Macroeconomics? - Looks at the whole economy at a point in time. - It studies total or aggregate demand in an economy. Four main economic performance indicators. - Economic growth Inflation Unemployment Balance of payment Economic growth? - Increase in the real GDP in an economy. - Increase in the productive capacity of an economy. - OR Increase in potential GDP (How the country is performing relative to its potential) GDP? - Gross domestic product. (=NI=National Expenditure.) Total production of output within the country’s border. Includes production of country’s citizens and foreigners in the country. C+I+G+(X-M) Real GDP? - Nominal GDP-Inflation Recession? - Two consecutive quarters of negative economic growth. Depression? - A long and severe degree of recession. Boom? - This is a period of significant rise in the rate of economic growth in an economy. - This is known as the business cycle or economic cycle or trade cycle. Unemployment? - Unemployment is a situation where people actively looking for a job but unable to find work. - This has inverse relationship with economic growth, when economy is growing, unemployment reduces. Inflation? - Inflation is increase in the general price level in an economy. - Continuous rise in price of goods and services in an economy. Hyperinflation? - This is a situation where the price of everything goes out of control and increases very quickly. Deflation? - A continuous fall in the general price level in an economy. - Opposite of inflation Disinflation? - Disinflation is a fall in the rate of inflation (still inflation) Creeping inflation? - Is when an inflation is rising slowly. - E.g., inflation of 2% to 2.2%. Mild inflation? - When prices begin to rise quicker than people realise. - E.g., inflation of 2% to 4% Reflation? - It is the act of stimulating the economy by increasing money supply or reducing taxes with the aim of bringing the economy back to growth after a recession. Stagflation? - When an economy is experiencing high rates of inflation during a recession. Balance of payment? - It is a record of a country’s economic transaction with the rest of the world. - There are two main accounts which are current account and Financial account. Current account? - Current account has four main accounts. Balance of trade in goods – Visible. Balance of trade in services – Invisible. Net primary income –interests on loan, profits and dividends generated from foreign investments. - Net secondary account – migrant remittances and foreign aid given or received to/from international organisations. How to calculate BOT? - Difference between sum of visible and invisible exported and imported. Balance of payment surplus? - When exports are greater than the imports. - The circular flow of income in an economy will increase. Balance of payment deficit? - If exports are smaller than imports. - The circular flow of income in an economy will decrease. - This has to be funded somehow, meaning that the government has to borrow money to fund this extra expenditure on imports, creating government/budget/fiscal deficit. Austerity? - This is where a country is forced by lenders to reduce government spending and increase taxes to repay debts. - C,I, and G will decrease, leading contraction of economy. Factors that might lead to a current account deficit. - Appreciation of currency- increase in the value of a currency against other. Economic growth- high consumer confidence and MPM will be high. International competitiveness of a country’s products- quality. Tariffs- if less tariff is imposed on imported goods, more will be imported. Relative inflation rate- price competitiveness. Structure of the economy- if a country exports primary products and import finished goods, then it will definitely be deficit. Marginal propensity to import. - Probability of citizens of a country to buy imported goods. Globalisation? - An integration of national economies into a single international market. - This means countries are interdependent to each other. Greenfield foreign direct investment(green FDI)? - Foreign company starting a business in other country from scratch( without takeover, merger, and joint venture) National Income? - Measures the monetary value of output produced in an economy over time. - GDP is the measure of NI, therefore, GDP = NI Gross National Income? - GDP + Money flowing from foreign country Real GDP per Capita? - Used to measure living standards in an economy. - GDP/Total population. Gross value added at basic prices(GVA) - GDP minus indirect taxes plus subsidies. Gross national product(GNP) - GDP + (investment income from overseas) minus (foreigner’s investment income within a country) Purchasing Power Parity? - This means that equalising the purchasing power of two countries by considering the cost of living and inflation differences between the two countries. - It is done because the cost of living and inflation will not be the same amongst countries. - GDP per capita at PPP is often used to make comparison in terms of standard of living. PPP=S=P1/P2 S= Exchange rate from A to B. P1= Cost of Good X in A. P2= Cost of Good X in B. Transfer payments? - Payments made for which no goods or services is produced. - E.g., Government subsidy and grant. - This is not included in GDP/NI. Accuracy of National Income=GDP - Measurement problem – fail to record all transactions. Black market transaction will not be recorded. Home produced services will not be recorded. The public sector – when cost decreases as a result of increase in productivity and efficiency, GDP/NI reduces. Limitations of using GDP/GNI to compare living standard over time. - Price – Inflation must be adjusted, so using real GDP is better. Measurement problem. Changes in population – GDP per capita is better. Quality of goods and services – GDP does not consider quality of goods and services. Defence related expenditure – GDP will increase while living standards remaining the same. Consumption and investment – more investment with sacrificing consumption will reduce standard of living in SR. Externality – even with high economic growth, standard of living can be reduced if there is pollution or other negative