Aggregate demand etc

1. Material vs. Non-Material Living Standards

• Material Living Standards: Determined by access to goods and services, income levels, employment rates, and GDP per capita.

• Non-Material Living Standards: Includes quality of life factors like happiness, health, environmental quality, crime rates, and leisure time.

• Trade-offs: Improving material living standards may negatively impact non-material ones, such as environmental degradation or social stress.

2. Economic Activity and Living Standards

• Economic Activity: The process of producing goods and services to meet societal needs.

• Measurement: GDP per capita is a key indicator, but other factors like wealth distribution and unemployment also influence actual living standards.

• Effects on Living Standards:

  • Higher economic activity raises income but can harm the environment.

  • Balanced growth can improve both material and non-material aspects.

3. The Business Cycle

• Four Phases:

  • Expansion: Rising GDP, employment, and inflation.

  • Peak: Maximum GDP growth, low unemployment, high inflation.

  • Contraction: Slowing GDP growth, rising unemployment, falling inflation.

  • Trough (Recession if prolonged): Lowest economic activity, high unemployment, deflation possible.

• Stagflation: A rare scenario where high inflation and high unemployment coexist.

4. The Circular Flow Model

• Five Sectors:

  • Households: Supply labor and consume goods.

  • Businesses: Produce goods and services.

  • Government: Collects taxes and provides public goods.

  • Financial Institutions: Facilitate investment and savings.

  • Overseas Sector: Trade with foreign economies.

• Key Flows:

  • Leakages: Savings, taxes, imports (reduce spending).

  • Injections: Investment, government spending, exports (boost spending).

5. Aggregate Demand (AD) and Its Drivers

• Definition: Total spending on goods and services (AD = C + I + G + X - M).

• Key Influences:

  • Consumer & Business Confidence: Higher confidence increases spending.

  • Interest Rates: Higher rates discourage borrowing and spending.

  • Government Policies: Budget surpluses reduce AD, deficits boost AD.

  • Exchange Rates: Weaker currency boosts exports, stronger one reduces them.

  • Overseas Growth: Higher growth abroad increases demand for exports.

6. Aggregate Supply (AS) and Its Drivers

• Definition: Total supply of goods and services in the economy.

• Key Influences:

  • Resources Availability: More skilled labor and capital boost AS.

  • Production Costs: Lower costs improve profitability and expand AS.

  • Technology & Productivity: Increases efficiency and potential GDP.

  • Regulations & Policies: Can either support or restrict economic activity.

  • Climate & Supply Chains: Natural disasters and disruptions impact AS.

7. Policy and Economic Stability

• Macroeconomic Goals:

  • Sustainable economic growth (around 3% GDP growth per year).

  • Low unemployment (4-4.5% is ideal).

  • Low inflation (2-3% annual target).

• Government’s Role:

  • Fiscal policy (spending and taxation) to influence AD.

  • Monetary policy (interest rates) to regulate inflation and growth.