AGGREGATE OUTPUT, PRICES AND ECONOMIC GROWTH
GDP, Income, and Expenditures
Gross domestic product (GDP)
Caculation
is the total market value of the goods and services produced in a country within a certain time period
under expenditure approach, GDP is calculated by summing amounts spent on goods and services produced during the period => this is termed value of final output method
under income approach, GDP is calculated by summing the amount earned by households and companies during the period, including wage income, interest income and business profits.
whole economy, total expenditure = total income
sum of value added method, gdp is calculated by summing the additions to value created at each stage of production and distribution
Components
inclueds only purchases of newly produced goods and services
transfer payments made by government (unemployment, retirement, welfare benefits) are not included
sale or resale of goods produced in previous periods is excluded
goods and services that will not be resold or used in the production of the other goods and service
goods and services provided by government are included in GDP even though they are not explicity (clear) priced in markets
also includes value of owner occupied housing (just as it includes the value of rental housing services)
the value of labor not sold (own home repair), products of production (environmental damega) is not included
Nominal GDP
total value of all goods and services produced by economy, valued at current market prices
because nominal GDP is base on current price, inflation will increase nominal GDP
even if the physical output of goods and services remains constant from one year to the next
Real GDP
measure the output of economy using prices from a base year, removing the effect of changes in prices so that inflation isnt counted as economic growth
real GDP growth reflects only increases in total output, not simply increases in the money value of total output
Nominal GDPt for year t =
∑N/ i=1 (price of good i in year t) x (quantity of good i produced in year t)
Real GDPt for year t =
∑N/ i=1 (price of good i in year t - n (base year) ) x (quantity of good i produced in year t)
GDP deflator
is a price index that can be used to convert nominal GDP into real GDP, taking out the effects of changes in overall price level
GDP deflator for year t = nominal GDP in year t/ real GDP x 100
Per capita real GDP
= real GDP/ population and often used as a measure of economic well being of country's resident
Under expenditure approach: GDP = C + I + G + (X - M)
where C : consumption spending
I : business investmeng (capital investment, inventories)
G: government purchases
X: export
M: import
or we can express as: GDP = (C + Gc) + (I+ Gi) + (X - M)
where: Cc: government consumption
Gi: government investment
Under income approach, we have GDP or GDI - gross domestic income:
GDP = national income + captital consumption allowance + statistical discrepancy
Capital consumption allowance (CCA)
measures the depreciation of physical capital from the production of goods and servicers over a period
amount that would have to be invested to maintain the productivity of physical capital from one period to next
Statistical discrepancy : an adjustment for the different between GDP measured under income approach and the expenditure approach because they use different data
National Income
sum of income received by all factors of production that go into the creation of final output
net income = compensation of empoyees (wages and benefits)
+corporate and government enterprise profits before taxes
+interest income
+unicorporated business net income (business's owners income)
+rent
+indirect business taxes - susidies (taxes and subsidies are included in final prices)
personal income
measure the pretax income received by households and is one determinant (affect) of consumer purchasing power and consumption
differs from national income in that PI includeds all income that households receive, including government transfer payments such as unemployment or disability benefits
Household disposable income or personal disposable income (thu nhập khả dụng)
is personal income after taxes
amount the households have available to either save or spend on goods and services. and an important economic indicator of ability of consumers to spend or save
Under total income : GDP = C + S + T
where C : consumption spending
S: household and business savings
T: net taxes (taxes paid - transfer payments received)
cause total income = total expenditure, we have:
C + S + T = C + I + G + (X - M)
=> S = I + (G - T) + (X - M)
G - T : is the fiscal balance, or different between government spending and tax recipts
X - M: trade balance
=> T - G = (I - S) + (X - M)
Aggregate Demand and Supply
to get aggregate demand curve, we need to understand the facrors determine each of components of GDP
Consumption
function of disposable income. an increase in personal income or decrease in taxes will increase both consumption and saving.
Additional disposable income will be consumed or saved.
the proportion of additional income spent on consumption is called marginal propensity to consume (MPC) - khuynh hướng tiêu dùng cận biên
the proportion saved is the marginal propensity to save ( MPS)
MPC + MPS = 100%
Investment
function of expected profitability and cost of financing
expected profitability depends on the overall level of economic output
financing costs are reflected in real interest rates, which are approximated by nominal interest rates - expected inflation rate
Government purchases
may be viewed as independent of economic activity to a degree, but tax revenue to the government.
