Economics
Output and Interest Rate
Output and interest rates are interconnected in economics. When output increases, it often leads to higher interest rates as demand for borrowing rises. Conversely, when output decreases, interest rates tend to fall as demand for borrowing decreases. This relationship is important for understanding the impact of monetary policy on the economy.
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6 Key excerpts on "Output and Interest Rate"
eBook - PDFFinancial Institutions
Markets and Money
- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
This chapter explains the role of interest rates in the economy and provides a basic explanation of the fundamental determi- nants of interest rates. The chapter serves as a foundation for Chapters 5 and 6, which also deal with interest rates. ■ vectorfusionart/Shutterstock Even though we understand the factors that cause interest rates to change, only people who have a crystal ball can predict interest movements well enough to make consistent profits. The gutters of Wall Street are littered with failed interest rate prediction models. 4.1 WHAT ARE INTEREST RATES? For thousands of years, people have been lending goods to other people, and on occasion, they have asked for some compensation for this service. This compensation is called rent— the price of borrowing another person’s property. Similarly, money is often loaned, or rented, for its purchasing power. The rental price of money is called the interest rate and is usually expressed as an annual percentage of the amount of money borrowed. Thus, an interest rate is the price of borrowing money for the use of its purchasing power. To a person borrowing money, interest is the penalty paid for consuming income before it is earned. To a lender, interest is the reward for postponing current consumption until the maturity of the loan. During the life of a loan contract, borrowers typically make periodic interest payments to the lender. On maturity of the loan, the borrower repays the same amount of money borrowed (the principal) to the lender. Like other prices, interest rates serve an allocative function in our economy. They allocate funds between surplus spending units (SSUs) and deficit spending units (DSUs) and among financial markets. For SSUs, the higher the rate of interest, the greater the reward for postponing current consumption and the greater the amount of saving in the economy.
eBook - PDFA Concise Guide to Macroeconomics, Second Edition
What Managers, Executives, and Students Need to Know
- David Moss(Author)
- 2014(Publication Date)
- Harvard Business Review Press(Publisher)
7 C H A P T E R O N E Output The notion of national output lies at the heart of macroeconomics. The total amount of output (goods and services) that a country produces constitutes its ultimate budget constraint. A country can use more output than it produces only if it borrows the dif- ference from foreigners. Large volumes of output—not large quantities of money—are what make nations prosperous. A national government could print and distribute all the money it wanted, turning all of its residents into millionaires. But col- lectively they would be no better off than before unless national output increased as well. And even with all that money, they would find themselves worse off if national output declined. Understanding the Macro Economy 8 Measuring National Output The most widely accepted measure of national output is gross domestic product (GDP). In order to understand what GDP is, it is first necessary to figure out how it is measured. The central challenge in measuring national output (GDP) is to avoid counting the same output more than once. It might seem obvious that total output should simply equal the value of all the goods and services produced in an economy—every pound of steel, every tractor, every bushel of grain, every loaf of bread, every meal sold at a restaurant, every piece of paper, every architectural blueprint, every building constructed, and so forth. But this isn’t quite right, because counting every good and ser- vice actually ends up counting the same output again and again, at multiple stages of production. A simple example illustrates this problem. Imagine that Company A, a forestry company, cuts trees in a forest it owns and sells the wood to Company B for $1,000. Company B, a fur- niture company, cuts and sands the wood and fashions it into tables and chairs, which it then sells to a retailer, Company C, for $2,500. Company C ultimately sells the tables and chairs to con- sumers for $3,000.
- Marianne Johnson, Warren J. Samuels, Marianne Johnson, Warren J. Samuels(Authors)
- 2009(Publication Date)
- Emerald Group Publishing Limited(Publisher)
b. Capital is being accumulated. – Is interest the price of capital(?) only in a static society. – Interest in dynamic society is much more complicated. – Is determined partly by the rate at which people are increasing capital – which rate of increase can vary. – Demand for capital/supply of capital and rate of new sources of capital. c. Changes in output generally due to increasing returns. – Many methods of production cannot be called into use until output has reached a well-developed point. – Prices do not change, nor interest, but amount of production grows, and it becomes profitable to introduce new saving methods. Assumptions: a. Society with which we are dealing is a closed economy – no questions of foreign exchange, yet. b. Perfect competition: i.e., individual producer does not take into account the effect on prices of his altering his output. (1) Many independent producers (2) No preference among buyers c. Population constant. d. Simplified banking system. – Only one bank, only money is deposited at that bank, only payments are made by check. or – Money is total deposit liabilities of all the banks minus their central bank deposits held for other banks, plus total cash, minus cash held by banks. e. All borrowing is done by sale of securities (i.o.u.) to a bank, all paying done by purchasing these back. F. Taylor Ostrander’s Notes 5 It now follows – any increase of amount of money in a period of time equals the amount of securities bought by the banking system in that period of time – they are only assets the banks hold. Three main rates of interest in community. Money: Short {- deposit rate, offered by banks. {- bill rate, includes rate of interest on treasury bills and rate on advance loans to industry Securities {- long-term rate, consuls, government stocks Definitions of certain terms: – Final incomes – money value of the output of the community in a given period of time (= F ).
