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econs butter book - Coggle Diagram

- - - - CGIX, shortages that stimulates firms to increase output in economy -> RNY increase by multiple via multiplier effect. Rundown of inventory, employ more FOP, inc NY
      - inc in AS because fall in COP -> actual growth, rise in national output, expand output at every price level: AS increase, unexpected buildup of inventories, sell to release excess stock
      - can also be illustrated via PPC
        
        point moves
    - - quantity of fop
      - quality of fop
      - level of tech
      - PPC: SHIFT OUTWARDS
      - why impt: without expansion of AS and potential output, rise in actual output must eventually come to an end when all spare capacity used up: only increase price but not output
  - - - income and wealth inequality
  - - - positive and stable rate of growth over extended period of time
  - - - population constant, real gdp increase, more purchasing power (rise in real gdp per capita) -> more final goods and services produced and made available in current period -> material welfare imrpove
      - future material sol improve
        
        absolute savings increase because higher income -> increase supply of loanable funds in credit market -> interest rates and borrowing costs to fall
        
        dec in interest rates and healthy growth -> business confidence -> invest -> potential productive capacity, potential growth
      - Non material sol improve -> health, education, leisure, environment -> higher income, better quality healthcare products and services -> increase life expectancy and fall in infant mortality rate. richer -> higher capacity to care for environment and less fortunate
    - - growth -> more goods and services demanded and produced -> higher induced demand for labour
      - unemployment -> crime, alienation, discontent
      - but can still have structural unemployment
    - - growing economy more generous to disadvantaged
      - extra tax revenue (personal and corporate), enable government to spend more on transfer payments and subsidies to alleviate poverty and ensure social mobility
    - - overheating economy, demand pull inflation
        
        rapid increase in AD, economy approaches full unemployment, resources increasingly scarce, inflationary pressures in economy
        
        large increases in equilibrium real output from Y0 to Y1 experienced as AS rise from AD0 to AD1 along keynesian range of AS curve because vast availability of untapped resources
        
        further rise in AD along intermediate and classical range -> smaller and smaller extents of inc in real output -> real output cannot rise to grow in sustained manner because productive capacity constrained with full employment of resources
        
        excess demand for goods, over employment of resources eg extra shifts. hard to sustain, cannot be support indefinitely
        
        once reach full employment, any further inc only inc general prices but not real output
        
        hurt export competitiveness because demand pull inflation, uncertainty for investors, X and I fall -> reducing real output
      - unequal and inequitable distribution of income
        
        usually beneficiaries of growth usually skilled and those who already have savings that enable new capital accumulation and material gains from their investments
        
        unskilled and less wealthy benefit much less
        
        rich: disproportionately bigger rise in capital incomes eg rents and wealth
        
        rewards and dividends of increased prosperity not shared equitably across all segments of population
        
        social cohesion, community life, trust, health, well being, infant mortality rates, life expectancy, crime and imprisonment rates
        
        access to opportunities: levels of income and social mobility
      - negative externalities and environment costs
        
        growth -> creation of artificial needs and wants -> buy things without intrinsic need -> raw materials -> cost on environment
        
        negative externalities
        
        large scale burning of fossil fuels inc carbon dioxide -> greenhouse effects -> health problems, rising sea levels -> lower non material standard of living
        
        threat to economic growth -> unsustainable economic growth
- - - - AD
        
        when not fast enough to keep economy at full enployment -> available inputs in economy lie idle -> demand deficient
        
