Macroeconomics

Gross National Product (GNP = GNI)
1. GNP = GNI = GDP + net property from abroad (or minus net property income paid abroad)
CIRCULAR FLOW OF INCOME
1. NATIONAL INCOME = NATIONAL OUTPUT = NATIONAL EXPENDITURE
Y = National Income; C = Domestic Consumption; S = Savings; M = Imports; T = Taxation; I = Investment; X = Exports; G = Government Spending
Net National Product (NNP)
1. NNP = GNP minus capital consumption
AD/AS
1. AD=C+I+G+(X-M)
  1. AD shift right:: reduction in income tax, therefore consumption increases, reduction in interest rates boosting consumer spending and corporate investment, increase in government spending, business boosting export sales
  2. AD shift left: decrease in consumption due to saving more or increase in interest rates or income tax, increase in interest rates thus less attractive so less investment, reduction in government spending, fall in exports from ex. appreciation of exchange rate
2. SRAS (upward sloping) dependent on indirect tax, wage costs, raw material and import costs, weather conditions
3. LRAS (vertical) determined by quantity and quality of resources and factors of production
  1. Classical/neo-classical: vertical due to belief that economy will be restored in the long run
  2. Keynesian: horizontal until full employment (Yfe) is restored then vertical
objectives: low levels of unemployment or perhaps full employment, price stability - low and stable rates of inflation, a satisfactory balance of payments, high levels of economic growth, a satisfactory distribution of income
UNEMPLOYMENT
1. consequences on economy: loss of output, loss of tax revenue, increase in government expenditure, loss of profits; consequences on firms: lower demand, reduction in productivity; consequences on individuals: lower living standards
2. Frictional unemployment: when a time lag exists between someone changing jobs; casual and seasonal unemployment
3. Structural unemployment: when a structural decline takes place in certain industries which are no longer capable of competing in their markets; technological unemployment
4. Cyclical or demand deficient unemployment: when the cyclical nature of the macro economy is moving downwards so labour is not required in large amounts
5. reducing unemployment using expansionary monetary and/or fiscal policy: cutting interest rates, Increasing government expenditure, cutting taxes
INFLATION: PERSISTENT INCREASE IN GENERAL PRICE LEVEL
1. measuring inflation using a consumer price index: the use of a survey to decide on the weights to be used -> The recording of price changes -> Each price is then multiplied by its weight
  1. problems with measuring inflation: changes in the quality of a good or service, special offers, change of expenditure patterns, sampling errors (ex. deviation from averages)
2. period of inflation dependent on: rate at which prices rise, whether rate accelerates or not, whether rate is that which was expected, rates compared to other countries
3. CONSEQUENCES OF INFLATION
  1. ANTICIPATED INFLATION
    1. Menu costs (costs to the firms)
    2. Shoe-leather costs (costs to the individual)
    3. Distortions to the tax system
      1. If tax thresholds are not increased in line with inflation, then FISCAL DRAG arises. This is when people are dragged into higher tax bands, or dragged over the threshold for starting to pay tax.
  2. UNANTICIPATED INFLATION
    1. Uncertainty (affects investment plans, etc)
    2. Wage distortions (worse-off hit harder than better-off)
    3. Resource costs (relative and general price increase -> eventual allocative inefficiency)
    4. Redistribution (arbitrary and unfair redistribution of income)
    5. BOP/Competitiveness (BOP worsens -> discouragement of capital and financial investments)
FISCAL POLICY
1. Fiscal policy is the use of government expenditure and taxation to manage the economy. It can be employed: to boost the level of economic activity if there is a shortage of demand which is causing a deflationary gap. In this case, it is called reflationary policy; to reduce the level of economic activity if too much demand in the economy is causing an inflationary gap . In this case, a deflationary policy is appropriate; as a supply-side policy ,used to improve incentives, e.g. through tax cuts, or to improve the quality of resources, such as increased government expenditure on health and education.
2. The budget is essentially the relationship between government spending on the one hand and government income or taxation on the other hand.
  1. Types of government expenditure: Government final consumption expenditure on goods and services, Gross fixed capital formation (or government investment), Transfer payments
3. Reflationary or Expansionary Fiscal Policy
  1. IN TIMES OF RECESSION: Cutting the lower, basic or higher rates of tax; Increasing tax-free allowances; Increasing the level of government expenditure
    1. AD SHIFT RIGHT
4. Deflationary Fiscal Policy
  1. IN TIMES OF ECONOMIC BOOM: Increasing the lower, basic or higher rates of tax; Reducing the level of personal allowances; Reducing the level of government expenditure
    1. AD SHIFT LEFT
MONETARY POLICY

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Macroeconomics

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