H1 Economics - Macroeconomics(Theme 3)

total expenditure on domestically produced G&S by 4 broad groups(households,producers,gov,foreign sectors) of economy; consists of 4 elements,

Consumption(C) + Investment(I) + Government(G) Expenditure + net exports(X-M);

X; export earnings, M; import expenditure

consumers' expectations of future income; ↑ current C when confident about future, ↓ current C when pessimistic, ↑ savings

consumers' expectations of future prices; expect ↑inflation->↑prices, ↑ current C buying G&S rather than later when > ex

i/r(borrowing); ↓i/r, cheaper to buy on credit, encouraged to consume on credit, opportunity cost of consumption ↓, ↑ C; ↑i/r, household disposable income ↓ after ↑ loan payments, < for consumption, ↓ C

credit availability; easier obtain credit, > ppl will apply, ↑ C

govt policy; FP △ income tax

wealth; > wealth(savings/property), > likely spend out of current income

i/r(borrowing); ↓i/r, when firms borrow to invest in capital goods, pay ↓ interest, allow ↓ cost of borrowing, ↑profitability given same returns on investments, ↑I

cost of capital goods; ↓price, > investment projects profitable @ same i/r, > profitable to use > capital < labour, ↑I

business expectations; firms > optimistic, expect better returns on investment, encouraged invest > to produce > & ↑profits, ↑I; firms > pessimistic, downgrade returns on investment, ↓I

govt policy; △ corporate tax, if firms making loss, △ may not impact profits

△ in tech; tech advancements, ↓ labour, speed up production -> ↑profits, ↑I to invest in tech

political stability; investors > willing invest as investments protected, > stable exchange rate

gov objectives; △ in objectives lead to △ in gov spending, ↑/↓ G

state of economy; recession, AD components(C,I) ↓ due to pessimism, ↑G to prevent further ↓AD

level of NI of trading partners; foreigners earn >, able consume > G&S from abroad, ↑X of country

inflation rates; if inflation rates in country > trading partners, country's exports > expensive, leads to > than proportionate(elastic) ↓ in qty dd for exports, ↓X

exchange rates; 1 currency appreciates, cheaper to purchase foreign G&S, buy ↑ qty of exports, assuming foreign exports price elastic, > than proportionate ↑ qty dd, ↑X

foreign protection; protect domestic industries from foreign imports through tariffs, quotas, etc, ↓X

income level; income ↑, ↑C of domestic & foreign G&S, assuming ceteris paribus(import prices), ↑ qty of imports, ↑M

inflation rates; if inflation rates in country > trading partners, domestic pdts > expensive, switch to imported pdts, ↑M

exchange rates; 1 currency appreciates, > expensive for foreigners to purchase their G&S, if foreign dd for their imports price elastic, qty of imports ↓ > than proportionately than ↑ in import prices, ↓M

local protection; protect domestic industries from foreign imports through tariffs, quotas, ↓M

measures volume of G&S produced within economy @ given price level

△ in COP in economy; ↑ in FOP costs -> ↑ COP, ↑prices to produce same amount of G&S, assuming ceteris paribus, AS shift ↑

△ producer taxes, subsidies; can ↑/↓ COP, cause AS shift ↑/↓

improvement to quality of FOP/tech; > productive labour, assuming wages constant, ↓ COP, AS shift ↑ and →

investment in infrastructure; efficiency ↑, AS shift →

△AD, AD shift ←/→ >

△ national income(Y) & GPL(P) >

△AD means ↑/↓ dd for G&S produced in economy, producers ↑/↓ production to ↑/↓ total value of G&S produced by economy >

△national income(real GDP), to produce ↑/↓, firms employ ↑/↓ FOP(labour), economy moves towards FULL employment

△AS, AS shift ↑/↓ >

national income ↓/↑, GPL ↑/↓ >

tech advancement; SR, AD ↑ from ↑I, national income & GPL ↑; LR, AS ↓ & → as firms implement ↑ tech overtime, national income ↑ further, GPL ↓>

↓ COP, ↑ productive capacity >

sustained economic growth

occurs when △AD brings about > than proportional △national income due to >/< rounds of spending

x-axis; national income/real GDP(Y)

y-axis; GPL(P)

