ALL notes cards theory / defs

Free trade, trade protection, exports, imports

• Absence of gov intervention in international trade

• Gov intervention in international trade

  • Disadvantages: trade wars, prices, income distribution (apart from subsidies), worsening export competitiveness, inflation

  • Benefits: infant, security, health safety env standards, developing country to diversify

    • Also: but sus,. Dumping, BoP, revenue, protection jobs domestically

• GS produced domestically and sold in another country

• GS produced in another country and bought for domestic use

Firm

Organisation that employs FOP to produce and sell g/s

Industry

Group of 1+ firms producing identical or similar g/s

Sum of all forms making same product(market supply)

Allocative efficiency

Producing the quantity and combination of goods most wanted by society , when economy allocated resources so that society gets maximised benefits from consumption

Barriers to entry

• EoS

• Natural monopoly

• Branding

• Legal

  • patents

  • Licences

  • Copyrights

  • Tariffs

• Essential resource control (debeers diamonds 50%) eg

• Aggressive tactics

Why MR below demand (and price) and MR relation to D

Because price changes when extra revenue for each unit changes

Price change from $6-$7

But this new price is also on other units in addition to lost units

//

Demand curve is inelastic when MR is negative — eg if when price falls the revenue falls

Natural monopoly

One large firm with EoS so large that Can supply entire market at lower AC than two or more smaller firms

Market power

Extent a firm in industry is able to control price at product sold

Oligopoly and monopoly

Few large firms producing similar goods services with high barriers of entry (differentiated or not)

One large firm producing unique product with no close substitutes with very high barriers to entry

Marginal revenue

Change in revenue from selling one extra unit of output

Explicit implicit and economic costs

• when firm uses resources it doesn’t own

• Sacrificed income from use of self owned resources by a firm

• Total of above

MC = MP theory

marginal product peak = marginal cost peak

• more workers = lower MC up to a point

• After : more workers= higher MC due to law of diminishing marginal returns

• Only in short run because fixed

EoS types and DEOS

• specialisation of labour

• Management specialisation

• Bulk putting of inputs (FOP)

• Financing

• Spread of costs eg marketing over larger output

does

• coordinating and monitoring

• Communication

• Motivation

Profit maximisation , normal absnoar profit

MC=MR

Normal— revenue enough to keep business running , covering explicit and implicit costs (total profit equals total cost) and since entrepreneurs costs is counted, the owner still gets payed

Crowding out

increased government spending and borrowing reduces private sector investment. It happens because high government deficits increase competition for funds, raising interest rates and making it more expensive for businesses to borrow and invest

Keynesian multiplier effect , MPC, MPS, MPT, MPM

Change in RGDP/ initial change in speeding

MPC: MP to consume: fraction of additional income that households spend on consumption of domestically produced GS

MPS:fraction of additional income that households save

MPT: fraction of additional income that is taxed

MPM: fraction of additional income spent on imports

K=1/MPW = 1/(sumMPS MPT MPM)= 1/(1-MPC)

Sum MPC MPS MPT MPM = 1

Perfect compeition , monopolistic

Large number of small price taking firms no barriers to entry and identical products

• Allocatively efficient P=MC, no loss

• Canadas wheat market - homogenous product, many farmers take prices

  • Produce at P=MC, no over/under consumption + esp good because climate means limited availible land so being used efficiently

    • However, real world not completely true→ gov subsidies, causing overproduction common in can farming

  • Lower prices→help stay competitive globally + price sensitive bulk import markets like Bangladesh, otherwise switch to alts (RUS)- exports — but still price taker in end

  • Output higher (vs mC)→ benefit import developing countries, self sufficient security → but limited labour during peak seasons

Many piece making firms , differentiated products and no barriers to entry

• – MC price > MC long run,

• + product variety

  • Differentiation in mC US trainer brands — diffferentiation and non price compeitition,

    • Innpovavtve technology, brand image, etc, brand deals advertising, →benefit consumers with better q products + unique

      • But depend on differentiation ability→bottled water also mC but limited variety

  • EOS: small PC firms can’t achieve EOS→lower avg costs in MC, lower prices and higher profits for shareholders : NIKE

    • Afford efficient tech automation, reduced AP→purshasing EOS< but IRL Nike prices are not low- strong branding allow price making

