Please enable JavaScript.

Coggle requires JavaScript to display documents.

The Macroeconomy - Coggle Diagram

- - - - or
        
        The total amount of money earned by a country from producing goods and services in a year
    - - It measures each year and compare in the short and long run
  - - - Higher ouput lead to increase peoples living standars
  - - - Domestic = home economy
      - Product = output
      - Gross = total
  - - - Receipts of profit, rent and interest earned on the ownership of foreign assets minus the payments of profit, rent and interes to non-residents
      - Income earned by residents abroad − Income earned by foreigners in the country
    - - Compensation of employees
        
        Income of workers who work in another country for a short period of time
        
        Includes seasonal and cross border workers too
  - - - Income sent home by relatives by people working abroad less Income sent by foreigners working in the country to their relatives abroad
  - - - High presence of Multi nationals
        
        They produce in the country but it is sent back to the home country
      - High number of foreign workers
        
        A lot of the money of this workers flows out since they transfer to another country
      - Foreign owned assets and property
        
        The income generated from these assets often goes to foreign investors.
        
        Real estate, factories or business
    - - Many past investments in foreign countries cause a lot of profit from net income abrod
      - Many citizens working abroad and sending transfers to the country
- - - - Measures the value of output produced by different industries
      - Avoids double counting by calculating
        
        The final value
        
        The value added at each stage of prod
        
        The difference between the price at which products are sold and the price of good and services used in their production
    - - Tottaling all the incomes earned in producing the country´s output
      - All the payments to factors of production
        
        Rent
        
        Interest
        
        Profit
        
        Wages
      - Excludes transfer payments since are not payments for goods and services
    - - Calculates GDP by adding
        
        Government spending (G) (excluding transfer payments)
        
        Investment (I)
        
        Consumer spending (C)
        
        Net exports (X - M) (exports minus imports)
      - GDP = C + G + I + (X - M)
  - - - Prices paid by consumers; they take into acount indirect taxes and subsidies
    - - Prices charged by producers before the addition of indirect taxes and the deduction of subsidies
      - Also reffered as factor cost
  - - - Total spending on capital goods
    - - GDP minus depreciation
    - - GNI minus depreciation
    - - Addtions to the capital stock
    - - The value of capital goods that have worn out or become out of date
    - - Include gross investment
        
        Replacement capital
        
        New capital
    - - Include net investment
        
        If net investment is positive, production capacity is growing, leading to economic expansion.
        
        If net investment is zero, the economy is maintaining its current level of production.
        
        If net investment is negative, the economy is shrinking, as capital goods are wearing out faster than they are being replaced.
  - - - It is involved in trade with other economies
      - Connected to the global economy.
    - - It does not trade with other economies
      - Relies entirely on domestic production and consumption.
      - No economy is fully closed, but it can be used as a theoretical model.
      - Are self sufficient but lack variety and efficiency
  - - - Households provide factor services
      - Firms produce goods and services for households.
    - - Firms pay factor payments
      - Households spend income on consumer goods and services from firms.
  - - - Funds public services, infrastructure, and welfare.
    - - Foreign buyers purchase domestic goods, bringing money into the economy.
    - - Businesses spend on new capital
  - - - Income that is not spent reduces demand.
    - - Spending on foreign goods means money leaves the economy
    - - Money paid to the government lowers household and firm spending.
  - - - But with LEAKAGES and INJECTIONS
  - - - If leakages > injections, the economy shrinks
        
        Less spending, income falls
      - A healthy economy maintains the balance between both
      - If injections > leakages, the economy grows
        
        More spending, income rises
    - - I (Investment) + G (Government Spending) + X (Exports) = S (Savings) + T(Taxes) + M (Imports)
    - - In the long run the change in one will cause change in the other.
      - .
        
        More Investment → More Income → More Saving
        
        More Government Spending → Higher Incomes → MoreTaxes Collected
        
        More Exports → Higher Incomes → More Spending on Imports
- - - - Investment
    - - Government spending
    - - Consumer spending
  - - - Spending by households on goods & services to satisfy current wants
      - Determinants
        
        Disposable Income
        
        More income = more spending
        
        Dissaving
        
        Spending exceeds income (using savings or borrowing)
        