externalities. Income distribution – Increase in real GDP may not be shared equally amongst population in an economy. Limitation of GDP/GNI when comparing living standard between countries. - Countries may use different accounting conventions. Quality of the data collected will vary. Size of the hidden market will vary. Quality of goods and services will vary. Externalities. Income inequalities. Geographical differences – Mexicans spend less heating bills than Russian. Real GDP per Capita at PPP must be used. Well-being? - Well-being is multi-dimensional concept that includes followings. Healthy life expectancy. Democratic participation rate. Feeling security. Level of pollution and congestions. Literacy rate. Good governance. Easterlin paradox? - Like marginal utility, extra happiness gain from income reduces at some point. How to measure inflation????? CPI (Consumer price index) - It examines the weighted average of prices of a basket of consumer G&S. - Weighted average means giving importance to the most dominant factor in the basket of goods used to calculate CPI. - Basket of goods means groups of items used to calculate CPI (around 650~700) Limitation of CPI? - There is lack of individual relevance – everyone’s spending patterns will differ. - Again, quality of G&S is not considered. - CPI is slow to respond to the new products and services. - Exclusion of housing costs. PPI (Producer price index) - Measures the price changes in producer’s perspective. - This is how much producers are paying for input. - Increase in PPI will result in increase in CPI. Cause of Inflation? Demand-pull inflation. - This occurs when the aggregate demand exceeds aggregate supply in an economy. - Shifting AD curve to the right. Sources of demand-pull inflation. - High consumer confidence – if it is high, consumers spend more. - High business confidence – spend more for investment. - Increase in government spending. - Increase in exports, changes in exchange rate. Cost-push inflation. - This is a situation where the general price level rises due to increase costs of production. - Shift aggregate supply curve to the left. Sources of cost-push inflation. - Increase in salaries and wages. Increase in demand for a commodity and raw material. Price of goods that have inelastic demand will be risen to boost profitability. Reducing subsidy or increase in indirect tax. Quantitative easing? - It is an expansionary monetary policy where the central bank buys government bonds or other financial assets in order to increase money supply and stimulate growth. - With this policy, interest rate usually falls. Cause of deflation? - Fall in aggregate demand. - Increase in aggregate supply. - Decrease in the money supply. The costs of high inflation? High inflation can cause confusion and uncertainty in an economy. - This will reduce both individual’s and producer’s spending. 1. Relative high inflation will reduce international competitiveness of an economy. - Higher inflation than other country will result in fall in net export(X-M) - Leading to fall in aggregate demand and so GDP decreases. 2. Severe effect on those who receive fixed income. - Their purchasing power decreases. 3. Reduction in real value of money. - Borrowers are better off while lenders are worse off. 4. Psychological costs. - Even if income rises together, people will feel unhappy since price of G&S rises. 5. Political costs - Since inflation is unpopular, high inflation may cause political instability. - E.g., Venezuela has a lot of political problems. 6. Shoe leather costs - This refers to the wear and tear of the shoes of people who make frequent trips to the bank to deposit money during inflation. - Time consumed for this is the cost. - Because receiving interest is better than just holding cash. 7. Menu cost - Menu of restaurants and shops needed to be changed frequently. 8. Unanticipated inflation - It is when the general price level in an economy increases faster than expected. - If inflation is unanticipated, the costs will be more serious. Anticipated inflation - It is one that is generally expected by economic agents. Cost of Deflation Uncertainty. - Consumers and business confidence fall. - Because they postpone spending since price may fall more. - AD falls, leading to low Economic growth. 1. Deflation makes borrowers worse off and lenders better off. - This is because the real value of debt will be higher as price level keep falling. - Therefore, people avoid borrow money and reducing consumption. 2. However, deflation can benefit. - People who receive fixed income. - Gain competitive advantage in international market. Therefore, low inflation (about 2%) is ideal for an economy. Unemployment. The population of working age. - This refers to the group of people between age of 16~65. The unemployed? - People who are willing and able to work but cannot find a job. The employed? - Consist of both employees and self-employed. The Labour forces? - This refers to all people who are of working age and are able to work. - Include employed and unemployed people. Inactive population? - Refers to people such as students, school children, pensioners and those people who are unable to work. Active population? - Refers to that part of the population that is either employed or actively searching for a job. Hidden unemployment? - People who are not working and not actively searching for a job. - These people are not included i - n unemployment. Underemployment? - People who are not satisfied with their jobs. - Either because they work less hours than they wish or they are overqualified for their job. The labour force survey? - It is a statistical survey conducted in a number of countries designed to capture the data about the labour market. Unemployment rate? - ILO unemployed/Labour force x100 Employment rate? - Number of employed people/populations of working age x100 Participation rate? - Number of people working or actively seeking for a job as a percentage of the working population. - The proportion of the working population in the labour force. Inactivity rate? - Number of those economically inactive population divided by the population of working age. - The proportion of the working population that is not in the labour force. The underutilisation of labour? - Refers to the sum of the number of people unemployed and underemployed expressed as a percentage of the labour force. The causes of Unemployment. Frictional unemployment. - This is unemployment that occurs as a result of people changing jobs. - Time will be spent during the switching procedure and they will temporarily unemployed. - Reasons can be redundancy or just searching for a new job. 1. Seasonal unemployment. - This occurs when people are unemployed at a particular time of the year. - E.g., Ski instructors and fruit pickers. 