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Macro Economics - Coggle Diagram

- - - - Rises and falls with demand for imports
      - How it affects
        
        Less likely to experience extreme current account surpluses and deficits
        
        change in exchange rate can also affect the capital account
        
        iIf home currency depreciates, it becomes cheaper for foreign investors to buy the country's assets
        
        Inflow can be used to finance the current account deficit. This might also reduce the value of income from assets once converted to the foreign investors own currency
    - - Reduces uncertainty
      - Policy makers need to intervene to maintain the rate at the chosen level
  - - - records
        
        goods and services
        
        net income
        
        wages from workers based abroad
        
        income from holding foreign assets
      - must equal 0 when added together
    - - records Changes in countrys stocks or assets
        
        foreign currency
        
        shares
        
        government bonds
        
        buildings
        
        bank accounts
        
        loans
    - - Automatic adjustments do not apply
      - if imports rise a country's account deficit increases and may have to sell some of its foreign currency reserves in exchange for the home country to stimulate demand for its own currency
  - - - more pressure on exporters to meet regulations of importing country
    - - Codex Alimentarius (Food)
      - World Organisation for Animal Health (Live Animal Trade)
    - - Bank of International Settlements
        
        Acts as a coordinating body among national and central banks and bank regulators to promote financial stability
      - International Monetary Fund - IMF
        
        Makes loans to counties to stabilise their currencies
        
        Controversies
        
        Countries need to make structural adjustments - more western style, open, growth oriented, market based economies
      - The World Bank
        
        Selling bonds on the world market
  - - - Generally have a large influence that can be detrimental to the interests of low and middle income countries
      - Large producers and consumers of goods, services and assets
      - High bargaining powers
- - - - Simplify and help understand how the economy works
        
        Equilibrium
        
        No impetus for agents to change their behaviour
        
        Disequilibrium
        
        some agents will seek to change their behaviour
      - Exogenous
        
        set outside of the model
        
        Investment line
      - Endogenous
        
        Set inside of the model
        
        Consumption component of aggregate demand
        
        AD = C + I
      - equilibrium
        
        AD = Y
    - - Comes from consumers and firms
    - - Higher income is related to higher consumption and vice versa
      - C = a + bY
        
        marginal propensity to consume
      - Consumption increases as income increases
    - - a letter used to represent any number of different values
        
        Consumption = C
        
        a = intercept
        
        Humans still need to eat and will consume at least the a intercept
        
        Y = Income / Output
        
        b = slope
        
        marginal propensity to consume
        
        I = Investment
    - - fraction of an extra unit of income that housholds plan to spend on consumption
        
        if income increases by £1 (the last unit change in income), and consumption by 50p, then the marginal propensity to consume is 0.5 - a half unit increase in income is spent on consumption
        
        C = 2 + 2/3Y
        
        Page 133
    - - Circular flow of income (pg.143)
        
        Y = C + S
        
        substitute AD and Y gives: C + I = C +S
        
        Subtracting C from both sides yields: I = S
      - Savings
        
        Paradox of thrift
        
        height of the Covid-19 pandemic personal savings in the Us rose sharply to an historic high
        
        Highest rate since the 1960s
        
        Personal savings hit a historic rate 33% in April up 12.7 since March
        
        US consumers accounted for 2/3rdfs the economy and therefore the speed and robustness of recovers depended on the increase in savings as a result of shutdown or consumer habits
  - - - Housholds don't spend all their money on home produced goods and services
- - - - Not included in government spending 4.2 | AD = C + I + G
  - - - Keynes helped develop Lloyd George's (Liberal) Manifesto in 1929
        
        Promised a £300million three point plan
        
        Transport
        
        £72.5M
        
        House Building
        
        200,000 houses a year
        
        Other Projects
        
        Drainage and phone systems
        
        Keynes argued
        
        Would employ directly or indirectly 5000 workpeople
        
        Believed the Balfour committee overlooked the fact that indirect employment > putting unemployed into work > increased the effective purchasing power > spending wages on goods and services > increasing income > creating new jobs > further spending in the economy
      - Promised 'a fit country for heroes to live in' - following WW1, this did not materialise
      - Before becoming Keynesian
  - - - American recovery act of 2009
        
        $831billion government spending
        
        Investment in infrastructure
        
        Health and education
    - - US Spent $1.2trillion
      - New infrastructure such as energy and broadband
- - - - tax paid out of income, gains or profits by individuals or firms
    - - VAT is an example as it is paid by an intermediary (the firm)
    - - was not in favour of stimulating the economy through tax cuts as he believed there would be no future benefits to the economy and difficult to persuade to reverse when became established
  - - - you cannot spend your way out of recession or borrow your way out of debt (Hannan, 2009)
      - 2010 Conservative and Lib dem coalition took a 'treasury view' or 'sound finance view' - severe cuts in government spending
        
        Similar to
        
        Balanced budget - Conservative governments spending is exactly matched by tax receipts
    - - The cabinet agreed to £52 million of cuts - enormous at the time
      - Following WW1
      - Biggest cuts were in the army and navy - defence budget cut by 42%
      - Civil Service numbers were cut by 35%
      - at close of 1921 - wage cuts averaging 8 shillings a week imposed on 6 million workers
      - General strike of 1926 - partly be explained because of the cuts
      - Aftermath
        
        Helped Labour government rise as seats went from 59 in 1918 to 142 in 1922
        
        Argument between Lloyd George and Keynes as to why governments could spend their way our of recession ('when the facts change, I change my mind. what do you do sir?')
    - - Differs from
    - - 3 Steps
        
        1 - Tax increases - extra £30billion taken in tax reduces disposable income by £30billion (£6billion saved by households) - initial fall in AD resulting from tax increase in only £24billion - increase in tax rate from 0.05 to 0.1 reduces multiplier from 4.17 to 3.57
        
        3.57 * £24billion = £85.7billion
        
        2 - increase in government spending - gives boost of £30billion to AD - increase in income
        
        3.57 * £30billion = £107.1billion
        
        3 - the net effect - tax increase alone reduces income by £85.7billion - increase in government spending increases income by £107.1billion - even though there was a tax increase the overall impact has been expansionary (it might be possible to spend your way out of a crisis and budget deficit)
        
        107.1billion - 85.7billion = 21.4billion
- - - - Level of output is related to income and spending
  - - - Affects Purchasing power
    - - Inflation
      - Deflation
  - - - Income
      - Expenditure
      - Output
- - - - Circular Flow
  - - - External Shocks
- - - - Stability > Increasing Stability > Crises
      - 3 Types of finance
        
        Hedge
        
        Speculative
        
        Ponzi