        Saving
        
        Disposable Income – Consumer Expenditure
        
        Interest ratest
        
        Lower rates → more spending, less saving
        
        Income distribution
        
        More equal distribution boosts total spending
        
        Credit availability
        
        Easier access → increased spending
        
        Expectations
        
        Wealth
        
        Rising house/stock values → higher spending
    - - Determinants
        
        Consumer demand
        
        Higher demand → Firms invest to expand production
        
        Interest rates
        
        Lower rates → Cheaper borrowing → Increased investment
        
        Technology
        
        Innovation boosts productivity → Encourages capital spending
        
        Cost of capital goods
        
        Lower prices or installation costs → More attractive to invest
        
        Expectations
        
        Gov policies
        
        Tax cuts & subsidies → Stimulate private sector investment
    - - Determinants
        
        Merit and Demerit goods
        
        Gov policy
        
        Increase revenue to then spend
        
        Tax revenue
        
        Tax cuts & subsidies → Stimulate private sector investment
        
        Demograpich changes
        
        More young people
        
        More spend in education
        
        Elder people
        
        More spend in healthcare
    - - Determinants
        
        Domestic GDP
        
        Higher GDP → More exports → Net exports increasel
        
        Foreings GDP
        
        Higher incomes abroad → More demand for exports → Net exports rise
        
        Exchange rate
        
        A fall in exchange rate makes exports cheaper and imports more expensive
        
        Elasticity
        
        If demand is elastic, export revenue rises and import spending falls → Net exports rise
  - - - Price level rises
        
        Contracts
      - Price level falls
        
        Expands
    - - Wealth effect
        
        As the price rises the people feel poorer therefore they will spend less
      - Interest rates
        
        Higher prices causes people to need more money, increasing demand for money therefore higher interest rates
        
        High interest rates, less comsumption
      - Foreign Trade Effect (Exchange Rate Effect)
        
        Higher domestic prices → exports become more expensive and imports cheaper → net exports fall → lower AD.
    - - Consumption
        
        Cuts in income taxes → more disposable income
        
        Increase in household wealth
        
        Higher consumer confidence → people are more willing to spend
        
        Rise in money supply → more access to credit
        
        Population growth → more consumers
      - Investment
        
        Lower corporate taxes → higher after-tax profits
        
        Higher business confidence
        
        Advances in technology
        
        Lower interest rates → borrowing becomes cheaper
      - Gov spending
        
        Fiscal stimulus to boost economic activity
        
        Political motivations
      - Net Exports
        
        Fall in the exchange rate → exports become cheaper, imports more expensive
        
        Improved quality of domestic goods →higher demand abroad
        
        Growth in foreign economies → increased
        foreign demand for exports
- - - - Upward sloping
        
        As the price level increases, output increases.
        
        Profit Effect
        
        Output prices rise, but input prices remain sticky in the short run.
        
        This increases the profit margin, encouraging firms to produce more.
        
        Cost effect
        
        While wages and basic input costs stay constant initially, average production costs can still rise with increased output.
        
        Overtime paid
        
        Training costs
        
        To maintain profitability, firms require higher prices to justify the added production costs.
        
        Misinterpretation Effect (Price Signal Confusion)
        
        Producers may mistakenly interpret a general rise in prices as a relative price increase for their specific product. Thinking their product is more in demand, they increase output even though the entire economy is experiencing inflation.
      - SHIFTS
        
        Changes in price of factors of production
        
        Cost of raw material
        
        Wages increase
        
        Change in taxes
        
        Change in factor productitvity or quality resources
        
        Productivity increases raise output without increasing costs.
        
        Improved labour or capital productivity
        
        Change in quantity resources
        
        A catastrophear
    - - Demand Shocks or temporary supply disruptions.
  - - - Keynesians
        
        The goverment intervention is needed to achieve full employment
        
        Shape
        
        Perfectly elastic
        
        Horizontal
        
        Upward sloping
        
        Perfectly inelastic
        
        Vertical
        
        Horizontal part
        
        High unemployment and idle resources
        
        Firms can increase output without raising wages or prices
        
        Upward part
        
        Economy starts nearing full employment
        
        Input shortages emerge: firms compete for labour and materials
        
        Wages and input prices rise → causes inflation
        
        Output still increases but at increasing price levels
        
        Vertical part
        
        No more output possible without new resources or better technology
        
        Any increase in demand now only causes inflation
        
        Full capacity reached
      - New classical economist
        
        Vertical straigth line at full employment output
        
        .
        