Autonomous vs induced spending

Autonomous:

• consumption investment gov spending net exports

• Multiplier effect only initiated by change in. Spending that is not caused by income change

Multiplier effect strength depends on level of spare capacity

Supply side policies

Fiscal and monetary

• reduce ST fluctuations in business cycle — stabilisation policies

Monetary:

• carried out by CB of each country aiming to change interest rates in order to influence AD

fiscal:

• government spending and taxation changes to influence AD

Roles of central bank

• banker to the government

• Banker to commercial banks

• Regulator of commercial banks

• Monetary policy

Independence — long term interests of economy , policies may be politically unpopular

Monetary policy goals

• low and stable inflation rate

• Low unemployment

• Reduce business cycle fluctuations

• Promote stable economic environment external balance

Determination of rate of interest

• risk of loan

• Length of time

• Size

• Degree of monopoly power of lender

Supply of meant fixed

Demand downward sloping

Creation of money

money multiplier

• 1/ required reserve ratio

Methods

1. Open market operations : buying and selling of pre existing gov bonds in bond market

2. Minimum reserve requirements : if requirements lower—then excess reserves increase and able to lend more

3. Changes in bank min lending rate : can lend to commercial banks, and when do so charges interest rates— minimum lending rate — so affects cost of borrowing for banks and thus how much money people borrow

4. Quantitative easing : buying bonds in open market but larger scale — more types of financial assets : central bank buys huge Q from commercial and to pay , creates reserve electronically for commercial banks— end up with more reserver to make loans ?? Bro what

Gov budget / revenue

1. Current (eg day to day spending like wages and salaries of gov employees)

2. Capital (eg public investment— building roads)

3. Transfer payments (payment to vul groups for redistribution income)

Revenue

1. Tax

2. Sales of public goods

3. Sale of gov owned property or enterprises (privatisation)

Monetary vs fiscal

• budget deficit FP

• FP time lags

• IR changes more easily reversed

• MP less political influence and resistance

• Political constraints FP

• IR small adjustment iccrements

• FP crowding out

Monetary policy strengths

• incremental, reversible, flexible, shorter time lag

• Central bank independence , limited political constraints, budget deficit debt none

Weaknesses:

• ineffective in recession: can’t do negative IR, consumer and producer confidence, banks fearful of lending

• Conflict between objectives , inflationary, problematic stagflation or cost push

Fiscal strengths

• help deep recessions, target sectors of economy , directly affect AD, deal with escalating inflation, potential output

• Automatic stabiisees (like progressive income taxes, unemployment benefits)

weaknesses:

• time lags , Political constraints, Sustainable debt ,

• tax cuts less effective in AD , fine tune economy inability, inflationary risk, cost push or stagflation unable to fix

• Crowding out

Equity vs equality and income inequality

Fairness and just

Vs

State of being equal with respect to smtn

• measure of how unevenly income is distributed throughout a population

Inequality indicators Lorenz curve :gini coefficient / wealth comparison

Lorenz curve

• percentage of population and percentage of income cumulative

Gini

• = area between diagonal and Lorenz curve / area under diagonal

Wealth coefficient / inequality is usually much larger than gini bc income = wealth but at higher proportion due to more opportunity to acquire wealth with additional income

Poverty types definitions

Absolute : income not sufficient to meet basic human needs (family or person)

With international poverty line at <1.90 dollars a day — extreme poverty and periodically adjusted for inflation

relative: compares income of individual or households in society with median income — inequality association

Causes of poverty / inequality

1. Opportunities inequality (birth lottery)

2. Human capital levels differ

3. Resource ownership

4. Discrimination

5. Unequal power and status

6. Gov tax and benefits

7. Technological change

8. Globalisation (demand usually for skilled rather than not)

9. Market based supply side

10. Pay in certain occupation increase s

11. Unemployment

12. Geography

13. Age

• Impact of income and wealth inequality

1. Economic negative growth (MPC)

   • MPC of wealthy vs not

   • Influence over policies for own benefit rather than community

   • Lower merit G provision

   • Demand for local GS

   • Credit can’t bc no collateral

   • Political instability

2. Low living standards

   • access to health and education, mortality rates, preventable diseases, social problems

