What is the Growth Accounting Equation? The Growth Accounting Equation is a financial tool that measures economic growth – specifically, how changes in real Gross Domestic Product (GDP) in an economy are influenced by changes in available capital, labor, and technology. The Growth Accounting Equation facilitates analyzing economic growth at the minutest level. It enables…
What are Imports and Exports? Imports are the goods and services that are purchased from the rest of the world by a country’s residents, rather than buying domestically produced items. Imports lead to an outflow of funds from the country since import transactions involve payments to sellers residing in another country. Exports are goods and…
What is the Dallas Trimmed Mean? The Dallas Trimmed Mean, popularly known as the Trimmed Mean PCE Inflation Rate, is a measure of core inflation in the price index for Personal Consumption Expenditures (PCE). It is called the Dallas Trimmed Mean because it is estimated by the staff at the Federal Reserve Bank of Dallas….
What is Capital Deepening? Capital deepening refers to an increase in the capital-labor ratio. The capital-labor ratio can go higher either due to an increase in the capital stock or through a decrease in the number of workers. Capital deepening increases the marginal product of labor – i.e., it makes labor more productive (because there…
What is Economic Profit? Economic profit (or loss) refers to the difference between the total revenues, less costs, and the opportunity cost associated with the revenue generated. Opportunity cost is the cost of an opportunity foregone, i.e., given up in order to pursue another one. For example, assume a company needs to make significant changes…
What are Limitations on M&A? Mergers and acquisitions are often used in non-financial debt covenants by lenders with the intention to avoid any significant impact on cash flow on the part of the borrowing party that may or may not affect their ability to pay back the loan. Hence, by putting limitations on mergers and…
What are Total Assets? Total assets refers to the sum of the book values of all assets owned by an individual, company, or organization. It is a parameter that is often used in net worth debt covenants. The value of a company’s total assets is obtained after accounting for depreciation associated with the assets. Net…
What is Public Infrastructure? Public infrastructure refers to infrastructure facilities, systems, and structures that are developed, owned, and operated by the government. It includes all infrastructure facilities that are open to the general public for use. Infrastructure includes all essential systems and facilities that allow the smooth flow of an economy’s day-to-day activities and enhance…
What is the Natural Rate of Interest? The natural rate of interest is also called the neutral interest rate, neutral rate, r* (r-star), and the long-run equilibrium interest rate. This interest rate is the theoretical short-term interest rate that would support the economy at maximum output or full employment GDP while keeping inflation constant. The…
What is the Neutrality of Money? A staple in classical economics, the neutrality of money suggests that changes in the supply of money in an economy only affect nominal economic variables such as exchange rates, wages, and the prices of goods and services. According to the theory, changes in the money supply do not affect…
