Economics Grade 12

Revision

macro economics

study what happens to the whole economy

GNP equals to

GDP + NGF ( net factor income )

when GDP exceeds GNP

resident of given country are earning less

nominal GDP

measures using CURRENT PRICE

Real GDP

measures using CONSTANT PRICE

GDP deflator

a tool that is used to measure price change overtime

inflation

regular and continiuos rise in general price level|
Decreasing purchasing power

economic growth rate

Rate at which the real GDP of country increase over a period of time

walking inflation

occurs when the inflation increase in a range of 3 to 10 percent

Jumping

occurs at a quick rate for short period of time

frictional unemployment

Short-term unemployment that occurs when workers are between jobs (e.g., quitting a job, recent graduates searching for work, or relocating).

. Structural Unemployment

Long-term unemployment due to a mismatch between workers' skills and job requirements or changes in the economy.

Cyclical Unemployment

Unemployment caused by economic downturns or recessions when demand for goods/services falls.

business cycle

refers to the natural rise and fall of economic growth over time, characterized by fluctuations in GDP, employment, income, and production.

Contraction (Recession)

Decline in economic activity, falling GDP for two consecutive quarters.

Trough

The lowest point before recovery begins.

Current Account

is a key component of a country’s Balance of Payments (BoP), which records all economic transactions between residents of a country and the rest of the world.

Trade Balance

=Exports of Goods & Services−Imports of Goods & Services

Surplus: Exports > Imports (e.g., China, Germany).
Deficit: Imports > Exports (e.g., U.S., India).

Aggregate Demand

Total demand for goods & services in an economy at a given price level. and shows the real output that buyers desire to purchase
AD=C+I+G+(X−M)

(Consumption + Investment + Government Spending + Net Exports)

why is AD curve downslope

Interest rate

Real balance effect
International trade effect

Shifts in AD

• Increase (Right Shift):

  • Tax cuts, higher wages, loose monetary policy.

• Decrease (Left Shift):

  • Recession, higher taxes, tight monetary policy.

AD-AS Equilibrium

• Short-Run: AD = SRAS (determines price & output).

• Long-Run: AD = SRAS = LRAS (economy at potential GDP).

LRAS Curve – Determinants

• Full-employment output depends on:

  • Labor, capital, technology, institutions.

SRAS Curve – Why Upward Sloping?

• Sticky Wages: Firms hire more workers at higher prices (profits rise).

• Misperceptions: Producers mistake price rises for higher demand.

. Aggregate Supply (AS) – Definition

• What? Total production of goods & services at different price levels.

• Short-Run AS (SRAS): Upward-sloping (prices flexible, wages sticky).

• Long-Run AS (LRAS): Vertical (full employment output).

goal of macro economics

economic growth , full employment price stablity

what is demand pull inflation

occurs when the demand for goods and service exceeds their supply

what is real balance effect in context of AD

occurs when rise in the price level reduces the real value of money decreasing purachasing power

factor that can shift the AD to the right include

increase in consumer confidence , govt spending or private investment

diffrence bn SARS

SRAS is upward-sloping due to sticky wages and prices in the short run, while LRAS is vertical at full-employment output, representing an economy's maximum sustainable production capacity when all prices and wages are fully flexible.

Key Determinants of LRAS

Quantity & Quality of Labor, Technology & Innovation , Natural Resources ,

mkt equilbrum in context of AD and AS

Short-Run Equilibrium (AD = SRAS)
Where AD meets Short-Run Aggregate Supply (SRAS).

Determines actual output and price level in the short term.

Long-Run Equilibrium (AD = SRAS = LRAS)
Occurs at the full-employment level of output (Y*).

When the Aggregate Demand (AD) curve intersects the Long-Run Aggregate Supply (LRAS) curve

Full-Employment Output , Price Stability

Demand Shocks

are sudden changes in AD that can shift AD curve
eg increase in giov t spending can shift the AD to the right

supply schoks

supply shock is a sudden, unexpected change in production costs or availability of key inputs, shifting the Short-Run Aggregate Supply (SRAS) curve.

Market faliure

is an economic situation where the free mkt fails to distrbute goods and service efficiently .

List the four types of market failures.

Externalities, public goods, monopoly power, and asymmetric information.

Name two government solutions to market failure.

Taxes/subsidies and tradable permits

What are the two key characteristics of public goods?

Non-rivalry (use by one doesn’t reduce availability) and non-excludability (cannot exclude non-payers).

What is the "free rider problem"?

When individuals benefit from a public good without contributing to its cost (e.g., enjoying national defense without paying taxes).

How can public goods be efficiently provided

Through government provision (funded by taxes) or voluntary community efforts

Extrnalities

occur when when the consumption or production of a good affect third parties

Define a negative externality with an example

Costs imposed on third parties

How do subsidies address positive externalities?

They incentivize production/consumption of socially beneficial goods

What is adverse selection?

When one party has more information, leading to market inefficiencies

Define moral hazard.

Post-transaction risky behavior due to lack of consequences (e.g., careless driving after buying insurance).

soln to the free rider problem

soln includes private provision with exclusion

What does the Coase Theorem state?