AD inversely proportional national income, AS // x-axis @ first, curves & becomes // y-axis

label as figure _:economy of ___

national income statistics(measure economic growth)

unemployment rate

inflation rate

national output = national income = national expenditure

monetary value of final output of/income generated from production of/expenditure on G&S produced in economy over period of time

total value of all G&S produced within geographical boundary of country, regardless of ownership of FOP, over one year, before adjustment for depreciation

GDP + (factor incomes earned by residents overseas) - (factor incomes earned by non-residents in domestic economy)

nominal; calculated w/ current year prices

real; calculated w/ base year prices, adjusted for inflation

refers to quality of life, includes both material & non-material aspects of living.

material aspects include quantity, quality of G&S available for consumption; measured by real GNI per capita

non-material aspects include quality of living environment; measured by Gini coefficient

△ income distribution not reflected; real GDP per capita does not reflect △ income distribution, addressed by Gini coefficient

△ in quality, composition of products; △ not reflected in statistics, addressed by % of households owning tech devices

△ in amount of leisure time; material SOL ↑ but causes ↓ leisure time, thus non-material SOL ↓, overall SOL no △

non-market transactions; △ in national income doesnt reflect △ SOL

unrecorded, undeclared items; omitted from national income, △ SOL not accurate

△ in social costs unaccounted; externalities arise from GDP growth, cause △ non-material SOL

differences in accuracy, reliability of statistical data; < developed countries < accurate data, > developed countries < reliable data due to tax evasion

differences in income distribution; countries w/ similar real GDP per capita different income distribution, SOL different

differences in black market size; transactions not taxed, but contribute to △ SOL

Human Development Index(HDI);

comprises 3 elements; life expectancy, school enrolment & adult literacy, real GNI per capita; account for both material, non-material SOL

limitation; only looks @ 1 aspect of economic, social, demographic aspects, overlooks income distribution, gender equality

Gini coefficient; measures income inequality, ranges 0-1, 0; perfect income equality, 1; perfect income inequality; if GDP, Gini ↑, gov redistributes wealth

limitation; statistic used in calculation not standardised, difficult for international comparison

sustained ↑ in GPL of economy, measured by Consumer Price Index(CPI) used to measure △ GPL b/w time periods

no. of unemployed as proportion of labour force(employed+unemployed)

sustainable economic growth

low, steady inflation

low unemployment

↑ in real output as measured by △ in real GDP from 1 time period to another

% annual ↑ in national output over period of time; SR ↑ in output due to > utilisation of present productive capacity, AD shift →

represented by point in PPC->point on PPC

↑ in economy's potential output; LR ↑ in capacity of economy to produce > G&S, AS shift → & ↓

represented by outward shift of PPC

sustainable; rate of growth maintained w/o creating other significant economic problems for future generations

inclusive; rate of growth sustained over period of time, broad-based across economic sectors, creates productive employment opportunities for majority of population

low EG;

income still ↑, tax unchanged, gov tax revenue still ↑ by small extent >

economic slowdown, gov ↑ spending by larger extent to stimulate economy, ↑ in G > ↑ in taxes, gov faces budget deficit, worsen gov debt

high EG;

AD rapidly ↑ w/ constraints in AS >

leads to resources ↑ly scarce as utilisation, competition for resources ↑, FOP prices ↑, results in DPI

rapid growth = higher inflation rates, cost of living ↑ as GPL ↑ in economy

-ve EG;

household income levels ↓, ↓ purchasing power, saving ↓ >

ability to consume G&S further ↓, SOL ↓

economy producing @ ↓ output, < G&S available to satisfy population's needs & wants >

derived dd labour ↓, wages ↓, consumption of G&S ↓, SOL ↓

gov collect < tax revenue during economic downturn, ↓ expenditure to improve infrastructure & ability to implement policies to overcome -ve growth, SOL ↓

rapid growth exhaust resources, create environmental problems for future generations >

productivity of FOP fall, natural resources destroyed >

future economic growth rates fall, -ve impact on future SOL

insufficient efforts by govt redistribute income & wealth >

rising dd for skilled workers, wages to skilled workers increase while that of lower skilled workers remain stagnant >