        CGIX
        
        domestic
        
        higher interest rate, dampen spending by HH and firms (cost of borrowing more expensive)
        
        international (external shocks)
        
        affect I component AD (FDI) and NX component of AD
      - AS
        
        lack of fixed capital investment
        
        affect actual and potential growth (affect AD and AS)
        
        firms -> new capital formation, economies must spend on replacing worn out and obsolete capital with technologically advanced equipment -> productive capacity and productivity (AS) of economy grows, inc in quantity, quality of capital and productivity
        
        required for labour productivity -> more capital stocks available to each worker (capital deepening: inc capital per labour ratio -> inc labour productivity, inc productive capacity, inc AS, pot growth)
        
        to expand capital stock: investment funds must be avail in loanable funds market -> high savings rate required but it is low in developing countries
        
        things affecting savings rate
        
        poverty
        
        values and virtues of saving
        
        social security benefits -> less required to save
        
        expectation: high inflation in future: bring forward purchases
        
        high income tax
        
        central banks dec interest rates
        
        quantity and quality
        
        lack of/fall in quantity and quality of natural resources
        
        new mineral deposits -> inc productive capacity, shift as curve to the right
        
        destruction and depletion of non renewable resources, degradation of envt (natural disasters-> threaten potential economic growth) -> fall in quantity and quality of natural resources, reduce productive capacity and AS
        
        lack of investment in human capital
        
        quantity and quality of labour
        
        size of working population, average length of work week, quality
        
        geographically and occupationally mobile
        
        education and training -> productivity and ability to produce goods and services -> output per worker increase with labour productivity -> productive capacity rise, AS curve righwards
        
        developing countries: high opportunity cost to divert resources away from current use to education -> benefits of education only realised in the long run. in short run, raising educational level reduces labour force
        
        entrepreneurs and risk taking, create new products, creative destruction -> dynamism of industries and long run economic growth
        
        lack of tech advancement
        
        new ways of combining given amount of resources to give larger output through R and D
        
        more efficient production than existing ones -> economic growth
        
        new products -> consumers induced to spend -> new investment opportunities eg development and expansion in one industry spread to related industries -> more business investments
        
        average COP fall, output per input increase with innovation -> AD AND AS INC
        
        require financing for research, but also depend on success of scientists and innovators, so may require government subsidies
        
        structural rigidities
        
        caused by institutions, lasting
        
        prevent market from operating freely
        
        eg european countries -> strict labour protection laws, restrict businesses' ability to lay off and discharge workers -> employment but also cause labour market rigidity -> hard to control costs for businesses, prone to closure
        
        strong trade union
        
        high degree of coordination of wage bargaining processes and min wage setting
        
        product markets
        
        excessive regulations deterring foreign investments->strong barriers to entry
        
        high admin and bureaucratic costs of starting business put off prospective investors -> slow potential growth
        
        in product, capital and labour markets
        
        often met with resistance because vulnerable cope with costs of adjustments eg lower wages, unemployment, worsening income inequality
  - - - technical recession: fall in real gdp for two consecutive quarters
      - fall in real national output
      - hire less fop
      - forgone output/income
      - strain government budget with lower tax receipts, higher unemployment payouts
      - higher stress, crime
      - hysteris (demand deficient unemployment)
    - - falling real national income
      - assume no change in population, RNY per capita fall, fall in PP
      - unemployment
      - HH earn and consume less if not working
      - lower ability to consume goods and services -> material sol deteriorates
      - less tax revenue (personal and corporate and consumption) -> less funds for government spending (healthcare, education -> lower non material sol)
      - level of savings in economy lower -> savings by unemployed households may be negative during recessions -> larger proportion of smaller income on necessities -> do not likely have excess income to save -> draw on past savings -> affect future SOL
    - - lost output in the future
      - unemployment, loss of income, workers fear further loss of jobs or pay cuts, consumer confidence declines, save or cut back on current expenditure
      - fall in investor confidence because households unwilling to spend, business sales and revenues decline, firms expect lower profitability, cut back on risky investments, investments fall
      - fall in C and I -> further fall in AD -> deepen recession -> slow down growth in productive capacity, negatively affect economic growth in long run
    - - slower growth rate -> slow down rate of price increase as AD weakens
    - - recession -> fall in real income reduces purchasing power
      - consume fewer goods and services including imports, ceteris paribus, net exports increase -> improve balance of trade balance in current account
      - but recession may worsen investment sentiments -> foreign investors withdraw investment, relocate -> net outflow of capital funds, worsening capital and financial account of BOP