Fiscal balance is a function of economic output
Net Export
function of domestic disposable incomes (which affect imports), foreign disposable incomes (which affect exports) and relative prices of goods in foreign and domestic markets
IS curve (imcome - savings)
illustrates the negative relationship between real interest rates and real income for equilibrium in the goods market
points on IS curve are the combanations of real interest rates and income consistent with equilibrium in the goods market
lower interest rates tend to decrease savings and tend to increase investment by firms (because investments will have positive NPV when firms' cost of capital is lower
when interest rates decrease, in order to satisfy fundamental (S - I) = (G - T) + (X - M), income must increase to increase savings (incrase S - T), increase tax receipt (decrase G - T) and increase import (decrease X -M)
LM curve (Liquidity - Money)
illustrates the positve relationship between real interest rates and income consistent with equilibrium in the money market
higher real interest rates decrease the quantity of real money balances individuals want to hold
equilibrium in the money market requires that an increase in real interest rates be accompanied by an increase in income
increase in demand for money from increase in income can offset the decrease in demand for money from higher rea interest rates and restore equilibrium in the money market
the aggregate demand curve
shows the relationship between the quantity of real output deman (= real income) and the price level
slopes downward because higher price levels reduce the wealthy, increase real interest rates and make domestically produced goods more expensive compare to goods produced aboard, all of which reduce the quantity of domestic output demand
the aggregate supply curve
describes the relationship between the price level and the quantity of real GDP supplied when all other factors are keep constant
represents the amount of output that firms will produce at different price levels
in the very short run, firm will adjust output without changing price by adjusting labor hours and intensity of use of plant and equipment in respone to changes in demand.
perfectly elastic very short run aggregate supply (VSRAS)
in the short run, SRAS curves upward because some input prices will changes as the production is increased or decreased
they dont adjust to changes in the price level in short run
in the long run, LRAS curve is perfectly inelastic.
in the long run, wages and other input prices change proportionally to the price level, so the price level has not long run affect on aggregate supply. this level of output as potential GDP or full employment GDP
Shifts in the aggregate Demand curve
AD curve reflects the total level of expenditure in an economy by consumer, businesses, governments and foreigners.
a number of factors can affect this level of expenditures and casue the AD curve to shift
change in price level is represented as movement along the AD curve, not a shift in AD curve
GDP C + I + G + net X, for changes in each of the following factors that increase aggregate demand (shift AD to the right)
increase in consumers' wealth : value of households' wealth increases. proportion of income saved decreases and spending increases => C increases
Business expectations: when business are more optimistic about future sales, they tend to increase their Invesment => I increases
Consumer expectations of future income: when consumers expect higher future incomes, due to a belief in greater job stability or expectations of rising wage income => they save les for the future and increase spending now => C increases
High capacity utilization: when companies produce at a high percentage of their capacity, they tend to invest in more => I increases
Expansionary monetary policy: when rate of growth of money supply is increased, banks have more funds to lend, which puts downward pressure on interest rates.
lower interest rates increase investment and increase consumers' spending => C and I crease
Expansionary fiscal policy: decreasing government budget surplus from decreasing taxes, increasing government expenditure or both (G increases), decrease in taxes increase disposable income and consumption ( C increases)
Exchange rates: decrease in the relative value of country's currency will increase exports and decrease imports. both of these affects tend to increase net exports (net X increase)
Global economic growth: GDP growth in foreign economies tends to increase the quantity of imports foreigners demand => increase domestic export demand (net X increases)
Shifts in the short run Aggregate Supply curve
the curve shows the total level of output that bussiness are willing to supply at different price levels
number of factors can cause SRAS curve shift to the right
labor productivity : holding the wage constant, increase in labor productivity will decrease unit costs to producers => producers will increase output (SRAS shift to the right)
input prices: a decrease in nominal wages or the prices of other important productive input will decrease production costs and cause firm to increase production => increase SRAS.
wages are the largest contributor to producer's cost and have greatest impact on SRAS
Expectations of future output prices: when businesses expect the price of their output to increase in the future, they will expand production => increase SRAS
taxes and government subsidies: either a decrease in business taxes or an increase in government subsidies for a product will decrease cost of production => firm will increase output => increase SRAS
exchange rate: appreciation of a country's currency in the foreign exchange market will decrease the cost of import => To extent that productive inputs are purchased from foreign countries, resulting decrease in production costs => output increases => increasing SRAS
Shifts in the long run Aggregate Supply curve
is vertical (perfectly inelastic) at the potential (full employment) level of real GDP.
Increase in the supply and quality of labor: an increase in labor force will increase full employment output and LRAS.
an increasing in the skills of workforce, through training and education, will increase the productivity of labor force => increasing LRAS
increase in the supply of natural resources: increases in the available amounts of other important productive inputs will increase potential real GDP and LRAS
increase in the stock of physical capital: increase in economy's accumulated stock of capital equipment will increase potential output and LRAS
techonology: improvements in techonology increase labor productivity => increase potential real output and LRAS
Macroeconomic equilibrium and growth
trạng thái cân bằng: đường AD cắt đường SRAS tại một điểm trên đường LRAS. Khi đó nền kinh tế đang hoạt động ở trạng thái cân bằng toàn dụng dài hạn (long - run full employment equilibrium) trong đó trạng thái toàn dụng lao động (full- employment) được định nghĩa là trạng thái mà hầu hết tất cả mọi người trong lực lượng lao động đều có việc làm, nền kinh tế khi đó chỉ tồn tại thất nghiệp tự nhiên (natural unemployment rate)
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recessionary gap : a decrease in aggregate demand will reduce both real output and price level in short run, real GDP is less than full employment GDP
recession is a period of decling GDP and rising unemployment
classical economists believed that unemployment would drive down wages, as workers compete for available jobs => increases SRAS and return the economy to its full employment level of real GDP
Keynessian economists, believe that this might be a slow and economically paintful process and increasing aggregate demand through government action is the preferred alternative.
