous variableresults shift the curve

  • Loanable Funds markets : ** (real inteest rate) vs (loanable funds) **
    • (interest rate) = (return to savings) = (cost of borrowing) = (cost of capital)

    • Assume -> single financial market

    • Loanable Funds supply = saving (increasing ft)
      • saving incentive: shift of the curve (change in exogenous variable)
      • graph!
    • Loanable Funds demand = investment (decreasing ft)
      • investment tax credit
  • Government investmet incentives (exogenous variable: shift of the curve)
    • investment tax credit: shift of supply curve (right)
    • saving incentive vs investment incentive: investment incentive leads to higher real interest rate
  • Governent budget deficit / surplu
    • deficit -> saving down -<> higher inteset rate / smaller loanable fund market
    • crowding out effect