Econ Final FINAL YAY

Gross Domestic Product (GDP)

total monetary value final G/S produced within a country’s frontiers during a period of time (year).

measure of a countries wealth

Rise in GDP=

fall in unemployment

Real GDP

adjusted for inflation shows true growth in production and not j bc of inflation

Nominal GDP

includes inflation, if inflation increases, GDP increases

Transfer Payments

Money given by the government (w)out receiving G/S in return ej. pensions/unemployment

(not inc in GDP)

Subsidies:

Money the government gives to firms to reduce production costs
👉 Included in GDPfc only! (bc firms)

Expenditure method=(GDPmp)

Calculates GDP based on what consumers pay and inc. taxes that consumers pay

Expenditure method eq. GDPmp=

Consumption+Investment+Publicexpenditure+ NetExports (exports-imports)

Expenditure method factors

Consumption: households (not real estate)

Investment: businesses+household real estate

Public expenditure: gov.

Net exports: exports-imports

GDPmp: based on market prices

Includes taxes, excludes subsidies

(what consumers pay)

Income method=GDPfc.

Total value of all income-what producers receive excluding taxes and subsidies

Income method eq. GDPfc=

wages+rents+interests+firm’s profits+depreciation

Income method GDPfc factors

Wages: workers' income 

Rents: income from properties 

Firms Profits: business income 

Depreciation: income to cover wear/tear of company equipment

Value added method=GDPfc.

total value of the final G/S, subtracting intermediate G/S from other companies

without indirect taxes/subsidies

Factor costs to market prices:

GDPfc+indirect taxes-subsidies 

Gross national product GNP

Value of production (output) of nationals of a country

GDP+Net Financial Income from Abroad

NNP Net National Product:

GNP-Depreciation

basically NET product of nationals

National income:

The total income earned by a country's citizens

GNP-depreciation-taxes+subsidies

Disposable Personal Income:

portion of national income(NNPfc) that reaches households

CONSUME or SAVE 

Disposable Personal Income equation

NNPfc (National income)-taxes-SSeq+aid

Demand Driven Inflation:

Demand 4 G/S exceeds supply.

Ej: Everyone rushes to buy TVs→prices go up.

Cost-driven inflation:

Rising production costs (e.g., oil, wages)

Gas prices go up → delivery costs rise → goods cost more.

Money Supply driven inflation:

Central bank prints too much money, reducing its value

High inflation effects

Loss of purchasing power: workers can buy less w the same amount of money 

Uncertainty: less investments/businesses close 

Difficult 2 save/lend money: when lenders get their money back→worth less

GDP Deflator and CPI differences:

-Use CPI to understand how inflation affects people.

-Use GDP deflator to understand how inflation affects the whole economy.

GDP Deflator:

Shows how much GDP growth is due 2 inflation

(nominal gdp/real gdp)x100 

Deflation effects

Less spending

Lower profits

Job cuts

Economic slowdown

FISCAL POLICY 

Government’s use of spending and taxation to influence the economy

Macroeconomic objectives of fiscal policy:

1. Sustained GDP growth,

2. Employment

3. Price stability,

4. Budgetary balance

5. External balance

Indirect taxes:

on goods/services (e.g., VAT

Direct taxes:

on income or wealth (e.g., income tax)

Public expenditures (fiscal policy)

money spent on goods/services by the government (schools/roads)→ included in GDP

Expansionary Fiscal Policy goals

-Inc. spending

-Inc. GDP

-reduction unemployment

-shift right of agg. demand curve

Expansionary Fiscal Policy:

1. inc. gov spending

2. inc. in transfers

3. dec. in taxes

Used during a recession:

Fiscal policy drawbacks

Higher inflation, greater fiscal deficit (gov debt)

Fiscal deficit:

gov expenditures are greater than revenues over a period of time

Contradictory fiscal Policy goals

-control inflation

-improve the fiscal balance

Contradictory fiscal Policy: (shift left)

-decreasing public expenditures

-increasing taxes

-reducing transfers

Contradictory fiscal policy drawbacks

Lower GDP, Higher unemployment

Money Functions: 

1. Exchange mechanism

2. Stores wealth:

3. Measurement tool:

Commodity money Requirements:

-Durable (non-perishable)

-Easily transportable

-Divisible

-Homogeneous

-Of limited supply

DIff btw Fiduciary and Fiat $:

Fiduciary money: based on trust not legal tender

Fiat money: government-issued legal tender backed by law and public trust

Reference interest r8:

Base interest r8 set by (ECB) that eurozone banks pay when borrowing money.

Eurozone banks charge households more 2 make profit

Assets: future monetary rents

Real assets: material goods (art pieces, real estate, etc).