Private bargaining can resolve externalities if transaction costs are low, property rights are clear, and few parties are involved.

what is the purpouse of a per unit tax adressing negetive externalities

a per unit tax aim to align the private marginal cost with the social marginal cost by taxing the producer or consumer

How does signaling reduce information asymmetry?

involves one party conveying meaningful information to reduce asymmetry (e.g., warranties for used cars or educational degrees for job seekers).

screening

involves less information about other party seeking to gather more info

what does consumer protection involve

safeguarding consumer right and interest

what are the key objectives of the consumer proclamation NO 813 / 2013 in ethiopia

are to protect consumer from misleading mkt practice , ensure access to accurate info

what’s allocative efficiency

occurs when resources are distributed in a way that maximize societal welfare

how govt subsides address positive externalist

by reducing cost for producer and consumer

role of tradable permits in addressing externalities

allow the market to determine the distribution of right

FISCAL POLICY

govts revenue (taxes) and expenditure policies

Monetary policy

action by national bank to control the money supply and interest rates

aim of fiscal policy

manage economic fluctuation

Two main tools of FP

Taxation and govt spending

components of govt spending

Transfer payment , grants in aidm, fedral assistance

expansionary fiscal policy

used during recession to increase aggregate demand , output and employment

Contractionary fiscal policy

used during inflationary periods to decrease aggregate demand and control rising prices

Monetary Policy

is managed by national bank wc controls the money supply and interest rate to achieve economic stability

aim of MP

interest rate, govt bonds, foreign exchange rate

tools of monetary policy

Open market operation - involves buying wc increase money supply and selling govt bonds wc leadsto decrease in money supply

Discount rate

is the interest rate the national bank charges commercial back when they borrow funds.
lowering the rate - reduces cost - lend more - increase money supply
Raising the rate - borrow more - reduce money supply

required reserve money ratio ( RRR)

percentage of deposit that bank must hold in reserve and not lend out

Expansionary monetary policy

policy is used when the economy is in slow down or recession
objective - increase money supply
effects - stimulate investments . boost consumer spending , moving the economy to its potential GDP

contractionary policy

used when there is too much money in the economy
effect - decrease the money supply , reduce money spending and investment

Income policies

measure taken by govt to control wages and prices

wages

determined by interaction of supply and demand

SUPPLY INCREASE - wages tend to fail
DEMAND INCREASE - wages tend to rise

price celling

keeps price from rising too high but can lead to shortage

Price floor

Ensure price dont fall too low , but can create surpluses

Foreign exchange policy

play critical role in country’s economy , influencing prices , trade and overall economic stability

Foreign exchange mkt participant

International traders, Tourists , Investors

Fixed exchange rate policy

govt sets and maintain the currency value relative

Devaluation and revaluation

Devaluation - the govt might lower the currency to make EXPORT CHEAPER AND EXPORT EXPENSIVE
Revaluation - the govt increase the currency to make IMPORT CHEAPER AND hurting export competitiveness

Flexible ( floating ) exchange rate policy

Govt sets and maintain the currency value relative another currency such as US dollar

depreciation

currency value decrease
making export cheaper

appreciation

currency value increase
export expensive

Depreciation and devaluation

makes export cheaper

factor influencing exchange rates

inflation rates , intrest rates , balance of payments

advantage and dis of fixed Exchange rate

adv - provide certantity and reduce speculation
DIS - limit govt ability to respond economic shocks

What is taxation

Compulsory, unrequited payments to the government with no direct benefit in return.

Direct vs. Indirect Taxes

Direct (paid by taxpayer directly, e.g., income tax). Indirect (passed to consumers, e.g., VAT).

Tax Rate vs. Tax Base

Rate: Percentage taxed. Base: Quantity/level of economic activity subject to tax (e.g., income, property).

Tax Incidence

Who ultimately bears the tax burden

Impact vs. Effect of Tax

Impact: Immediate burden on payer. Effect: Long-term behavioral/economic responses (e.g., reduced consumption).

Tax Shifting

Passing the tax burden to others (e.g., businesses raising prices to shift indirect taxes to consumers)

Tax Avoidance vs. Evasion

Avoidance: Legal reduction of liability (e.g., deductions). Evasion: Illegal non-payment (e.g., hiding income).

Objectives of Taxation

Reduce inequality, stabilize economy, discourage harmful consumption, incentivize investment, enhance living standards, allocate resources, reduce unemployment.

Adam Smith’s Tax Principles

Equity, certainty, convenience, economy, fiscal adequacy.

Equity and certainity

equity tax payer should match their ability to pay
Certainity tax should be clear

convinience and economy

economy - tax collection should be minimal

Modern Tax Principles

Fairness, efficiency, simplicity, flexibility.

. Horizontal vs. Vertical Equity

Horizontal: Equal tax for equals. Vertical: Higher ability = higher tax (progressive system).

Progressive Tax

Higher income = higher tax rate (e.g., Ethiopia’s Schedule A: 10–35%).

. Proportional Tax

Flat rate for all income or same

Regressive Tax

Higher income = lower tax rate