        Resources are fully used and wages/prices are flexible
        
        The economy naturally returns to full capacity (potential output), regardless of short-run fluctuations
        
        In the long run, all markets (including labour) will match
        
        Movement that adjusted by itself
        
        But costs rise due to wear and tear, labour fatigue, or higher wages
        
        SRAS shifts left → output returns to original level, but at a higher price level
        
        A rise in aggregate demand → firms increase output temporarily
      - SHIFTS
        
        Quantity of resources
        
        More women entering the labour force
        
        Net investment
        
        Increase in retirement age
        
        Discovery of new resources
        
        Net migration
        
        Land reclamation
        
        Quality of resources
        
        Technology
        
        Education and training
        
        LRAS rigthward shift promotes non-inflationary economic growth
- - - - Output and price level
- - - - Increasing GDP per capita
  - - - Ensuring more equal access to resources and opportunities
      - Enhancing quality of life
      - Improving economic well-being
    - - Includes social, economic, and environmental
        progress
    - - Improved healthcare and education
      - Environmental improvements
      - Fairer income distribution
  - - - The increase in a country’s output of goods and services over time.
      - By constant price
        
        Price in a base year (Arg: 2004)
      - Gives a truer picture of actual changes in output over time.
    - - Total output measured in current market price
        
        The price of the current year
      - May give a misleading impression of how well a country is performing
        
        This since the Nominal GDP may increase not because an increase in output but yes inflation
    - - The price index used to convert nominal into real GDP is called GDP deflator
        
        Includes prices of all domestically produced goods, including capital goods and exports, but excludes imports.
  - - - If the economy has spare capacity, output can rise without needing more resources.
      - A rightward shift cause more GDP and employment
      - Causes of AD growth
        
        Higher consumer confidence
        
        Increased government spending
        
        Lower interest rates
        
        Tax cuts
      - Spare capacity
        
        The economy is not producing at it maximum
    - - Shown by rightward shift of LRAS or outward shift of PPC.
      - Two possibles
        
        More Resources
        
        More entrepreneurs
        
        Net investment
        
        Higher labour supply
        
        New land/resources
        
        Better Quality of Resources:
        
        Technological advancement
        
        Land productivity
        
        Human capital improvements
        
        Improved health care
  - - - Increased incomes and living standards
      - More government revenue (taxes)
      - Higher employment
    - - Inflation
      - Environmental damage from overuse of resources
      - Inequality if growth benefits are not evenly distributed
    - - PPC: Point Y is higher than X, but still inside the curve = unused resources
      - AD/AS: Output may rise from Y to Y1, but unless AD intersects vertical LRAS, full potential isn’t reached.
      - Even if AD and LRAS rise, the economy may still operate below capacity.
  - - - Balancing short-term needs with long-term development is a major policy challenge.
    - - Low education and healthcare standards
      - Limited access to capital and technology
      - Poor infrastructure
      - High opportunity cost of shifting resources
        
        More spending on education → less for healthcare
        
        More capital goods → fewer consumer goods in short term
        
        R&D investment → fewer resources for immediate needs
      - Corruption
      - External debt burdens
      - Limited trade access
  - - - Opportunity Cost of Growth
        
        A short-term sacrifice in current consumption for future benefits.
      - Structural Adjustment Pressures
        
        Economic growth often causes sectoral shifts
        
        Workers must retrain, relocate or change occupations
        
        Older or less skilled workers may struggle to adapt, leading to social tensions
        
        Some industries grow others decline
    - - Stress, work load and wellbeing
        
        Higher pressure for innovation and productivity
        
        Less work–life balance
        
        Longer working hours
      - Environmental Degradation
    - - Urban Congestion & Infrastructure Strain
      - Inflationary Pressures
        
        Rapid growth, especially when driven by aggregate demand, may lead to inflation.
        
        This is worse for low income housholds
      - Increased Inequality
  - - - Less need for government borrowing
      - Can support fiscal sustainability and public investment
    - - Political and econmic status
- - - - Some adults are retired.
      - Homemakers
      - Children are too young to work.
      - Too ill to work
      - University students
    - - Anyone in the labour force is Economically active
      - The labour force is the total number of
        people available for work in an economy.
        
        The employed and unemployed people
        
        These individuals can contribute to the
        production of goods and services.
      - Determinants of the labour force
        
        Number of people in full-time education
        
        School leaving age
        
        Female participation
        
        Labour force participation
        
        The proportion of the population that are of working age and who are inside the labour force
        
        A country may have a large working-age population, but this does not guarantee a large labour force.
  - - - Both often moves in the same way
        
        If the labour force grows faster than the number of unemployed people, the unemployment rate may fall, even if more people are unemployed.
  - - - It is measured at a specific point in time.
    - - It measures movement over time.
      - Unemployment is not static
        
        The number can remain the same but...
        
