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Macroeconomic Review Chap 1-4
1.
Chapter 1:
a) Key concept
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Scarcity: The situation in which unlimited wants exceed the limited resources
available to fulfill those wants
The law of dimishing marginal returns/product/productivity: the cost
advantage usually diminishes for each additional unit of output produced
Opportunity cost: The value of the highest alternative that must be forgone in
order to undertake the activity.
Economics: The study of the choices people make to attain their goals, given
their scare resources.
3 fundamental questions:
+ What to produce
+ How to produce
+ Produce for whom
Macroeconomics: The study of the economy as a whole ( unemployment,
national income, rate of growth, GDP, inflation, price levels)
Two areas of research:
+ Causes and consequences of short-run fluctuations in national income
+ The determinants of long-run economic growth ( increase in national income)
Objects of macro
+ Total output
+ Price level, inflation
+ Umemployment, social welfare
+ International trade, balance of payment, foreign exchange rate
Economic models: explain economic processes; focus on the effects of only one
change at a time
Observations => Hypothesis => Building with assumptions => Collecting data and
check accruracy of model
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Macroeconomic system: Inputs will go to black box, in which they interacts
with market principles and then outcomes of economy will be produced under
aggregate numbers
Fiscal policy: the use of government taxation and spending to influence the
economy
Monetary policy: Central bank control MS, often targetting a rate of interest to
promote economic growth and stability.
Income policy: Economic-wide wage and price controls, instituted by
government as a response to inflation and below marke level
2.
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Measuring macroeconomic
For an economy as a whole, income = expenditure because
+ All transaction has buyer(s) and seller (s)
+ Spending by buyer = Income of seller = GDP
Gross Domestic Product ( GDP)
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GDP is a measure of the total income and expenditure of an economy.
GDP is the total market value of all final goods and services produced within a
country in given period of time
+ market value: Output is valued at market price
+ all final: final goods, not intermediate goods
+ goods and services
+ produced : currently produced, not in the past
+ within a country: produced the geographic confines of a country ( no matter
who sell it )
+ in a given period of time: the same year and quarter ( quy )
GDP includes all legal products
NOT counted in GDP:
+ home producing and consuming in product
+ illegal products
+ old and used products – second hadn
+ imported products
Circular – flow diagram
+ Sectors:
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Simple economy: Households, Firms
Closed economy: Households, Firms, Government
Opened economy: Households, Firms, Gov, Foreign
+ Factor of production : labour, land, capital
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Components of GDP (Y)
+ C: Consumption – spending by household ( except buying new housing)
+ G: Government - spending by local, state, federal governments ( not include
transfer payment )
+ I: Investment – Spending on equipment, inventories, structures, buying new
house
+ NX: net exports – NX = X - M
Y= C+I+G+NX
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Nominal GDP: values the production of goods and services at current prices
𝒏
𝑮𝑫𝑷𝒕𝒏
= ∑ 𝒒𝒕𝒊 𝒑𝒕𝒊
𝒊=𝟏
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+ q: quantity
+ p: price
+ t: current year
+ i: good number i in n products
Real GDP: values the production of goods and services at constant prices
t = o is base year
𝒏
𝑮𝑫𝑷𝒕𝒓
= ∑ 𝒒𝒕𝒊 𝒑𝟎𝒊
𝒊=𝟏
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GDP Deflator: is a measure of the price level caculated as the ratio of nominal
GDP to real GDP times 100
𝑫𝒈𝒅𝒑 =
𝑮𝑫𝑷𝒏
∗ 𝟏𝟎𝟎
𝑮𝑫𝑷𝒓
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+ D-GDP: change in p
+ GDPn: change in p,q
+ GDPr : change in q
Growth rate in the year n
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𝑮𝑫𝑷𝒏𝒓 − 𝑮𝑫𝑷𝒏−𝟏
𝒓
=
∗ 𝟏𝟎𝟎%
𝒏−𝟏
𝑮𝑫𝑷𝒓
Inflation rate in the year n
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=
𝑫𝒈𝒅𝒑𝒏 − 𝑫𝒈𝒅𝒑𝒏−𝟏
𝑫𝒈𝒅𝒑𝒏−𝟏
∗ 𝟏𝟎𝟎%
GDP and economic wellbeing:
o GDP is the best single measure of the economic wellbeing of a society
o GDP/person shows the income and expenditure of the average person
o The higher GDP, the higher standard of living
o Not perfect measure of happiness or quality, only standard
o Net economic welfare (NEW)
NEW = GDP ( or GNP ) + V1 – V2
V1: value of rest, goods and services which are not sold, revenue from
black market
V2: negative extremly for natural resources, environment such as noise,..
