BLUE Notebook (Starting from GDP)

Question	Answer
What is recession?	Total amount of goods and services produced in an economy declines
What is GDP ?	Total market value of final goods and services produced by RPUs in a specific period of time
Why sometimes firm's contribution is smaller than the its sales revenue?	1. Use up intermediate goods produced by other firms, so value added of other firms should be deducted 2. sales include past inventories
Nominal GDP VS real GDP	Nominal GDP: Pc x Q Real GDP: Pb x Q
What are the limitations of national income statistics?	1. difference in price (sol: use real GDP) 2. difference in population size (sol:use per capita real GDP) 3. Inaccuracy of estimating the value of illegal production, unreported production and non-marketed production 4. External costs of production 5. Value of leisure 6. Income distribution (sol: consider income distribution) 7. Composition of GDP
What is Labor force?	All people aged 15/above including employed or unemployed employed; all people aged 15/above who work for payment or profit or have a formal job attachment underemployed; a person who is involuntarily working less than 35 hours per week and is available for and seeking additional work *unemployed; all people aged 15/above who are without a job and are available for and seeking jobs
Then what is non labor force?	people who are not employed or unemployed, they maybe 1. people aged under 15 2.retirees 3.permanently disabled 4.house-wives 5.full-time students
Costs of unemployment	To the unemployed: 1. Lower living standard 2. Loss of work experience or skills 3. Affect family harmony To the Govt: 1.Financial burden To the Society: 1. Loss of national output 2.Loss of human capital accumulation 3. Social problem
Price index- Consumer price index (CPI) and GDP deflator	CPI: measure the price change of goods and services consumed by households =(current-year value of a fixed basket/ base-year value of the same basket) x 100 GDP deflator: price level of goods and services related to GDP in a specific period relative to the price level in the base period =nominal GDP/real GDP
What are the uses of the price indices?	1. Measuring inflation 2.Measuring the purchasing power of money 3. Measuring the cost of living
Why CPI tends to overestimate the effect of rising price on the cost of living?	1. Consumption substitution; CPI measures the price change of a fixed basket of goods and services, however, consumers turn to goods with smaller price increase. Therefore, increase in cost of living is smaller than CPI. 2. Quality improvement; The higher the price reflect an improvement in quality of the same basket of goods, which does not reflected by CPI
Difference between CPI and GDP deflator	Including imports: CPI but not GDP deflator On weighting: Fixed for CPI and variable for GDP deflator
Principles of taxation (Good tax system)	1. Equity: the tax payments should be in proportion to the tax payers' income 2. Certainty: the tax obligation of the tax payers should be stated with certainty and not be arbitrarily interpreted or changed by the govt 3. Convenience: the time and methods of the tax payment should be convenient to the taxpayers 4.Economy: the administrative costs of tax collection relative to tax revenue should be minimized
Other principles considered by HK Govt	1. The ability-to-pay: People with higher income should pay higher tax rate (progressive tax) 2. The benefit: people who receive benefits from government should be taxed 3. The territorial source: only income derived within HK is taxed, regardless of the residence of the taxpayer
Difference between direct tax and indirect tax	Direct tax: Cannot shift tax burden to others Indirect tax: vice versa
How to calculate tax rate?	(tax/taxable income)x 100%
The three types of tax	1. Progressive tax: When income increase, tax rate increase 2. Proportional tax: When income increase, tax rate remains constant 3. Regressive tax: When income increase, tax rate decrease
Effect 1; Increase in tax allowance on income inequality	Low and middle income groups: 1. taxable income decrease 2. tax payable decrease 3. disposable income increase High-income group (paying standard rate): 1. taxable income remain constant 2.tax payable remain constant 3.disposable income remain constant ...... Improve income inequality
Effect 2; tax rebates to tax-payers on income inequality	Low and middle income groups: 1. taxable income remain constant 2.tax payable decrease 3.disposable income increase High-income groups (paying standard rate): 1.taxable income remain constant 2.tax payable decrease 3.disposable income increase ..... Worsen income inequality as those very low income groups don't get the tax rebate as they don't have to pay tax
Effect 3; Widen marginal tax bands on income inequality	Low and middle income groups: 1.taxable income remain constant 2.tax payable decrease 3.disposable income increase High income group (paying standard tax rate): 1. taxable income remain constant 2.tax payable remain constant 3.disposal income remain constant .... improve income inequality