3. Social political stability

   • polarised societies and extremism

4. Crime

5. Health , happiness , education

Policies to reduce income and wealth inequality

• taxation — provide fund for go. Spending welfare, merit etc

  • Direct and indirect

  • Proportional progressive and regressive

• Non taxation

  • Investment human capital

  • Transfer payments : payment made by gov to individuals for purpose of redistribution income away from certain groups to others

  • Targeting GS spending

  • Universal basic income

  • Policies reduce discrimination

  • Gov intervention— min wage and price controls

PPC

Shows combination of maximum output that can be produced by an economy with fixed resources and technology provided there is full employment

(actually full employment not like the natural rate)

Consequences of economic growth

• SOL

• Environment

• Inequality

Sustainable level of debt: gov debt and costs

National debt also known as

• amount of money gov owes to lenders outside of government

Costs:

• debt servicing

• Credit rating

• Future tax and spending

• Private investment

• Economic growth

• Debt trap

• Income inequality

Unemployment , labour force

People of working age who are actively looking for a job but are not employed

Employed + unemployed (still seeking work!)

Measuring unemployment difficulties

• hidden unemployment — underestimation —

  • people may give up looking so aren’t counted any more , or

  • underemployed (looking for job that matches skills but can’t find)

    • Also: Working part time but want full time

  • retraining programmes

  • Early retirement

• Overestimation

  • - underground economy — unregistered business and work

• Regional and population differences

Unemployment consequences

• loss of real GDP output

• Social

• Income/ tax revenue

• Unemployment benefit costs

• Personal

• Income inequality

• Skills lost over time

1. Types of unemployment

• Structural (natural)

  • changes in location of industries ,

  • Labour market rigidities

  • Demand for certain skills

• Frictional (natural)

  • Workers recently fired and looking for new jobs ,

  • Waiting to start a new job

  • Quit job to find another

  • Redundancy due to employer bankruptcy

• Cyclical

  • Recessionary gap , low AD — less workers required

• Seasonal (natural)

  • Demand for labour in certain industries changes on seasonal basis based on needs for skills

Natural— real gdp equals potential

Phillips curve

Trade off of inflation and employment in economies — correlation

Inflation ^ unemployment v

But : breakdown with stagflation where inflation rises while EG and employment falls — seen in 1970s

So instead can now shift up and down to account for this

aggregate demand

Total quantity of agreggate output that buyers in an economy want to buy at different possible price levels deters paribus

Causes of changes in consumption spending/investment/gov ( AD )

• consumer confidence

• Interest rates

• Wealth

• Income taxes

• Level of household indebtedness

• Future price level expectations

• business taxes

• Business confidence

• Interest rates

• Technology

• Corporate indebtedness

• Legal institutional changes

• political priorities

• Deliberate efforts to influence AD

• National income abroad changes

• Exchange rates

• Trade policies or protection

AS

Total quantity of goods and services produced in an economy over a particular time period at different price levels

SR vs LR in macro

Micro : ST is period of time where FOP is fixed (only one at least)

Macro: SR = period of time where prices of resources are roughly constant or inflectible (do not change much in response to D/S)

LR = period of time when prices of all resources are flexible and change along with changes in price levels

therefore

• Upward sloping because price level rise SR while resource price fixed so become more profitable to increase production

Cause of SRAS shift

• wage changes

• Non labour resource price

• Indirect taxes

• Subsidies

• Supply shocks

LRAS vertical (monetarist)

• ?

1. Eliminating recessionary gap — with assumption of resource price flexibility

1. SR: R prices fixed — profits increase when demand increase and price increases

2. Supply more

3. LR: wages flexible— resources more expense as general price levels rise

4. Higher COP — so SRAS decreases

Keynesian outlook

• assumes long term factor prices are sticky downwards — won’t fall during recession

• As spare capacity reduces- prices spike exponentially because can increase employment without needing to increase prices to attract FOP like workers

Long term AS changes

• increase in Q of FOP

• Increase in quality of FOO

• Technology improvements

• Efficiency

• Institutional changes

Wages / fixed

Price of labour —

• rigid because

  • labour contracts

  • Min wage legislation

  • Trade unions

  • Effect of worker morale

GDP

total value of goods and services produced within and economy in a period of time

Circular flow of income model

Illustrates relationships that help us to understand an economy , representing the flows of money , g/s and FOP between different economic agents like households , firms, financial markets, gov and other counties

