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1. Investment tax credit
2. Public education improves human capital
3. Govt subsidies and grants promote research and development
4. Patents, copyrights, property rights, and political stability
5. Promoting saving to make it easier for firms to borrow i
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Policies that can be used to stimulate investment
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Stock Variable
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a variable which can be measured at a point in time
-money is one
-wealth is one
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nominal variables
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are not adjusted for inflation so they do not imply constant purchasing power of the dollar or other currency of measurement
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GDP Deflator
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measures the prices of all goods and services produced in an economy
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-change in price levels
-change in taxes
-change in interest rates
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factors reducing the size of the multiplier
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autonomous consumption
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consumption determined completely independently of income
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disposable income
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the income available to households for spending after income taxes
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-commodity money (extra value besides monetary)
-Fiat money (paper currency)
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Two types of money
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productivity
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amount of goods and services produced for each hour of a worker's time
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1%
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How much is CPI estimated to be inflated each year?
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capital goods
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can be saved and used later
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good
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something that can satisfy a want or a need (services included)
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-income
-tastes and preferences (+)
-prices of related goods
-number of buyers (+)
-expectations of future prices (+)
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factors that affect supply
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Y=MX+B
*b=y intercept
m=slope
M=change in Y/change in X= rise/run
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graphing the consumption function
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Comparative Advantage
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occurs when one country can produce a good AT A LOWER OPPORTUNITY COST than another country can produce
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-given time period
-fixed technology
-fixed resources
-efficient use of said resources
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the constants of a PPF or PPC
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-foreign price
-exchange rate
US Price=(foreign price)/(exchange rate)
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price of imports depends on...
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economic good
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are scarce goods for which the desire to use or own those goods is greater than the available supply if those items are available for free
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Availibility of resources
technology
availability of labor
expectation of future inflation or future prices
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Factors shifting the SRAS
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Diminishing Marginal Returns (macro)
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makes predictions about how much an economy can produce as it continues to add more and more units of physical capital where each unit of physical capital has an identical quality.
*we assume that the economy is adding more and more machines that are exactly the same
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-income (movement along line)
shift: 1. wealth
2. price levels
3. interest rates
4. expectation of future variables (more/less income)
5. Autonomous consumption
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Determinants of Consumption Function
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-occurs when no party in a market or economy has an incentive to change behavior
-a point toward which the economy is moving unless something is preventing this movement.
-economy will stay at equilibrium unless something changes
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equilibrium
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∏t+1= Pt+1-Pt
---------
Pt
Pi= (price level in period t+1)-(price level in period t)
---
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inflation is the percentage change in the price level between two price periods
what is the formula for inflation?
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Per Capita Nominal GDP
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based on current year prices
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1. doesn't change
2. 70%, 20%
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1. If MPC doesn't change then slope _____.
2. Consumption accounts for ____ % of GDP and Investment accounts for _____ % of GDP.
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consumption goods
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will spoil and cannot be saved
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Positive Economics
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deals with "what is"- no value judgments are made.
ex. the price of apples is $1 per pound. consumbers bought 250 pounds of apples at a local supermarket last week at that price
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-GDP deflator uses all goods produced in an economy. CPI uses a fraction
-GDP Deflator bundle of goods changes frequently based on what is produced. CPI bundle changes infrequently
-GDP deflator changes automatically. CPI is changed
-CPI includes import p
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Differences in CPI and GDP deflator
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MPC= (C2-C1)
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(Y2-Y1)
(change in c) divided by (change in y)
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formula for marginal propensity to consume
mpc and mps are interchangeable
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opportunity cost
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value of the next best alternative forgone to select an alternative
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net domestic product = gross domestic product - depreciation
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net domestic product formula
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Marginal Propensity to Consume
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how much of a change in consumption we see along with a change in disposable income
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-land
-labor
-capital (physical *machines, factories; human capital* knowledge, training)
-sometimes entrepreneurship
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Factors of Production
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CPI=(current cost/base cost) x 100
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CPI formula
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simple multiplier=1/(1-mpc)=1/(mps)
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used to calculate resulting change in equilibrium GDP
formula
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absolute advantage
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occurs when one country can produce more of ALL tyes of goods than another country can produce
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-investment allows a country to produce more by expanding its PPF
-opportunity cost of investment means fewer consumption goods today
-countries w/high investment usually have high growth in Real GDP. It is also true that countries with high growth in rea
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Information on investment
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1. consumper price index (CPI)
2. Producer Prince Index (PPI)
3. GDP deflator
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name the three price indexes
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1. substitution bias (cheaper altnernatives when prices rise)
2. introduction of new goods (new goods increase variety, leading to increase in the value of dollar. consumers need fewer dollars to reach given living standard)
3. unmeasured qaulity change
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Problems with estimating the CPI - the cost of living
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Per Capital Real GDP
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based on base year prices
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Per Capita Income
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is Income Per Person
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Y=C+I+G+NX=C+S+T-TR
where s=savings
t=taxes
tr= government transfers
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what is the formual GDP set equal to?