        Many people retire
        
        Many people enter to the labour force
        
        People find job
        
        People are fired
        
        Give up of seeking work
        
        Discourage workers
        
        After a period of time without job they leave the labour force
      - People enter unemployment
        
        Voluntarily leave a job
        
        Are made redundant
        
        Leave school or university
        
        Recover from illness
        
        Stop being a homemaker
        
        Migrate into the country
      - People leave unemployment
        
        Become ill
        
        Become a homemaker
        
        Find a job
        
        Become a discouraged worker
        
        Enter higher education
        
        Emigrate
  - - - Counts people who register to claim unemployment benefits
        
        Based on government records.
      - Ad
        
        Cheap and quickly to calculate
        
        Uses existing data
      - Dis
        
        Some take advatange of the benefit and not look for work
        
        Some may work illegally while receiving benefits.
        
        May be a number of groups who are actively seeking for work but who do not appear
        
        People with high non-employment income
        
        Full-time students looking for jobs
        
        Too young or old to claim benefits
        
        People who choose not to claim benefits
    - - Conducting a survey usuallly using the ILO definition of unemployment.
        
        Are available to work in the next 2 weeks
        
        Are actively seeking paid work
        
        Are without a job
      - Surveys to households
      - Ad
        
        Uses internationally agreed definitions
        
        More accurate and inclusive
        
        Provides extra information
      - Dis
        
        Based on a sample → may include sampling errors
        
        Expensive and time-consuming
  - - - Occurs when people are temporarily out of work while changing jobs or entering the workforce.
        
        Inbetween jobs
        
        Is less harmful
      - Voluntary
        
        Workers choose not to work at the current wage.
      - Search
        
        Workers take time to find a better-paid or more suitable job.
      - Casual
        
        Workers move between short-term jobs
      - Seasonal
        
        Jobs disappear at certain times of the year
    - - Change in structure of economic activity
      - Long-term changes in the economy, affect the types of jobs
        available.
      - Changes in methods of production
        
        Due to new technology
      - Changes in consumer demand in some products
      - Mismatch
        
        Workers’ experience
        
        Location of jobs and workers
        
        Workers´ skills
      - May be difficult to the worker to move since
        
        Occupational immobility
        
        Skills
        
        Geographical immobility
      - Unemployment...
        
        Technological
        
        International
        
        Regional
    - - Results in the lack of aggregate demand
      - Firms produce less
        
        Need fewer workers
        
        Unemployment rises.
      - The reduce of wages may not change the situation
        
        Lower wages lead to less spending so less demand
      - Common during recessions or economic downturns.
      - Problem?
        
        Affects large part of the economy
        
        Difficult to solve unless the demand rise again
        
        Long lasting
  - - - May lose skills or confidence.
      - Affect physical and mental health.
      - Harder to find work the longer they stay unemployed
      - Fall in income
    - - Workers may avoid asking for wage increases
      - Demand for their products may fall
      - More workers available to choose from
    - - Government collects less tax.
      - More government spending on benefits.
      - Loss of output
        
        Less GDP
      - Living standards fall overall.
  - - - Duration
      - Type
      - Rate
    - - Part time and willing full
      - Low paid jobs
    - - Underemployment
- - - - The percentage rise in an economy´s price level over a period of time
    - - Sustained increase in a economy´s price level
    - - The average off all prices
      - It reflects how much it costs to live in a country.
  - - - Huge rise of prices
      - The currency may be changed
      - Exceeds 50% per month
      - People lose confidence in the currency
    - - Sustained fall in the price level
      - Rise in the value of money
      - Discourage spending and investment
    - - The average price level is rising
      - Not all prices
      - Is not a problem
      - The value of money falls
      - Purchasing power declines
    - - Fall in the inflation rate
      - The inflation continues but it is less
    - - Low rate of inflation
      - Not usually harmful to the economy
      - Can encourage businesses to produce more
      - Also known as mild inflation
  - - - Compares the average level of prices during a twelve-month period with the average level of the previous twelve
    - - Comparing the percentage change in the price level for a given month with that of the same month of the previous year
    - - [(New price level - Old price level) / Old price level ] x100
  - - - Shows the average change in the prices of representative basket of products purchased by households
        
        Acuracy depends on
        
        How often the basket is updated
        
        How effectively substitution and quality bias are managed
        
        How well sampling is done
    - - 1.Select a base year
        
        Usually a year in which nothing unusual has occurred
      - 2.Carry out a survey to find spending patterns
        
        A sample of households is asked to keep record their spending patterns. Then are placed into categories
      - 3.Attach weights to the different categories
        
        Are based on the proportion of total expenditure. Eg: 24.8/100
      - Find out price changes
        
        Prices in a range of retail outlets and from number of other sources such as gas companies
      - Multiply weights by price changes
        
        The total will give the change in the consumer price index
    - - The base year
        
        Hard to pick a “normal” year.
        
