Macroeconomics Notes!

5 Macroeconomic Objectives: Economic Growth Employment Price Stability External Stability Income Distribution 4 Factors of Production: Land Labour Capital Enterprise Rent Wages Interest Profits Steady rate of increase in National Output Low unemployment levels Low, stable inflation Favourable balance of payments Equitable distribution of income

Leakages: Savings Taxes Imports

Injections: Investment Government Spending Exports

Measuring National Income: 3 ways to calculate GDP The Output Method Measures the actual value of all goods and services produced. Sum of all of the value added by all firms in an economy. At each stage of the production process we deduct the cost of inputs, so that we do not double count the inputs. The Income Method Value of all incomes earned in an economy The Expenditure Method Value of all spending on goods and services in the economy. C+I+G+(X-M). GDP could be defined as the total of all economic activity, regardless of who owns the productive assets In contrast, GNP/GNI is the total income that is earned by a countrys factor of production regardless of where the assets are located. GNI = GDP + Net property income from abroad. NNI (Net National Income) = GNI Depreciation of Capital V.difficult to measure Reasons for Depreciation: Wear and tear as machinery is used; damage to capital equipment, technology may make machinery obsolete. Real GDP = Nominal GDP adjusted for inflation GDP per Capita - Easiest of the national income statistics to measure total GDP divided by population. Why are National Income Statistics Gathered? Report Card for a country, has a government been successful in achieving economic growth? Statistics used to develop policies Used to develop economic models to make forecasts about the future. Businesses use statistics to forecast future demand. Performance of an economy over time can be measured (with real data) To evaluate standard of living within an economy. Basis for comparing different countries.

Limitations Of Data: Inaccuracies: Tax claims by households and firms, output data and sales data difficult to obtain. There is also a lag time from when figures are recorded, to when they are all assembled. Informal Markets (Unrecorded or Under-Recorded Economic Activity): Dont include any do it yourself work or other work done at home. Significant in under developed economies. Subsistence farmers eat their own food, not counted in GDP, hard to make comparisons. Illegal markets e.g drug trafficking not counted. People dont record work to evade tax. Hidden economy accounts for about 8.4% of US economy, it is estimated. External Costs: Does not account resource depletion, pollution etc.

Other Quality of Life Concerns: GDP may rise while people are working longer fours, taking fewer holidays. GDP does not include free activities such as volunteer work. Composition of Output: defence spending? Large part of countries output do not benefit consumers, eg

Green GDP = GDP environmental costs of production. Aggregate Demand: total spending on goods and services in a period of time at a given price level.

Demand curve of a normal demand curve shows relationship between the price of one good, AD is demand curve for a whole market. Consumption total spending by consumers on domestic goods and services. Durable goods are used over a long period of time. Investment addition of capital stock to the economy. Replacement and induced investment occur.

What can cause changes in consumption? Changes in income Changes in interest rate effects savings + borrowing Changes in wealth wealth is made up of assets, not income a stock of money, eg house prices, stocks and shares. Changes in expectations/ consumer confidence Household Indebtedness whether households are willing or able to borrow money. Time of year What causes change in investment? Change in interest rates Changes in national income - if rising consumption should rise putting pressure on capacity of firms. Technological change Expectations/ business confidence. What can effect Government spending? Electoral cycle State of economy What can cause a change in Net Exports? Exports goods or service bought by foreigners. Rise is foreign incomes. With high national income imports more likely Changes in the value of a countrys currency. If a countrys currency becomes stronger, the countrys exports become more expensive to foreigners. Changes in a countrys trade policies, tariffs etc. Relative inflation rates, eg if inflation in USA was relatively higher than Britain, US goods would be less competitive in Britain.

Gov. Policies Affecting AD: Fiscal Policy: G and T (Gov. Spending + taxes) 2 forms of tax Direct (on income) Indirect (goods and services) Expansionary Fiscal Policy: to encourage consumption income tax could be lowered. To encourage investment lower corporate taxes. Gov spending to increase public services will increase AD Monetary Policy: money supply, interest rates, financial regulation, quantitative easing Aggregate Supply total amount of goods and services that all industries in the economy will produce at every given price level. Short Run AS short run defined as the period of time when the prices of the factors of production do not change.

If a larger level of output is to be produced, firms are likely to face higher average costs of production, eg more incentives will be needed for workers to produce more. Marginal and average costs will increase as output increases in the short run. The increase in costs will be passed on as a higher price level. Changes in the Costs of Production: A change in wage rates A change in the costs of raw materials A change in the price of imports. Eg changes in exchange rate of a countrys currency. A change in government indirect taxes or subsidies

Long Run AS New Classical LRAS believe gov. Intervention should be minimal.

Perfectly inelastic, full employment level of output. Represents the potential output that could be produced if the economy were operating at full capacity. Doesnt mean there is no unemployment. The view asserts that output is based entirely on the quantity and quality of F.o.P, not on price level. Keynesian AS- Does not really distinguish between SR and LR

1. AS will be perfectly elastic at low levels of economic activity. Producers can raise output levels with higher average costs due to spare capacity in the economy eg unemployed labour, under-utilised capital. 2. Spare capacity is used up as economy approaches potential output, have to bid for scarce factors. 3. Full capacity, all F.o.P are employed. LRAS curve will shift is there is an improvement in the quality or quantity in F.o.P

Land Land reclamation, increased access to supply of recourses, discovery of new resources Fertilisers, Irrigation, technological advances for discovery of new resources. Labour + Entrepreneurship Increase in birth rate, immigration, decrease in natural rate of unemployment Education, training, apprenticeship programmes. Capital Investment Technological advances, Research and Development Supply-side policies Interventionist: Gov intervention to encourage growth, these would be undersupplied by market forces. Lengthy time lag between implementation and effect on output, but AD will increase quickly. Investment in human capital education, training, encourage immigration. Research and Development Could offer tax incentives to encourage R and D by allowing firms not to pay taxes on the retained profits used for R and D. Also issue patents and copyrights. V.Expensive Provision and maintenance of Infrastructure Direct Support for businesses/ industrial policies anti monopoly laws, helping small and medium businesses to become established and grow, supporting export companies in their access abroad. Eg making a ministry and trade and industry. Market-based supply-side policies offer incentives for businesses. Reduction in household income taxes, and corporate taxes (more money for investment, more incentive to produce efficiently if theyre keeping more of their profits) Reduction in trade union power