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Real GDP
because
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What is a better measure of production?
nominal or real GDP?
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aggregate demand
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shows the quantity of goods and services that various demanders in the economy want to buy at different price levels
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-price levels are constant
-taxes are constant
-interest rates are constant
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simple multiplier assumes
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NDP=Y-Depreciation
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net domestic product formula
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Net Exports
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net exports are determined autonomously
therefore...
NX=NX-Bar
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-a medium of exchange
-a unit of account
-a store of value
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3 Functions of Money
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Traditional Growth Theory or Neoclassical Growth Theory
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assumes that an economy adds to its capital stack, each individual unit of capital will lead to less of an increase in per capital real GDP than the previous unit
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Convergence Theory or Absolute Convergence Theory
decades of data suggest:
still very long way away from this (50+ years)
probably will not occur
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states that at some future point, all economies will have roughly the same per capita real GDP
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C= C-Bar + mpc*Y = C-bar + c*Y
y=income
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Consumption and Autonomous Consumption formulas
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Flow Variable
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a variable which can be measured over time.
-gdp is one
-income is one
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(Nominal GDP/Real GDP) x 100
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GDP Deflator Formula
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because even if someone had NO income, they would have to have necessities which would cause them to borrow.
this would create economy even if income was zero.
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Why is C-bar always greater than zero?
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Stagflaglation
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-SRAS shifting left
-price levels increase but real GDP is constant or decreasing
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government purchases
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government purchases are made independently of income...
therefore... G=G-bar
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+: number of firms, technology & productivity, subsidies
-: input costs, taxes, price expectations
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Factors that affect aggregate supply
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1. law of supply (as price increases, quantity supply increases)
2. higher prices create incentives for greater production
3. producing larger quantities often creates a higher per unit cost of production
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Y=QaxPa - QbxPb
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Formula for Real GDP
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price indexes
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allow us to moniter general trends in the prices of most goods and services
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(1) at each price level, producers can produce less due to less oil or other input
(2) at each output level, producers require higher prices due to increased production costs
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two interpretations of negative SRAS shock
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S=I+G+NX+TR-T
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Formula for Savings
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(nominal GDP/Price Level) x 100
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formula for Real GDP
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Club Convergence or Conditional Convergence Theory
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states that all economies will converge to one of two or more levels of per capita real GDP depending on the economy's factors of production
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$1
someone will save and someone will spend
it will even out over the long run
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an increase of $1 in income leads to an increase of _____ in consumption?
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Gross Domestic Product (GDP)
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the market value of all final goods and services produced in a nation's borders within a given time period
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1. income in other countries
2. price levels domestically v. abroad
3. exchange rates
4. interest rates domestically v. abroad
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Factors that do have an affect on Net Exports (NX)
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1. purchases & sales of stocks & bonds
2. government transfer payments
3. private transfer payments
4. sales of preowned items
5. illegal activities
6. do-it-yourself production
7. legal but unreported activities
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Transactions excluded from GDP
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net investment = gross investment - depreciation
gross investment: total spending on firms
net investment: better measure of the increase in the ability to produce
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Net investment formula
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Producer Price Index (PPI)
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weighted average of some prices that firms pay for commodities
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if you have more money than when you started
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Positive Nominal Interest Rate
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Yd=C+S
c=consumption
s=savings
Yd=C+S=Y+TR-T
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Formula for disposable income
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100
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CPI is always equal to what in the base year?
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Consumer Price Index (CPI)
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weighted average of prices of some goods that urban consumers pay
measures change in price over "basket of goods" over time
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-law of demand
-affordability
-substitutability
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Why is demand curve usually downward sloping?
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1. what to produce
2. for who to produce
3. how to produce
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three questions all economists must answer
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if you have the power to buy more than when you started
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Positive Real Interest Rate
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1
*change in y is usually relatively small
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MPC+MPS= _____
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real variables
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are adjusted for inflation so that they can imply constant purchasing power of the dollar or other currency of measurement
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MS=coins + currency + checkable deposits with no restrictions check writing
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formula for money supply
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Normative Economics
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deals with "what should be"- value jugments are made
ex. consumers deserve more apples and the price of the apple should be $1.50 per pound
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A-bar=C-bar+I-bar+G-bar+NX-bar=sum of autonomous
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Formula for sum of autonomous
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Law of Diminishing Marginal Productivity (micro)
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as one firm adds to its capital stock, each additional unit adds less of its output than the previous unit
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1. interest rates
2. expectation of future sales/profit
3. available production capacity with existing capital
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three factors that influence investment
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I=I-Bar+Φ*Y
I=I-Bar
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Investment Formula
I-Bar is autonomous investment and phi is a variable that can be estimated
phi=0
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C+I+G+NX= GDP
consumption
investment
government purchases
net exports
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formula for GDP
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late 1800s UK was the richest nation
today...
the US, Canada, Japan, and Germany have higher per capita GDP than the UK
Japan has the fastest growing rate of per capita real GDP
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countries and per capita income/per capita real gdp
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Per Capita GDP
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is GDP per person (GDP divided by Population)
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