Effect 4; Decrease marginal tax rate of each tax bands on income inequality	Low and middle income groups: 1. taxable income remain constant 2.tax payable decrease 3. disposable income increase High income groups (paying standard tax rate): 1. taxable income remain constant 2.tax payable remain constant 3.disposable income remain constant ..... improve income inequality
Effect 5; Impose general sales tax on income inequality	Low and middle income group: 1. taxable income remain constant 2.tax payable increase 3. disposable income decrease High income group(paying standard tax rate): 1.taxable income remain constant 2.tax payable increase 3.disposable income decrease .... worsen income inequality as GST is regressive in nature
Effect 6; decrease standard tax rate on income inequality	Low and middle income group; 1. taxable income remain constant 2.tax payable remain constant 3.disposable income remain constant High income group (paying standard tax rate): 1. taxable income remain constant 2.tax payable decrease 3.disposable income increase .... worsen income inequality
What is money? Image: Bill (binary/octet-stream)	Anything generally accepted as medium of exchange
What is barter economy?	exchange 1 good for another directly Limitations: 1. double coincidence of wants 2.no common measure value as value expressed in terms of another good 3.indivisibility of goods
List out all functions of money	1. Medium of exchange and means of payment 2. Store of value 3. unit of account 4. Standard of deferred payments
What are the properties of a good form of money?	1. generally accepted 2.scarce 3.divisible 4.durable 5.portable 6.homogeneous 7. having denominations
What are the types of deposits in HK?	1. demand deposit: No interest 2. saving deposit: medium interest 3.time deposit: higher interest 4.negotiable certificates of deposit: higher interest
The types of banks	Central bank: non profit public body and responsible for the monetary affairs of an economy Commercial bank: profit-making
What are the characteristics of central bank?	1. issue currency 2.formulate monetary policy 3. government's banker and advicer 4. supervise commercial banks 5.lender of the last resort 6.discount window services 7.market clearing house
Commercial banks-3 tier banking system in HK	1. Licensed bank minimum paid-up capital: $300m types of deposits: all minimum deposit amount: any maturity: any 2. Restricted-license bank minimum paid-up capital: $100m types of deposits: TD and NCD minimum deposit amount: greater than or equal to $500000 maturity: any 3. Deposit-taking companies minimum paid-up capital: $25m types of deposits: TD and NCD minimum deposit amount: greater than or equal to $100000 maturity: at least 3 months
What is the fractional reserve system?	All banks are required to keep only a fraction of their total deposits as legal reserve
Important formulas	bank reserve ratios (rr) =(reserves/deposits)x100% Monetary base(M0) =Cp + R max deposits created= reserve/rrr max banking multiplier= 1/rrr actual banking multiplier= D/R max loan=max D-max R Fall short of reserve= (1-rrr) x initial withdrawal
Why banks keep excess reserve?	1. meet withdrawal needs of customers (voluntary) 2. insufficient demand for bank loans (involuntary) 3. keep more reserves to prevent bank run (conservative) **cost of keeping excess reserve: forgo the interest earned from lending out the excess reserve
What is fully loaned up?	Banks do not keep excess reserve
Assumptions of credit creation	1. Fractional reserve system 2. bank chooses to keep no excess reserves-sufficient demand for loans 3.no cash leakage from the banking system
Steps on money creation	1. New deposit/reserve (eg the central bank just issued $100) 2. New excess reserve 3.lend out as loans 4.all loans redeposited into the banking system 5.new deposits can create new excess reserve and loans 6.process goes on and on until required reserve=actual reserve 7.max deposit (calculation)
Steps on money contraction	1. Withdraw money/ increase the rrr 2.fall short of reserve (calculation) 3.Call back loans 4.Further withdraw money from deposit to repay bank loans 5.Withdrawal will make actual cash reserves in other banks fall short of legal requirement 6.banks continue call back loans 7.Process continue until there is no shortage of reserve
What is money balance?	Can be nominal or real. Referring to the quantity of money that people actually hold at a certain moment
What is money demand?	The quantity of money that people plan to hold at a certain moment. Mt+Ma
What is Money transaction (Mt)?	To finance daily expenditures, make purchase (medium of exchange)
What is Money asset (Ma)?	To hold money as asset (store wealth)
Compare bonds/other non-money asset and money	1. Money interest (i.e nominal interest): V/X 2.liquidity: lower/highest 3.risk: higher/lower *forgo return of holding bonds=nominal interest rate