lack of training to upskill low wage workers >

leads to ↑ income inequality

3 types, CFS

cyclical/demand-deficient; occurs when economy in recession, caused by fall in AD; AD↓ > real output ↓, GPL ↓ > firms ↓ production, dd for FOP including labour ↓ > wages, employment ↓

frictional; occurs when labour inb/w jobs due to time lag when ppl change jobs/shift b/w companies/move regions(imperfect info)

structural; occurs economy undergoes structural △ due to △ consumer dd, technology; △ results in certain industries, skills become obsolete & create dd for others

high unemployment, household income ↓ >

purchasing power ↓, ability to consume G&S ↓ >

↓ levels of material needs & wants satisfied, ↓ material SOL

↑ crime, ↑ social problems >

↓ non-material SOL

low unemployment; not a concern, frictional unemployment always exist due to time lag switching jobs >

high unemployment;

consumers; unemployed ppl lose income, ↓ purchasing power >

consume ↓ quantity of G&S, ↓ material needs & wants satisfied, ↓ material SOL

producers; sustained ↓ consumer dd, producers become > pessimistic, ↓I >

↓ profits from sales that could've been made if economy @ full employment; cut down on I & production

govt; ↑ unemployment, ↑ benefit payments & welfare payouts >

gov collect ↓ tax revenue when unemployed dont pay income tax, consume less G&S(indirect taxes) >

leads to inefficient allocation of resources >

economy producing below productive capacity, incurs economic cost from forgone output if resources efficiently employed >

maximum possible output not attained

2 types, DC

demand-pull inflation; excessive ↑ AD given constraints in AS(assuming economy nearing/@ full employment)

cost-push inflation; independent of dd, COP ↑ >

profits of firms ↓, firms ↓ production of G&S >

AS ↓(shift ↑), GPL ↑(assuming AD constant)

can be caused by ↑ labour costs(FOP), ↑ cost of imported raw materials, ↑ indirect taxes

sustained decrease in GPL of economy

persistent ↓AD; GPL ↓, associated w/ recession, ↓ incomes & outputs, cyclical unemployment

↑AS; LR ↑ in potential growth, tech advancements causes AS shift → & ↑; associated w/ ↑ incomes, ↑ employment

↑ real GDP per capita >

↑ output of G&S produced for each person, > G&S, available to each person to consume >

↑ material SOL

> output of G&S produced >

↑ dd for labour >

↑ wages, if wages ↑ > ↑ price >

purchasing power ↑, ↑ ability to consume G&S >

↑ material SOL

> output produced >

> income, profit generated >

govt can collect > tax revenue, use to provide > merit/public goods >

↑ non-material SOL

when economy in recession, high unN, deflation

expansionary(to ↑econ growth, ↓unN);

↑G, ↑AD directly >

↓ income tax, ↑disposable income, ↑C >

↓ corporate tax, ↑after-tax profits, ↑I >

as C,I,G ↑, AD ↑, thru multiplier effect >

real GDP ↑(assuming economy X @ full employment) >

↑ econ growth, ↑dd for labour, ↓unN >

↑budget deficit/ ↓budget surplus

when economy facing DPI

contractionary(to ↓inflationary pressure);

↓G, ↓AD directly >

↑ income tax, ↓disposable income, ↓C >

↑ corporate tax, ↓after-tax profits, ↓I >

as C,I,G ↓, AD ↓, < competition for resources >

↓price of resources, ↓price of G&S, ↓ DPI

↑budget surplus/ ↓budget deficit

budget surplus; tax revenue > gov spending

budget deficit; tax revenue < gov spending, current budget deficit = debt incurred in a year; several years of accumulated debt = national debt

sustained = actual growth + potential growth

↑G subsidies on training/skills upgrading >

↑AD in SR, through multiplier effect >

labour ↑ productivity, ↓COP as > output can be produced w/ same level of input, SR AS shift ↓ >