2. Structural unemployment. - This is an unemployment that occur as a result of a change in structure of an economy. - There are 3 types of structural unemployment. a) Regional unemployment. 3. -Some workers live too far from the workplace and unable to move closer. b) Sectoral unemployment. -This occurs as a result of skills gap in an economy. -Occurs as a result of a mismatch of skills between the unemployed and available job opportunity. c) Technological unemployment. -Occurs when development of technology causes some people leave their job. Cyclical or Demand-deficient unemployment. - This occurs as a result of job losses during economic recessions or downturns. - Mostly occurs when there is decrease in aggregate demand in an economy. 4. Classical or real wage unemployment. - It occurs when real wages are kept above the market clearing wage rate. - There is surplus of labour, discouraging firms to hire labours. 5. Note: Cyclical unemployment occurs due to lack of aggregate demand. - Is called demand-side unemployment. Seasonal, structural, classical, and Frictional occurs due to lack of AS. - Is called supply-side unemployment. Aggregate demand(AD)? - Total spending on goods and services in an economy over time. Why AD curve is downward sloping? - At high price level, net exports tend to fall since imported goods are cheaper. - Also, interest rates are likely to be higher when price level is high. So less C and I. Movement along the AD curve. - Occurs when there are changes in price level, inflation. Factors that causing shifts to the curve. 1) Consumption. - Change in unemployment rates. Change In interest rates. Substantial rise in stock market, housing prices – wealth effect. Reduction in number of high saving population- increase APC. Change in population structure. New technology creating new consumer products. Change in income tax. Expectation of inflation – spend now before price goes up. Consumer confidence. Availability of credit- how easy it is to take credit, if it is easy to borrow, people will borrow more, hence C will rise. b) Investment. - Change in interest rates. Business confidence. Increase in profitability(fall in cost of production) – more retained earnings. Fall in corporation tax and indirect tax. - Rate of economic growth- if economy is stagnant, there will be no investment. - Availability of credit. - Government regulations, subsidies, or loans. c) Government spending. - This is not dependent on economic variables; it depends on the government in power. d) Net exports. - Exchange rates- price competitiveness. - Quality of goods and services- non-price competitiveness. Exchange rate? - price of one currency in terms of another currency. Average propensity to consume? - Proportion of total income that is spent. - C/Y Marginal propensity to consume? - Proportion of additional income that is spent - △C/△Y - MPC tends to be higher for those receive high income and vice versa. Saving? - The part of disposable income that is not consumed over a period of time. Average propensity to save? - The proportion of total income that is not spent. - S/Y Marginal propensity to save? - Proportion of additional income that is not spent. - △S/△Y Savings ratio? - The proportion of income that is saved expressed in percentages. Dis-saving? - Negative savings ratio. Causes of Dis-saving. - Using income saved from previous periods. - Borrowing Effects of changes in the savings ratio. - Fall in savings ratio could increase consumption in the short run. but this may cause inflationary pressure, deteriorating BOP balance. - In the long run, however, fall in saving ratio might result in insufficient funds for investments, slowing economic growth. - Therefore, rise in saving ratio can be beneficial when the economy grows too fast, while it becomes problem when there is low or negative growth. Investment? - Addition to the capital stock of the economy. - Purchase of goods that are not to be consumed but used to produce other goods. Capital stock? - The value of total stock of capital goods. Gross investment. - Value of investment before depreciation. Net investment. - Gross investment minus depreciation. Physical capital investment. - Purchase of factories, plants, and equipment. Human capital investment. - Provision of training to the workforce. Accelerator theory? - I = a(△Y) - a = accelerator coefficient, which is capital-output ratio, (capital/output) Government expenditure - Spending by the public sector on goods and services. Factors affecting government spending. a) Fiscal policy. 1) Expansionary fiscal policy- increase government spending, reduce tax. 2) Contractionary fiscal policy- reduce government spending, increase tax. b) The level of economic activity. - During growth, level of unemployment is low. - So, expenditures on mean-tested benefits reduces during growth. c) Government may increase spending to correct market failure. - Providing subsidies to encourage production of merit goods. d) Changes in political priorities of the government. Automatic stabiliser? - This is the use of fiscal policy instruments to influence an economy. - This affects the economy without any government action. - E.g., Income(payroll) tax reduces when general income level fall(recession). Discretionary fiscal policy? - There is a deliberate government action to stabilise the economy. Factors influencing net exports. - Relative price of exported goods. - Real income in domestic economy. Exchange rate. State of the world economy. Degree of protectionism, like tariffs. Non price factors like quality.