Factors affecting Mt	1. payment technology increase 2.time interval between income receipts increase 3.saving increase----income increase 4.price level increase 5.synchronization between receipt and payment increase
Factors affecting Ma	1.risk of holding interest-yielding assets increase 2.cost of switching assets increase 3.wealth increase 4.inflationary expectations 5.expected bond price decrease
How central bank affect M0 and banking multiplier?	1. decrease rrr: max. banking multiplier increase bank keep less reserve as required reserve increase excess reserve (loan) multiple creation of money money supply increase 2.decrease discount rate: decrease cost of borrowing increase borrowing increase reserves increase loan (because have a higher profits with lowered discount rate) multiple creation of money money supply increase * discount rate: interest rate that the central bank chargers when it lends money to banks 3.Open Market Operation #A---Purchase a.Pay b.money circulate in public deposit into banks c.reserve increase d.immediate increase money supply e.increase in reserve further create deposits f. increase in money supply (money creation) #B---Sale a.receive money from buyers b. money circulate in public deposit less into the bank c.immediate decrease money supply d.decrease in reserves further reduce deposits e.decrease money supply (money contraction) 4. Issuing currency M0 increase credit creation increase money supply
What is inflation?	persistent increase in the general price level caused primarily by govts' printing more paper money/cheap-metal coins, which increase money supply and decrease each piece of money's preciousness once-and-for-all increase in prices is not inflation (eg when a sales tax is imposed)
What is deflation?	persistent decrease in the general price level
What is disinflation?	persistent increase in the general price level but at a declining rate
How to measure inflation or deflation?	measure by %change in price index positive: inflation negative: deflation
Formula for nominal interest rate	Nominal interest rate (n%)= real interest rate (r%)+inflation rate (I%) *expected/actual
What is the cost of holding bond?	1. nominal interest rate of holding money=0% (because money is not interest bearing) 2. real return of holding money= -I%
What is the cost of holding money?	1. nominal return of holding bond=n% 2. real return of holding bond= n%-I%=r%
What is the redistributive effects on inflation?	It happens only when inflation is unanticipated, resulting redistribution of income among people in society.
1.1 Fully anticipated inflation	1. because of inflation, purchasing power of a future payment decrease 2.if it is fully anticipated, 3.people will ask for inflation premium to cover the loss in purchasing power from inflation 4. in turn can adjusted to eliminate the effect 5. No redistributive effect as result
1.2 Unanticipated inflation	Case 1; Fixed receipts and payment 1. purchasing power of money decrease 2. amount they pay or receive will reduce unexpectedly in real terms 3. As future income payers: gain As future income receivers:lose Case 2; Unanticipated deflation or over-anticipated inflation 1. purchasing power of money increase 2.amounts they pay or receive will increase unexpectedly in real terms 3.As future income payers: lose As future income receivers: gain
1.3 Unanticipated/ Under-anticipated inflation ** actual inflation rate is greater than the anticipated inflation rate	As future income payer: gain 1. Because inflation premium they paid is less than the actual fall in purchasing power of money 2. Therefore the amount they paid is reduced unexpectedly in real terms As future income receiver: lose 1. Because inflation premium they received is less than the actual fall of the purchasing power of money 2. therefore the amount they received is reduced unexpectedly in real terms
In general, who will gain when redistribute income from public to govt?	Govt: gain Public: lose 1. Progressive tax: The higher your nominal income, the higher tax rates you need to pay (i.e pay more tax not only in money term but also in real terms) 2. Issuing govt bonds: Future income receivers: people holding government bonds Future income payers: govt ...debt is reduced in real term 3. Inflation tax: Government finance expenditure by printing money which increase money supply, price level (according to QTM) and so decrease purchasing power of money. Since public are the cash holders, the purchasing power is transferred to the government.
The Quantity Theory of Money (QTM) *** points out that a continuous increase in MS will result in inflation	REFER TO YOUR NOTEBOOKKKKKK!!!!!!!
Exchange rate and BOP	REFER TO YOUR NOTEBOOKKKKKK!!!!!!!

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BLUE Notebook (Starting from GDP)

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	Created by ellie kwok over 7 years ago