↑real GDP, ↓GPL >

LR, ↑ productive capacity, AS shift → >

further ↑real GDP

↑G in terms of;

skills upgrading; learn skills more suited for △consumer dd, △tech; creates productive employment opportunities for all

workfare; lower-paid workers given income supplement to stay working; gains of economic growth distributed

progressive tax; ↑ income earners pay proportionally ↑ tax; income redistributed from ↑ income to ↓ income

problems financing G; may deplete reserves, < reserves in future to fight recession OR if borrowing, ↑ national debt, ↑ burden on future gen to pay back debt thru ↑ tax, ↓SOL in future

crowding out effect; gov borrow money from financial sector >↑competition for limited funds, ↑i/r >

↑ cost of borrowing, C,I ↓ >

AD ↑ by lower extent, < effective

policy conflict; ↑ inflation if gov allow AD ↑ too much >

w/ ↑G, ↓tax revenue, ↑AD >

if AD rises beyond FN, GPL ↑, leads to ↑ inflation >

gov must have accurate info, not ↑G by too much

size of multiplier; size too small, ↑AD may not bring about sufficient ↑national income >

< effective

time lags; time for gov recognise issue, time to plan, implement solution; by then issue >>, if spending occurs during economic recovery, ↑inflation

inflexibility of gov expenditure; ↓G not easy as used for long term projects/social, political objectives

expectations of consumers, firms; ↑tax rates, if consumers/firms optimistic, may not ↓C,I

policy conflict; can lead to ↓econ growth, ↑unN if AD ↓ below FN, important for gov have accurate info, not ↓G, ↑tax rates too much

policy acceptability; when ↓G on merit/public goods, affects SOL, ppl < receptive, if ↑tax rates, ↓disposable income of households/profits, unhappy

↑econ growth, ↓unN in open(export-oriented) economy

expansionary; ↓i/r, ↓cost of borrowing >

↑ consumption of big ticket items, ↑C >

↓i/r, ↓return to savings >

↓opportunity cost of spending, ↑consumer spending, ↑C >

↓i/r, ↓cost of borrowing >

given same returns to investment, > investment projects profitable, ↑I >

↑C,I causes ↑AD

initial △AD has greater final impact on eqm NY as ↑C,I stimulates further rounds of spending(multiplier)

dampen inflationary pressure(DPI)

contractionary; ↑i/r, ↑cost of borrowing >

↓ consumption of big ticket items, ↓C >

↑i/r, ↑return to savings >

↑opportunity cost of spending, ↓consumer spending, ↓C >

↑i/r, ↑cost of borrowing >

given same returns to investment, < investment projects profitable, ↓I >

↓C,I causes ↓AD

initial △AD due to ↓C,I leads to further reduction of spending(reverse multiplier)

↑econ growth, ↓unN

expansionary; depreciation of ER;

↓prices of exports in foreign currencies >

assume dd for exports price elastic, > than proportional ↑ in qty dd for exports, X↑;

↑prices of imports in domestic currency >

assume dd for imports price elastic, > than proportional ↓ in qty dd for imports, M↓

↑(X-M), AD ↑, through multiplier effect >

real GDP ↑(assuming economy X @ FN) >

↑ actual growth, ↑dd for labour, ↓unN

(dampen inflationary pressure arising from ↑exports)

contractionary; appreciation of ER;

↑prices of exports in foreign currencies >

assume dd for exports price elastic, > than proportional ↓ in qty dd for exports, X↓;

↓prices of imports in domestic currency >

assume dd for imports price elastic, > than proportionate ↑ in qty dd for imports, M↑

↓(X-M), AD ↓, < competition for resources >

↓price of FOP, ↓price of G&S, ↓DPI as GPL ↓

(dampen inflationary pressure arising from imported inflation due to ↑global prices)

contractionary; appreciation of ER;

