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Macroeconomics - Coggle Diagram
Macroeconomics
Inflation
Sources / Causes of Inflation
- demand pull inflation: caused by shock to AD, if AD rises more rapidly than the economy's productive capacity. 12
- cost push inflation: when the costs of production rise causing AS to shift to the left. 13
(Economic) Impact of Inflation
- Unexpected: effects on 1. distribution of income 2. distribution of wealth 3. economic efficiency 4. macroeconomy (15 - 21)
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Deflation
- is -ve inflation, a decline in the general price level.
The Cost of Deflation is bad, why?
(1) Symptom of a recession: AD is too low; economy is far below the potential level of output.
(2) Postpone spending with the expectancy of price decreasing.
(3) Redistributes Income and Wealth
(4) Causes "liquidity trap", when monetary policy becomes ineffective in stimulating AD.
Types of Inflation
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(3) hyperinflation: extremely high, could be 1M
Core Inflation
Calculates inflation rate after excluding prices of food and oil, since they are volatile components, cause inflation to rise.
What is Inflation?
- a sustained increase in the overall price level.
- the overall price level is a price index ((1) GDP Deflator (2) CPI), which is simply a weighted average of the prices of various g/s.
Philips Curve 27-35
- describes the relationship between inflation rate and
unemployment rate.
- short-run PC
- long-run PC
Optimal Inflation Rate is a positive, but low predictable inflation rate provides the best climate for economic growth.
- avoids liquidity trap and wages downward rigidity.
Productivity, Output, Unemployment
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The Demand for Labor
- capital stock is fixed -- short-run analysis
- workers are all alike
- labor market is competitive
- firms maximize profits
nominal wage = marginal revenue product of labor
MRPN = MR x MPN ... MR = P ... MRPN = P x MPN
W = P x w and MRPN = P x MPN ... W = MRPN is the same condition as w = MPn
costs and benefits of hiring one extra worker:
- firm's profits are maximized when w = MPN
- if w > MPN, profit rises if number of workers N declines
- if w < MPN, profit rises if number of workers N increases
Labor demand curve shows relationship between real wage rate and the quantity of labor demanded. It is the same as MPN curve, since w = MPN at equilibrium. Downwards sloping. + Slide 18/19/20
Unemployment 39 - 45
labor force = employed + unemployed
unemployed = unemployed / labor force
participation rate = labor force / working-age population
employment ratio = unemployed / working age population
- discouraged workers
- unemployment spell
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The Production Function
Y = AF (K,N) ; productivity of factors depends on technology and management.
Slopes upward: more of any input produces more output.
Slope becomes flatter: diminishing marginal product as output increases.
Marginal Product of Capital: MPK = deltaY / deltaK
MPK is always +ve and it declines as K rises.
MPK is = to the slope of production function graph.
Supply Shocks
= productivity shock = change in an economy's production function.
affect the amount of output that can be produced for a given amount of inputs:
- positive supply shock (increase Y) shifts PF upward
- negative supply shock (reduces Y) shifts PF downward
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Issues addressed
unemployment
It refers to the number of people who are available for work and actively seeking work but cannot find jobs.
Unemployment rate is the number of unemployed divided by the total labor force (no.of people either working or seeking work).
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inflation
a continuous increase in the overall level of prices overtime. The percentage increase in the average level of prices over some period, often a year.
Deflation: the overall prices of goods and services declines.
Disinflation: the inflation rate decreases.
Stagflation: high inflation rate + high unemployment (stagnation)
Hyper Inflation: extreme inflation.
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business cycles
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It reflects a decline in aggregate economic activity (contraction or recession) to a low point (trough) followed by a recovery of activity (expansion or boom) to a high point (peak).
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international economy
Open Economy: an economy with extensive trading and financial relationships with other national economies.
Closed Economy: an economy that does NOT interact economically with the rest of the world.
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macreconomic policy
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Fiscal Policy // Concerned with government spending and taxation.
Determined at the national and local levels.
Monetary Policy: determines the rate of growth of the nation's money supply.
Controlled by the Central Bank.
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National Income Accounting
- an accounting framework used in measuring current economic activity.
- the broadest measure and most commonly used is GDP (market value of all final g&s newly produced within a country during a specified period of time (one year)).
the 3 approaches are equivalent:
any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach)
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Product Approach: the amount of final g/s produced
(value of final output).
Income Approach: summation of incomes generated by this production.
Expenditure Approach: summation of the spending by purchasers to buy this output.
Income Approach
- add all incomes of factors of production (before taxes)
- GDP = wages + rent + interest + profits
- profits before tax = value of output - costs
Product Approach
- adds up only final goods (not intermediate goods to avoid double counting)
- intermediate goods are goods used in the production process and are completely transformed into other goods.
- value added by a producer = value of output minus value of the intermediate goods purchased from other producers and used to produce that output or minus inputs purchased from other firms.
Expenditure Approach
- add up expenditure by final purchasers.
GDP using Expenditure Approach:
- measures total spending on final g/s produced within a nation during a specific period of time.
- Y = C + I + G + NX ... (income-expenditure identity)
Market Value
PROBLEM: not all g/s pass through the organized formal market, like:
- Government Services (not sold in markets)
- Activities taking place in Underground Economy
- Value of Environmental Quality & Natural Resource Depletion
- Nonmarket Activities: homemaking
- cash in circulation
- informal sector
- GDP is a measure of economic activity, but NOT a complete accurate measure of the wellbeing of a nation, it misses imp items.
market prices are used to evaluate g/s. Allowing the add up of unlike items by valuing them at their market prices.
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Y = C + I + G + NX
Investment
- gross domestic private investment
- volatile component, affected by changes in business climate
Three Categories:
- Business (Nonresidential Fixed Investment: spending by business on structures and equipment and software.
- Residential Fixed Investment: spending by households on construction of houses and apartment buildings.
- Inventory Investment: changes in firm inventory. Change in inventory = inventory end of year - inventory beginning of year.
+ve inventory investment = increase in inventory. total expenditure = total production
-ve inventory = decrease in inventory. goods sold > goods produced.
Changes in inventories are included whether inventories are unsold finished goods, goods in process or raw materials.
Government Purchases
part of G is:
- on investment, to add to the nations capital stock.
- for current needs (food, military, salaries)
EXCLUDE:
- transfer payments: payments made to targeted groups NOT in exchange of g/s (as welfare benefits and unemployment benefits).
- interest payments on the government debt because they do not reflect current production).
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Consumption
- spending by domestic households on final g/s (including those produced abroad)
- largest component of GDP (about 60%) and most stable
Three Categories:
- Consumption Durables: long lived consumer goods)
- Nondurable goods: short lived goods)
- Services: education, healthcare, financial services, transportation, etc.
Net Exports
Exports: goods produced in the country but are purchased by foreigners, so they represent part of the domestic production and must be added to GDP.
Imports: goods produced abroad, but are purchased by domestic residents in the country, so part of C/I/G is spent on imports which are not part of domestic production so we have to subtract all imports to ensure that total expenditure will give same figure as total production.
Chapter 1
Macro is about National Aggregates
Summing individual economic variables to obtain economy-wide totals. Aggregate consumption, investment, output.
GDP
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Count only final goods, not intermediate.
The value added by a firm is the value of its production minus the value of intermediate goods used in production.
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Aggregate production = Aggregate income
Value added = labor income + capital interest + land rents + profits
Macroeconomic Forecasting
Macroeconomic Analysis
Macroeconomic Research
Data Development
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Positive Analysis
Normative Analysis
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Classical Approach
Keynesian Approach
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Chapter 3
Productivity, Output and Employment - Inflation