both expansionary fiscal and monetary policy are methods to increase
Inflationay gap: an increase in aggregate demand curve that results in an equilibrium at a level of GDP > than full employment GDP in the short run
competition among producers for workers, raw materials and enery may shift the SRAS curve to the left, returning the economy to full employment GDP but at a price level that is higher
alternatively, government policy makers can reduce aggregate demand by decreasing government speding, increase taxes, slowing the growth rate of money supply, in order to move the economy back to initial long run equilibrium at full employment GDP
Stagflation (đình đốn khi lạm phát cao) : decrease in SRAS caused by increase in prices of raw materials or energy => new short run equilibrium is at lower GDP and higher price level compared to initial long run equilibrium
a subsequent decrease in input prices can return the economy to its long run equilibrium output
increase in aggregate demand from either expansionary fiscal or monetary policy can also return the economy to its full employment level, but at a price level that is higher compared to initial equilibrium
especially difficult situation for policy makers, cause actions to increase aggregate demand to restore full employment will also increase the price even more
conversely, decision by policy makers to fight inflation by decreasing aggregate demand will decrease GDP furrther more.
decrease in wages and prices of other productive inputs may be expected to increase SRAS and restore full employment equilibrium.
however, this process may be quite slow and doing nothing may be a very risky strategy for a government when voters expect action to store economic grwoth or stem (stop or dont spread) inflationary pressure*
effect of combined changes in AS and demand on economy
aggregate demand and AS both increase => real GDP increases but effecct on price level depends on the relative magnitudes (độ lớn) of the changes because their price effects are opposite directions
aggregate demand and AS both decrease => real GDP decreases but effecct on price level depends on the relative magnitudes (độ lớn) of the changes because *their price effects are opposite directions
aggregate demand increases and AS decreases => price level will increase but effect on real GDP depends on the relative magnitudes (độ lớn) of the changes because *their price effects are opposite directions
aggregate demand decreases and AS increases => price level will decrease but effect on real GDP depends on the relative magnitudes (độ lớn) of the changes because *their price effects are opposite directions
sources of economic growth
Labor supply
labor force is the number of people over age of 16 who are either working or available for work but currently unemployed
Human capital
affected by population growth, net immigration, labor force participation rate
important sources of economic growth
education and skill level of a country's labor force can be adjust as important a determinant of economic putput
workers who are skilled and well educated (posses more human capital) are more productive and better able to take advantage of advances in technology => investment in human capital leads to greater economic growth
Physical capital stock
high rate of investment increases a country's stock of physical capital. larger capital stock increases labor productivity and potential GDP
increased rate of investment in physical capital can increase economic growth
Technology
improvements in technology increase productivity and potential GDP
rapid improvements in technologyy lead to greater rates of economic growth
Natural resources
raw material inputs (oil, land) are necessary to produce economic output. These resources may be renewable (forest) or non renewable (coal)
country with large amounts of productive natural resources can achieve greater rates of economic growth
Sustainability of Economic growth
Potential GDP = aggregate hours worked x labor productivity
growth in potential GDP = growth in labor force + growth in labor productivity
economy's sustainable growth rate can be estimated by estimating the growth rate of labor productivity and growth rate of labor force
sustainable rate of economic growth is important because long term equity returns are highly dependent on economic growth over time
is the rate of increase in potential GDP
Production function
the relationship of output size of labor force, the capital stock and productivity
economic output
as a function of amount of labor and capital that are available and their productivity, which depends on the level of technology available
Y = A x f (K, L)
where Y = aggregate economic output
L = size of labor force
K = amount of capital available
A = total factor productivity, closely related to technological advances
can be stated on per worker basis:
Y/L = A x f (K/L)
where: Y/L = output per worker (labor productivity)
K/L = physical capital per worker
labor productivity can be increased by either improving technology or physical capital per worker
Solow Model:
growth in potential GDP = growth in technology + WL (growth in labor) + Wc (growth in capital)
WL and Wc are labor's percentage share of income and capital's percentage share of national income
growth in per capita potential GDP = growth in technology + Wc (growth in the capital to labor ratio)
in developed contries, where capital per worker is relatively high, growth of technology will be primary source of growth in GDP per worker
at high levels of capital per worker, an economy will experience dimishing marginal productivity for capital and must look to advances in technology for strong economic growth