        If the base year had unusually high inflation, later price changes may appear smaller than they really are.
      - The Survey
        
        Sampling issues
        
        It is a sample
        
        Too many vegetarians → overweighted vegetables in CPI.
        
        Accuracy of responses
        
        People may make mistakes or leave out purchases on purpose
      - The basket of goods and services
        
        Most gov update the content regurlarly
        
        In between updates, consumers may react during this time to changes in prices by altering their purchases
        
        A selection of goods and services used to calculate the CPI
        
        Limited Substitution Assumptions
        
        CPI assumes substitution within product types E.g. brand A → brand B
        
        It does not account for switching between types E.g. car → bus travel
      - Different Groups, different Inflation
        
        CPI is an average, but not everyone is affected equally.
        
        Depend on the person they may spend in different things
    - - A price increase might reflect better quality, not just inflation
      - A price does not change but the quality is worse
  - - - Values at the prices operating at the time
      - Do not account for inflation
      - Example: A salary of $6000 in 2016.
    - - Data adjusted for inflation
      - Shows true purchasing power
      - Formula
        
        (Nominal value x Base year CPI) / Current year CPI
  - - - Prices increase due to higher production costs
        
        Higher wages
        
        Wage spiral
        
        Wages ↑ → Prices ↑ → Wage demands ↑ again
        
        Rising raw materials & energy costs
        
        Exchange rate depreciation
        
        Firms increasing profit margins
        
        Environmental shocks
    - - Occurs when prices are pulled up by a rise in AD not matched by a rise in AS
        
        ↑ Investment
        
        ↑ Net exports
        
        ↑ Government spending
        
        ↑ Business confidence
        
        ↑ Consumer spending
      - Rise in AD will have a greater impact on the price level the closer the economy comes to full capacity
    - - Some events can trigger both types of inflation
      - Example
        
        A fall in the exchange rate
        
        Imports become expensive = cost-push
        
        Exports become cheaper = demand-pull
        
        Once inflation begins, it can trigger a wage-price spiral
      - Economist view
        
        Monetarists
        
        Believe inflation is mainly caused by increases in the money supply
        
        Keynesians
        
        Argue inflation may cause greater borrowing and spending, increasing money supply as a result
      - Inflation is often multifactorial
        
        Also it is difficult to determine its cause
  - - - Reduce international competitiveness
    - - If interest rate do not rise in the same line with inflation, borrowers wil gain and lenders will lose
    - - Catalogues, bar codes, advertisiments and price tags may be changed
    - - Costs involved in moving money from one financial institution for another one
    - - Income levels corresponding to different tax rates are not adjusted in line with inflation
    - - Confuse price signals, causing missallocation of resources
    - - Expectations → wage demands ↑, firms raise prices → inflation feeds itself
  - - - Real interest rates may fall
      - It does not tend to rise in the same line to inflation
    - - Wages form a significant proportion of costs
      - Inflation would enable them to reduce the real costs of labour by either keeping money wages constant or by not raising them in line with inflation
    - - A stable inflation cause by increasing in demand may make firms feel optimistic
      - Investment may be incourage as the real rate of interest may fall and consumer expenditure rise
  - - - Demand-pull inflation → less harmful (linked to rising output)
      - Cost-push inflation → more harmful (linked to falling output)
    - - Higher inflation = more damage, especially if it becomes hyperinflation
      - Accelerating or fluctuating inflation → ↑ uncertainty → ↓ investment
      - Stable inflation is easier to plan around
    - - Unexpected inflation → bad
      - Expected inflation → manageable
        
        .
        
        Firms adjust prices
        
        Interest rates adapt
        
        Goverrments adjust tax brackets, pensions, wages
    - - A country may have high inflation, but if lower than trade partners, exports may still be competitive
    - - Advances in technology
      - International competition
      - Trade union power
  - - - Caused by increased aggregate supply
      - Prices fall, output and real GDP rise
      - Often linked to productivity gains or tech advances
    - - Prices fall, output falls, unemployment rises
      - May cause a deflationary spiral
        
        Delayed consumption
        
        Less investment
        
        Job cuts
      - Caused by falling aggregate demand