↓price of imported FOP in domestic currency >

↓COP, ↑profits, ↑incentives to ↑production >

↑AS in SR, AS shifts ↓, GPL ↓ as firms pass ↓COP to consumers in terms of ↓prices >

mitigate extent of imported CPI

nature of economy;

policy conflict; can lead to ↑inflation; ↓i/r, ↑AD >

if ↑AD near FN, GPL ↑, leads to ↑inflation >

gov need accurate info, not ↓i/r too much

expectations of consumers, firms; ↓i/r to ↑C,I >

if consumers/firms pessimistic, wont borrow >

C,I may not ↑

size of multiplier; size small, ↑AD may not bring sufficient ↑NY >

↓effectiveness

time lags; recognition, implementation lag; but faster to implement than FP as need not borrow/finance

policy conflict; can lead to ↓econ growth, ↑unN; ↑i/r, ↓AD >

if ↓AD below FN, real GDP ↓, unN↑ >

gov need accurate info, not ↑i/r too much

expectations of consumers, firms; ↑i/r to ↓C,I >

if consumers/firms optimistic, continue to C,I>

C,I may not ↓

policy acceptability; ↑i/r, result in ↑cost of borrowing, ppl unhappy

policy conflict; can lead to ↑inflation; weaker ER, ↑AD >

if ↑AD near FN, GPL ↑, ↑inflation >

gov need accurate info, not depreciate ER by large extent

expectations of foreign consumers; ↓ER to ↑(X-M), if foreign consumers pessimistic, may not ↑ own M >

may not ↑(X-M)

size of multiplier; size small, ↑AD may not bring sufficient ↑NY >

↓effectiveness

time lags; recognition lag, implementation lag; faster to implement than FP as budget not involved

accuracy, availability of data; affect both exp, cont; w/o accurate data gov may not know how much △ER

policy acceptability; weaker SGD ↑import cost >

local producers depend on imported FOP ↑COP, exports < competitive >

SG import most food, ↑import cost, ↑COL

policy conflict; can lead to ↓econ growth, ↑unN; ↓(X-M), ↓AD below FN >

↓real GDP, unN↑ >

gov need accurate info, not appreciate ER too much

stronger domestic currency ↓export competitiveness; appreciation causes ↓import prices, ↓price of FOP, ↓COP of exports >

however export prices ↑ due to appreciation as > expensive in terms of foreign currencies, overall ↑export prices

doesnt solve root cause; if inflation due to ↑domestic costs(wage,rental costs)

aim; ↑ potential growth by ↑ quantity of FOP &/or ↑ quality of FOP >

used to ↓ macroeconomic instability, ↑ factor mobility

SR SSP; dampen CPI from ↑ domestic costs, achieve ↓unN, ↑actual growth

LR SSP; achieve sustained growth(actual+potential) w/ low inflation

SR; e.g. provide subsidies to firms, help ↓COP; ↓employer CPF, ↓rate to contribute, ↓burden of employers, > willing to retain workers

dampen CPI from ↑ domestic costs;

if ↑price of FOP, ↑COP, AS shift ↑ >

SSP(subsidies) ↓ extent of AS shift, ↓ extent of CPI >

↓CPI

↓unN, ↑econ growth;

gov ↓COP of firms thru subsidies to remain competitive >

firms retain workers, ↓unN rate >

↓COP, AS shifts ↓, ↑real GDP, ↓unN

LR; interventionist SSP; education, training, subsidies, tax incentives to ↑R&D, shift AS → by improving quantity, quality of resources >

AS↑, economy better meet ↑dd of country while managing high inflation >

↓chances of DPI as ↑AD causes ↑P to a smaller extent

market-oriented SSP; in product markets designed to ↑competition, efficiency >

↑competition force firms innovate, become > innovative, ↑ allocative efficiency >

economy produce > G&S w/ same amount of resources

e.g. deregulation(removal of gov regulation in markets); ↑competition, innovation >

profit-minded firms ↑ productive efficiency to ↓prices

promote free trade b/w nations; removal of trade barriers, promote inflow of imports, domestic firms losing customers to rivals producing similar goods @ ↓ prices >

↑competition in domestic market, ↓unit costs, prices for consumers

SR;

political acceptability; subsidies costly to gov, deplete reserves >

incur opportunity cost

LR;

time lag; interventionist SSP(education,training) takes time to have effect, subsidies/tax incentives on R&D costly & takes time

policy conflicts; market-oriented SSP, some firms may simplify production processes, ↓dd for labour >

unN ↑;

SSPs essential to help maintain price stability in LR