Financial assets: represent ownership/debt (stocks/deposits/loans)

Money demand factors: 

Income

Interest rates

Uncertainty

Monetary Supply 

1. sum of cash (coins/bills), 

2. banking deposits

3. public debt issued by governments

quantity of $ that circulating in an economy

Checking accounts & sight deposits (M1):

Little/no interest r8, high seq/liquidity accessed cancelled any time (checks/debit card)

Savings deposits/savings accounts (M2):

Higher remuneration (interest rate) Money withdrawn w savings book

Fixed-term deposits (M2)

-Cannot be withdrawn (penalty).
-Higher remuneration interest r8

Creation of money Agents

Central banks: print/inject money w Open Market Operations or loans 2 com. banks

Commercial banks: money multifplier effect w loans

Ppls decisions: deposit (4 banks 2 loan) or spend $

Bank reserves:

% of deposits banks keep as reserves @ all times

Reserve requirement ratio:

cash minimums that banks must save 2 meet central bank req; adds security/stability 2 system

Eurosystem:

European Central Bank (ECB) and national banks of eurozone countries (adopted the euro)

ECB functions:

1. Issue all coins/bills in eurozone.

2. Statistics (interest r8s)

3. Ensure functioning of payment systems

4. Manage foreign currencies

5. Monetary policy.

Monetary Policy=measures taken by ECB 2

-control $ in circulation (monetary supply)
-influence agg. demand 2 achieve macro objectives

Monetary Policy objectives

1. Price Stability (2%) MAIN OBJECTIVE

2. GDP growth

3. Employment

Monetary policy instruments

1. Interest rates: setting low interest r8-> GDP/Demand/Employment inc. 

2. Open market operations (OMOs):

3. Setting reserve requirement ratio:

Interest R8s ECB

a) Deposit facility’s interest rate:

b) Marginal lending facility’s interest rate:

c) Main refinancing operations’ interest r8:s

Marginal lending facility’s interest rate:

commercial banks PAY 2 ECB 2 receive overnight loans

Deposit facility’s interest rate:

commercial banks RECEIVE from ECB when they deposit their $

Main refinancing operations’ interest r8:

Main Rate

Also known as DISCOUNT R8

banks pay 2 ECB→week loans

Open Market Operations OMOs:

ECB buys or sells public (gov.) debt 2 investors (com banks)

*Primary tool for monetary policy, conducted any time in secondary markets

ECB Sells public debt (OMO)

removes money

money out of hands of investors/circulation

ECB Buys public debt (OMO)

stimulate economy (money in hands of investors/public)

Reserve requirement ratio policy:

increase in reserve req. ratio→bank has less funds available 2 lend→less monetary supply

Expansionary monetary policy:

Higher: Agg Dem, Employment, GDP, inflation

Expansionary monetary policy tools

A) Lowering interest r8s

B) Buying public debt 

C) Lowering reserve requirement ratio

Contradictory monetary policy

Lower: GDP, Agg Demand, Employment 

Contradictory monetary policy tools

A) Increasing interest rates

B) Selling gov. debt 

C) Increasing reserve requirement

Unemployment Causes:

-Productivity and Competition: more sales/more tech

-Labour Flexibility/Regulations: hiring rules min wage

-Demographics: pop growth

-Disparity Btw Edu/Job Market Needs:

-Underground market

Economic effects unemployment

-Gov. Costs: larger transfers, higher public expenditures.

-Less output/GDP

-Families in precarious situations

Social effects unemployment

Discouraged/active pop looking 4 work: stress/depre.

Discrimination: women and the young

Types unemployment

Frictional:

Structural:

Seasonal:

Cyclical:

Structural unemployment

Long-term unemployment: changes in the economy

ej. Workers lack skills or Industries relocate/disappear

Cyclical unemployment

slowdown in economy (recession) less demand 4 G/S->companies cut jobs

Unemployment Demand Policies:

Aim 2 inc spending 2 create employment

Expansionary fiscal/monetary policies

pos effects on employment short term @ cost of inflationary pressure

Unemployment Supply Policies:

inc productivity 2 create employment.

productivity improvements (edu. & innovation)

Offshoring:

-Business functions in other nation-resource abundant & labor cheap.

-Reduces demand 4 national workers→inc. domestic unemployment

Other unemployment policies

Labor market flexibility: reducing legal protections

Wage flexibility: removing min wage

Creation of jobs: part-time/temporary employment (cost of quality)

Eliminating fraud (underground economy)

Active population:

Labor force. Employed or Unemployed & actively looking for a job.

Inactive population:

Ppl of working age not working/looking 4 work ej. students, stay @ home parents NOT part of labor force

Labor Force=

Employed + Unemployed (actively seeking

Unemployed

part of labor force actively seeking a job