Firm→ households

• food and shelter

• Goods and services

• Interest Rent wages profit

Household→ firms

• Capital land labour enterprise (FOP)

Household→ x →firm

• Financial market

  • savings - investment

• Gov

  • Taxes - gov spending

• Other countries

  • Imports - exports

National income accounting

Def: measurement of nations economic activity = aggregate output

Methods:

1. Expenditure method : CIGnetX

2. Income method : all income earned by FOP over a year

3. Output method : value of all final goods and S produced over time (final”” to avoid double counting)

Issues

• doesn’t account for price level changes

• Population

So use PPP/ capita

Trade benefits

• choice

• Lower prices

• Leave security

• Efficiency production

• Allocative efficiency

• Innovation, new ideas, new tech

• EoS

• Acquiring needed resources

• ForEX source

• Specialisation

• Growth

Absolute advantage , comparative advantage , limitations

(Assumptions: / limits:

• transport costs ignored, FoP fixed (location, mobility, and Q), full employment, free trade, homogenous products)

)

• production of good through use fewer resources than another country ; more efficiently

• Produce good at lower opp cost than another country

Tariffs

taxes on imported goods

• Regressive , foreign producers worse off

• Domestic better off ,

Import quotas, production subsidies , export subsidy

• Legal limit to Q of G imported over particular time period

• Payment by gov to firm for each unit of output produced

  • Protect domestic firms competing with imports — could too extreme cause surplus that is exported (bad bad for allocation)

  • Protect exporting firms— paid per exported goods

    • Producers benefit, domestic employment increases

    • Consumers pay higher prices, negative gov budget, taxpayers lose (pay)

Administrative barriers, trading blocs, preferential trade agreements, types of trading blocs

• go through customs, inspections , package reqs, regulations standards

• when group of countries agree to reduce tariffs and other trade barriers in order to free(er) trade and cooperation

  • 1. Free trade area: mutual free trade between members , NAFTA

  • 2. Customs union, CEFTA

    • FTA and common external policy

  • 3. Common market, EU

    • FTA and Customs union and removal of all FOP movement barriers between members

• agreement between two or more countries to lower trade barriers on particular products between them

Trade creation , diversion

• customs union entry leads to production transfer of good to low cost producers from high cost

• Entry to customs union causes production of good to transfer from low to high cost producers

Monetary union

• common market with common currency and central bank

WTO

• Organisation for liberalising trade

Objectives:

• trade dispute handling

• Negotiations

• Agreements

• Policies

• Technicals assistance and trade

Bad

• economically powerful agendas / interests

• Coalitions

• Influence

• Assumes equal development apart from least developed

Exchange rate, freely floating, causes of changes

• price of currency in terms of another currently (buy currency— demand, pay using currency — supply)

• Exchange rates determined by market forces (d/s), no gov intervention

Causes of change:

1. exports

2. flows of remittances

3. Imports

4. Relative interest rates

5. Relative Inflation (imports/ex)

6. Investment in out

7. Changes in income (M/X affected)

8. Speculation

9. CB intervention using foreign currency

Affects of ex rates

Exports

• += expensive, reduce demand, imports cheaper

• – = opposite

Unemployment

• += reduce AD reduce employment, compete with imports industries worse off, but reduce CPI so reduce , depend wether AD or SRAS more affected

• – = AD increases , dep on near potential GDP — DPI , opposite, importing competition benefit

Economic growth

• + reduce AD bad, but SRAS increases , CPI decreases , help lower inflation good

• – AD rises, CPI increases , inflation bad , export industry growth — LRAS AD AS

Forgein debt

• + easier to pay debt back

• – harder to pay back

CABOP

• SPICEE

tourism

• + cheaper holidays for domestic

• – opposite

Depend on : business cycle stage, protecrionism, duration, extent, reliance on MX, PED, time lag

Pegged exchange rates , fixed, policies to maintain

• fix current to major current like USD

• Controlled by central bank intervention to maintain exchange rates

using sale and buying of forex

• but reserves can run out

Policies

• upward: sell own currency

• Downward:

  • sell forex buy own,

  • interest rate changes,

    • Attract foreign investments , reduce domestic citizens withdrawing money

    • But could reduce economic growth , employment

  • borrow form abroad,

    • Use borrowing to sell for domestic

    • But interest payment on debt , increase debt

  • limit imports,

    • Trade protection reduce imports or contractionary policy — can’t afford imports

