Macroeconomics

GDP vs GNP/GNI

GDP: gross domestic product; measures the total value of goods and services within a countries borders

GNP: gross national product: GDP+outside a country’s borders, nationality+remittances

GDP types and pros of using it to measure economic growth

1. Nominal GDP: total economic output, without adjusting for inflation

2. Real GDP: adjusts for inflation-more accurate

   real GDP=nominal GDP/price deflator times 100

PROS of using GDP to measure growth:

• comparison of economic strengths

• provides GDP per capita-avg. income

• easy to track and manage

CONS

• overestimates quality of life

• GDP doesn’t equal happiness

• does not show inequality

The business cycle

• natural cycle of ups and downs in economic activity of a firm

1. Expansion: growth, employment rises, business expands

2. Peak: growth reaches a peak, slows down

3. Contraction: economic activity declines, possible recession

4. Trough: lowest point before recovery

alternative measures of well being

• world happiness report

• gross national happiness

• OECD

• green GDP

aggregate demand-AD and factors affecting it

total demand for goods and services in an economy

C+I+G(X-M)

factors affecting:

• changes in consumption, investment, G, X, M

aggregate supply-AS, types and factors affecting them

total output of goods and services at every price level

1. short run(SRAS): period where prices remain the same

2. Long run(LRAS): maximum sustainable output

factors affecting:

SRAS: temporary; wage changes, taxes, subsidies

LRAS: permanent; labor force, education, technological improvements

new classical SRAS vs keynesian LRAS model

New classical: supply creates demand

• supply side

• efficiency of market forces-no gov. intervention

Keynesian: demand creates its own supply

• demand side

• gov. intervention needed

LRAS graph stages: in the short run an economy can produce more without raising prices-when at full capacity, output can’t increase without causing inflation

1. Flat section: room for growth, output is below potential

2. upward slope: closer to full employment-resources become more scarce

   • firms raise wages and prices

3. vertical section: full employment, can no longer increase output

say’s law

classical economic idea: supply creates its own demand

• in the long run, there can’t be general overproduction or unemployment

• argued against government intervention

economic growth in the short run vs long run

short run:

• increased consumption

• fiscal/monetary policy

• excessive AD-causes inflation

Long run:

• improvement in factors of production

• capital: better technology

• labor: population growth

• natural resources

inflation vs deflation vs disinflation

inflation: persistent increase in the general price level

deflation: persistent fall in the general price

disinflation: a slowing down of inflation

types of inflation

formula: CPI1-CPI2/CPI1 times 100

1. demand pull: the good inflation

   • higher demand than supply, prices go up but GDP goes up

2. cost push inflation: the bad inflation

   • higher cost of producing, prices go up, GDP goes down

costs of government debt

• debt servicing cost

• credit ratings

• impact on future taxation and spending

lorenz curve and gini coefficient

lorenz curve: visual indicator of distribution of wealth

gini coefficient: math indicator A/A+B

0-perfect equality 1-perfect inequality

types of poverty and inequality causes and fixes

1. absolute poverty: unable to access basic human needs (food, shelter)

2. Relative poverty: below 50% of a countri’s averge earnings

Inequality causes:

• opportunity

• discrimination

• human capital levels (skills, knowledge, education)

Policies to reduce inequality:

• direct, indirect taxes

• minimum wage

• UBI

• policies reducing discriminations

5 types of unemployment

1. Frictional Unemployment

• people are between jobs or looking for their first job, usually short-term

2. Structural Unemployment

• Caused by a mismatch of skills or changes in the economy, often long-term

3. Cyclical Unemployment

• Caused by a fall in demand during a recession

4. Seasonal Unemployment

• Happens because of seasonal changes in demand for certain jobs

5. Real Wage Unemployment

• Caused when wages are too high, above the market-clearing level

• minimum wage laws or strong unions

government policies; Fiscal policy types and pros and cons

• use of government spending

1. expansionary fiscal policy:

   aim: close recessionary gaps, boosting the economy

   • cut taxes-more consumption and investment

   • increase government spending

2. contractionary FP:

   aim: close inflationary gaps, slowing the economy

   • increasing taxes-decreasing consumption, investment

   • decrease government spending

   • ex. austerity

PROS:

• can target specific economic sectors

• effective in a recession-boosts confidence

CONS:

• political pressure

• time lags-bureaucracy takes time

• government debt rises, crowding out possibilities

keynesian multiplier

government spending leads to a larger overall increase in income, GDP

• more gov. spending=bigger impact on GDP, people spend even more money

formula=1/1-MPC

MPC: marginal prosperity to consume

government policies; Monetary policy types and pros and cons

Central bank's way to control economic factors

1. Expansionary MP: promote growth during times of trouble

   • decrease interest rates-increased spending

   • buy government bonds

   • decrease minimum reserve ratio

2. Contractionary MP: slowing down the economy during high inflation

   • increase minimum reserve ratio

   • sell government bonds

   • increase interest rates-decrease spending

PROS:

• flexible, easily reversible

• short time lags-policies implemented quickly

CONS:

• low consumer and business confidence

• lowering interest rates is ineffective when close to 0

money multiplier effect

process by which banks make money through lending

• initial deposit of money leads to a larger increase in the money supply

government policies; supply side types and pros and cons

aim at improving the production side of the economy

1. Market based: reducing barriers for businesses

• deregulation-removing rules, regulations

• privatization: greater incentive to innovate

• trade liberalization

PROS:

• no burden on government budget

• improved resource allocation-private entities are better are determining equilibrium

CONS:

• equity issues (profit>equity), business self interest

• time lags

• environmental impact

2. Interventionist: government intervention needed

• investment in infrastructure, education, training

PROS:

• direct support for a specific industry

• improvs long term growth, reducing inequality

CONS:

• time lag

• high costs

• may cause inflation

crowding out

government borrowing pushes out private investment by raising interest rates