Understanding Economic Growth and Financial Institutions
Classified in Economy
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1. Real GDP per Person
Define real GDP per person. At what rate did the U.S. real GDP per person grow from 1914-2014? –Real GDP per person is real GDP divided by the population. Real GDP per person tells us the value of goods and services that the average person can enjoy. Real GDP per person in the U.S. doubled between 1960 and 1987 and almost tripled between 1960 and 2013.
2. Factors Affecting Potential GDP
What are the two factors that make potential GDP grow? –Potential GDP, which is the maximum level of real GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurial ability that would bring rising inflation and fluctuations of real GDP.
3. Classical Growth Theory
What is classical growth theory? –A theory of economic growth based on the view that the growth of real GDP per person is temporary and that when it rises above subsistence level, a population explosion eventually brings it back to subsistence level.
4. Neoclassical Growth Theory
What is neoclassical growth theory? –Is the proposition that real GDP per person grows because technological change induces saving and investment that make capital per hour of labor grow.
5. New Growth Theory
What is new growth theory? –A theory of economic growth based on the idea that real GDP per person grows because of the choices that people make in the pursuit of profit and that growth will persist indefinitely.
6. Financial Institutions
What is a financial institution? –A firm that operates on both sides of the market for financial capital. It borrows in one market and lends in another.
7. Nominal vs. Real Interest Rate
Distinguish the nominal from the real rate of interest. –Nominal interest rate is the number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent. Real interest rate is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money. It’s approximately equal to the nominal interest rate minus the inflation rate.
8. Exchange Rate
What is an exchange rate? –The price at which one currency exchanges for another in the foreign exchange market.