eBook - PDFFundamentals of Finance
Investments, Corporate Finance, and Financial Institutions
- Mustafa Akan, Arman Teksin Tevfik(Authors)
- 2020(Publication Date)
- De Gruyter(Publisher)
Money supply has various definitions as M1, M2, and M3. Economists believe that the money supply is important in managing economic activity. The interest rate is the cost of money. For banks, interest is paid on savings de-posits; to consumers, interest is paid on loans and credit card balances. Interest can also be defined as the cost of postponing consumption. The nominal interest rate (NIR) is subject to risks of inflation, maturity, default, and liquidity. The yield curve plots yield against time to maturity for default-free securities. 6 For a complete discussion of bank regulation, see S. Dow, “ Why the banking system should be Regulated, ” Economic Journal , 106(436), 1996, pp. 698 – 707. 2.11 Summary 29 The Central Bank in general is a government-established organization responsi-ble for supervising and regulating the banking system and for creating and regulat-ing the money supply. The balance sheet of a Central Bank is an important economic indicator followed by markets. The banking industry is heavily regulated to inform investors properly, insure soundness of financial intermediaries, and improve monetary control. 30 2 Money and Interest Rates
eBook - PDFEconomic Environment NQF4 SB
TVET FIRST
- D Bekker, M Richards, FHB Serfontein, A Smith(Authors)
- 2013(Publication Date)
- Macmillan(Publisher)
Use the circular flow model to explain what would happen to the flow of spending, production and income in the economy in the following circumstances: a) More goods and services are exported. b) More is spent on imported goods and less on domestic produced goods. Domestic production: production that takes place inside the borders of a country Words & Terms 43 2.2 Gross domestic product An important measure of the level of economic activity (that is the level of production) in a country is its gross domestic product (GDP). The gross domestic product tells us what is happening to the level of domestic production in a country. An increase in the gross domestic product means that we are producing more goods and services and are better off than before. A decline in the gross domestic product indicates that we are producing fewer goods and services than before and we are therefore worse off. Module 2: Measure the macro economy Gross domestic product can be defined as the value of all final goods and services produced within the border of a country during a certain period. This period is usually a year. There are a number of important terms in this definition that we must take into account when we use the gross domestic product as a measure of economic activity. Only final goods and services are included. Final goods and services refer to those goods and services that are consumed by households and firms. Final goods are things such as television sets, clothes, chairs, bookcases, hats, and so on, and services are things such as those provided by lawyers, doctors, teachers, plumbers, beauticians, and so forth. In the production of the final goods and services, intermediate goods are used. Intermediate goods are purchased to be used as inputs in producing other goods before they are sold to end users.
eBook - ePub- John Roscoe Turner(Author)
- 2019(Publication Date)
- Taylor & Francis(Publisher)
CHAPTER XXII INTEREST1. The productivity theory 2. The interest rate unaffected by variation in production 3. Unproductive loans 4. The money fallacy 5. Variation of bank interest 6. Gross interest and net interest 7. Time-discount 8. Illustration 9. Time-discount in capitalization 10. Capitalization and interest 11. Adjustment of interest to capitalization 12. The present worth of a bond 13. Money loans analogous to investments 14. The interest rate reflects time-discount 15. Fallacy of inversion 16. Interest involved in simple exchanges 17. Preference for present possession 18. Apparent exceptions 19. The consumption idea 20. Reasons for differences in time-discount among persons 21. Exercises 1. The Productivity Theory.Ask the common man, "What determines the rate of interest?" He will consider this a simple common-sense question and give, with an air of confidence, one or the other of the following replies: "The rate of the productivity of capital determines interest," or "The rate of interest is determined by the supply of loanable money on the market." These replies, however, are false; they represent two of the most persistent fallacies in economics.One observes that the rate of return on different types of business tends to be about the same. A $50,000 store, or mill, or farm, or mine will return a net yield of $2,500. He reasons from the capital value of the agent to the money worth of the product, and concludes that the rate of interest is proportionate to the productivity of capital.2. The Interest Rate Unaffected by Variation in Produc- tion.Does the capital value of a farm determine the price of the crop, or is it the price of the crop that determines the capital value of the farm? Can you sell your crop for $1,000 because your farm is worth $20,000, or is your farm worth $20,000 because you can sell the annual crop for $1,000? The order of thought must be the reverse of that assumed by the productivity theorist. The farm produces crops, but the capital value of the farm does not determine the price of the crop; it is the price of the crop that determines the capital value of the farm.
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