    • But affect growth incomes and downsides of trade barriers

  • impose controls on exchange

Devaluation revaluation , managed exchange rates ,

• decision. By gov to lower international price of currency

• Opposite

• exchange rates determined by market forces but with periodic intervention to reduce short term fluctuations

Overvalued and undervalued currencies

• over: value is maintained higher than market level

  • Imports cheaper,

  • Exports more expensive , Unfair competition for domestic , Worsens current account balance

• Under: lower

  • Exports cheaper, Promote employment and EG

  • Unfair competitive advantages for domestic, misallocation of resources, retaliation, imports expensive

BOP

• record of value of all transactions between the residents of one country and residents of all other countries in world over given period of time

  1. Current account

     • Measures of flow of funds from trade in GS, plus net investment income flows and net transfers of money (aid grants and remittances)

       • G, S, income, current transfers

  2. Capital account

     • Inflows - outflows of funds for capital transactions in NON PRODUCED NON FINANCIAL ASSETS

  3. Financial account

     • FDI, portfolio, reserve assets, official borrowing

Marshall Lerner condition and j curve

Deval or depre may not change CABOP due to low PED potential

• depreciation success at correcting CA deficit only if : PED X+ PED M > 1

• Due to time lag mostly reaction , unresponsive in short run

Method to correct P CAD

1. Expenditures reducing policies

2. Exp switch: depreciation

3. Supply side to inc competitive

4. Exp Switching policy: trad protection

Sustainable,e development , poverty reduction → pollution

• preservation of environment and economy for current and future

SDGS; 17 goals developed at UN on sustainable development n 2012

• poverty cause of environment destruction due to over exploitation by the poor of scare env resources (over use of CPR)

ED vs EG

EG: increase win output (real GDP) and incomes over time, measured on per capita basis (shown on PPC or monetarist/)

ED: process that leads to improved standards of living for population as who,e — poverty, access to basic needs, gender equality, employment, inequality income

Indic ED indicators,

• GDP GNI —PPP

• Health

  • Life ex , infant mortality, maternal

• Education

  • Literacy rate, pri school enrolment, sec

• Econ Inequality

  • Gini coefficient, poverty line, min income, lorenz curve

• Social inequality

  • Fertility rate, nourishment, life expectancy ineq, etc

• Energy

  • Income spent on elec/fuel, energy use , renewable energy, pollution

• Environment

  • Co2, species prev, ozone, water use,

Composite indicators

HDI: life expectancy, mean/exp years of schooling, GNI per cap + inequality adjusted versions

Gender equality index

HPI;

Poverty cycle

  

Barriers to EG

• low level human capital

• Infrastructure access

• Appropriate technology

• Inequality wealth

• International market (Trade barriers)

• Primary prod → price volatility due to low PES< and low YED with growth- incomes grow mean demand grow less?, p;rices don’t grow , while import secondary→also developed place tariffs on pri producing

• Informal economy

• Capital flight

• Indebtedness

• Landlocked / geography

• Diseases / climate

• Political social (investment )

ED/G starts : foreign aid

1. Foreign aid : transfer of funds or GS to developing countries with main objective to improve econ/social/poltiical — concessional (beneficial than market alone, non-commercial)

   1. Poverty cycle

   2. basic goods

   3. Income distribution

   4. Economic growth

   5. SDGs goals

   6. Debt trap

   BUT

   • tied aid, Conditional , volatility and unpredictability , substitute, not reach most need, corruption,

     1. Official development aid — political strategic, economic, humanitarian

     2. NGO (Private aid)

• Raise public awareness , expertise and advice, innovation,

• BUT: small size and weakness typically, loss of independence, attract personnel away from gov , challenge to state authority,

Phases of trade liberalisation

Inward FDI as EDEG stray

benefits : local skills and tech, tax rev, industry local, unemployment , economic growth, offset current account , increase savings investment

Drawback: income not all remain, compete with domestic firms, benefit local suppliers not, environment, dependency, power to promote policy against interest local

GDP GNI def

• GDP ndicator of the Value of output produced in a country in a year

• GNI: income received by residents (GDP+ net income also made abroad)

Pot main differences reasons

• remittances, repatriation