NEW reflects better than GDP but it is very difficult to have enough data so
economists still use GDP or GNP
Consumer Price Index ( CPI )
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CPI is a measure of the overall cost of the goods and services bought by typical
consumer
How the CPI is caculated
The CPI is an accurate measure of the selected goods that make up the typical
bundle, but it is not a perfect measure of the cost of living because:
+ Subtitution bias
+ Introduction of new goods
+ Unmeasured quality changes
Interest represents a payment in the future for a transfer of money in the past
+ The nominal interest rate is the interest rate usually reported and not corrected
for inflation. It is the interest rate that bank pays
+ The real interest rate is the nominal interest rate that is corrected for the effects
of inflation
+ Real interest rate = Nominal interest rate – Inflation rate
R=I–𝝅
3.
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Aggregate Expenditure and Fiscal Policy
a) Aggregate Planned Expenditure
APE: the total amount that firms and households plan to spend on goods and
services at each level of income
AD : sum total of goods that are demanded in an economy over a period
Consumtion function: C = Co + Mpc*Yd
+ Co: autonomous consumption
+ Yd: disposable income = Y – T = Y – t*Y = C+S
𝒅𝒆𝒍𝒕𝒂𝑪
𝑴𝑷𝑪 =
𝒅𝒆𝒍𝒕𝒂 𝒀𝒅
Saving function: S = - Co + MPS*Yd
Investment function: I=Io
Government fucntion: G=Go
Net export: NX=X-M
+ X=Xo
+ M=MPM*Y
APE function: APE= C+I+G+X-M=Co+Io+Go+Xo+(MPC(1-t)-MPM)*Y
Increase APE: Rise Go (easiest), increase MPC, Reduce t,mpm
Equilibrium output: the level of outptut whose production will create total
spending just sufficient to purchase that output
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Spending multiplier: 1−𝑀𝑃𝐶 = 𝑀𝑃𝑆
b) Fiscal Policy
Goals for macroeconomic policy
+ Growth: keep unemployment as low as possible without increasing inflation
+ Stabilization: control the business cycle
Fiscal policy: a governmetn adjust spending level (G) and tax (T) to monitor and
influence a nation’s economy
Expansionary fiscal policy:
Low AD ( negative
Expansionary Fiscal
demand shock)
Policy
Recession
Increase AD
Incease G
Deflation
Decrease T
High Unemployment
Contractionary fiscal policy:
High AD ( positive
Contractionary Fiscal
demand shock)
Policy
Reduce AD
Economic Bubbles
Decline G
Rise T
High inflation
Disadvantage of fiscal policy
+ Long lags between conception & implementation
+ Political decisions about spending and tax policies
+ Hard to turn off spendign projects once growth picks up
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c) Automatic stabilizers
Automatic stabilizers are features of the structure of modern government
budgets, particularly income taxes and welfare spending, the act to dampen
fluctuations in real GDP
Instruments:
Tax: T=t.Y
Government budget balance:
B=T–G
+ B = 0: balanced budget
+ B > 0: budget surplus ( thang du)
+ B < 0: budget deficit ( thaam hujt
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Types of budget deficit:
+ Actual budget deficit ( Br): Tiền vượt quá ngân sách
+ Cyclical budget deficit ( Bc): Tiền thay đổi so với dự định
+ Structural budget deficit (Bs): Tiền thâm hụt dự định
Br = Bc + Bs
4.
Money and Money Market
a) Money
- Money is the set of assets in an economy that people regulary use to buy goods
and services from other people
- Functions of money: money has three functions:
+ medium of exchange : buyers give to sellers to purchase
+ unit of account: yardstick people use to post prices and record debts
+ store of value: transfer purchasing from the present to the future
- Commodity money: commodity with intrinsic value. Ex: Gold, Silver
- Fiat money: used as money because of government decree. Ex: coins, currency
- Currency: the plastic notes and metal coins in the hands of the public
- Demand deposts: balances in bank accounts
b) Money supply
- Monetary base: money issued by central bank
B=Cu+R
- Money Supply: quantity of money available in the economy
MS=Cu + D
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Banks can influence the quantity of demand deposits in the economy and money
supply
Reserve ratio: fraction of deposits that banks hold as reserves
ra = rr + re
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The money multiplier: the amount of money the banking system generates with
each dollars of reserves
mM = 1/rr
𝒎𝑴 =
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𝑴𝑺
𝑺+𝟏
𝒔+𝟏
=
=
𝑩
𝒔 + 𝒓𝒂 𝒔 + 𝒓𝒓 + 𝒓𝒆
The central bank
+ oversee the banking system
+ regulates the quantity of money
- Three tools of money control
+ open-market operations: buy and sell government bonds
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o Buys government bonds => MS increases
o Sells government bonds => MS decreases
+ Changing reserve requirement: rr increases => mM reduces => MS reduces
+ Discount rate: interest rate the Central baank charges for loans
o Increase discount rate => Decrease MS
o Decrease discount rate => Increase MS
Monetary Policy: is the process by which the monetary authority of a country
controls the supply of money, often targetting a rate of interest for the purpose of
promoting economic growth and stability
+ expansionary: increase MS, reduce I => AD increase
+ contractionary: reduces MS, increase I => AD decreases and slow inflation
The impact of monetary policy
Increase MS => reduce I => increase investment => AD and Y increase