IB Economics SL: Macroeconomics

Measuring National Income
1. National Income = National output = National Expenditure
  1. Methods
    1. Income
      1. Sum of payments to factors of production
    2. Output
      1. Sum of value of final output produced by various industries
    3. Expernditure
      1. GDP = Consumption + Investment + Government spending + Net expeort
  2. GDP
    1. Total value of output produced in an economy in a given time period
    2. GNI = GDP + Net income from abroad
      1. NNI = GNI - depreciation (capital consumption)
      2. Real GDP/GNI = nominal GDP/GNI - inflation
      3. GDP/GNI per capital (divide by population)
      4. Green GDP = GDP - environmental costs of production
    3. Doesn't take into account: spillover effects, degradation, black market, improvement in quality
2. Circular Flow of Income
  1. An interaction between Households, Government and Firms
  2. Injections (J)
    1. Government Expenditure, Investment, Export
  3. Withdrawals (W)
    1. Taxation, Saving, Import
  4. Equilibrium J = W
3. Business Cycle Model
  1. A pattern of Growth
    1. Boom (extended period)
      1. High inflation, Shortage of resources, Rising property values
    2. Recession (2 quarters)
      1. Unemployment, Falling consumption and investment, Business failures
    3. Trough (Minimum GDP)
      1. Long term unemployment
    4. Recovery (Growth post-recession)
      1. Increasing consumption, employment, investment and inflation
    5. Boom = +ve output gap Trough = -ve output gap
Macroeconomic Models
1. AD/AS Analysis
  1. Equilibrium AD = AS
  2. AD
    1. Total demand for an economy's goods and services
    2. AD= Consumption + Investment + Govern Expenditure + Net Export
      1. Changes in those will cause a shift in AD
        Consumption
        Consumer Confidence Interest rates, Wealth Income taxes, Debts
        Investment
        Interest rates, Taxes on profits and investment, Business confidence , Corporate debt
        Government spending
        Political and economic priorities
        Net Export
        Exchange rates, Protectionism, Income levels of trading partners
        Fiscal and Monetary policies
        Change in Tax and Interest Rates influences AD
  3. AS
    1. Total value of goods and services that an economy can produce in a give time period
    2. Short Run AS Shifts
      1. Variable costs, Taxation and Subsidies, Labor costs, Supply-side shocks
    3. Long Run AS Shifts
      1. Productivity/ Efficiency, Technology, Institution
      2. Keynsian
        Different levels of spare capacity in an economy
        Shifts when improvement in quantity and/or quality
        At high spare capacity, deflationary gap exists At low spare capacity, "bottleneck" appears, At full capacity, increase in AD is inflationary
        Demand side then supply side policies
      3. Monetarist/ Neo Classical
        Always at fully capacity (vertical line)
        Shift when change in quantity and quality, not price level
        Short-term changes in AD will be counteracted in long-term
        Supply side policy
  4. Keynsian/ Monetarist debate
    1. Keynesian
      1. Market are slow to adjust, economy can be at equilibrium below max employment, Government should intervene, fiscal > monetary
    2. Monetarist
      1. Markets work, Economies tend to full employment, Inflation is caused by excess money supply, minimum government intervention
Supply/ Demand side policies
1. Demand side
  1. Fiscal
    1. the use of government spending and taxation to influence AD, raise revenue, redistribute income and influence consumption patterns
    2. Government budget
      1. Budget deficit
        Govern.Spending > Tax
      2. Budget surplus
        Govern.Spending < Tax
      3. National Debt
        Accumulation of past deficits
      4. G Expenditure
        Payments, Investments, Social benefits
      5. G Revenue
        Direct and Indirect Taxes, Privatized national industries
    3. Automatic Stabilizers
      1. GDP grows, Budget surplus GDP falls, Budget deficit
        Stabilize Short term fluctuation
    4. Strength/ Weaknesses
      1. Strengths
        Targetable
        Direct impact on AD
        Role in recession
      2. Weaknesses
        Time lag
        Crowding out
        Lack of fund for private sector
        Political influence
        Inflexible
    5. LRAS* effects
      1. Favorable environment for businesses and employment, government spends on infrastructure -> potential output
  2. Monetary
    1. the use of the rate of interest predominatnly to influence AD (Money supply control and exchange rate)
      1. Money supply affects interest rates
    2. The role of the central bank
      1. Banker to the government
      2. Regulate commercial banking system
      3. Manage government's borrowing via bonds
      4. Set interest rates for macro objectives
      5. Manage supply of money via nominal interest
      6. Manage foreign currency resereves
    3. Inflation targeting
      1. Focus on rate of inflation
        Symmetric/ Asymmetric
        Using interest rates
    4. Strength/ Weaknesses
      1. Strengths
        Independence of central banks - no political influence
        Relative speed of change, faster than fiscal
      2. Weaknesses
        Investment can be interest-inelastic
        Time lags
        One policy fits all
        Ineffective against cost-push inflation
        Ineffective during recession, due to low confidence
2. Supply side
  1. Interventionist-based
    1. Investments in
      1. human capital
      2. new technology
      3. Infrastructure
    2. Industrial policies
    3. Could be ineffective on ELDC due to government deficit
  2. Market-based
    1. Deregulation, privatization and encouraging competitition
    2. Labor market reforms
    3. Incentives to work and invest (firms)
    4. However, could increase monopoly power for firms
      1. Reduction in health and safety for workers
Economic Growth
1. an increase in real GDP over a given time period
2. Actual Growth
  1. Below full employemnt
3. Potential Growth
  1. Long-term trend growth
4. Consequences
  1. Benefits
    1. Per capital income growth
    2. Higher living standards
    3. higher tax revenue
    4. Employment rise
    5. Easier to redistrubute income
  2. Drawbacks
    1. Inflation
    2. Externalities of resource depletion
    3. Increase import and current deficit
    4. Unequal ditribution of income
    5. Unbalanced growth if focused only on consuption
Unemployment and Inflation
1. Unemployment
  1. Unemployed
    1. The people who are registered as willing, able and available for work at the market-clearing wage, but who are unable to find work
  2. Unemployment Rate
    1. the number of people unemployed as a percentage of the labor force
  3. Underemployment
    1. when workers who want full-time jobs are only able to find part-time jobs. Low wages and output per worker are reflections of work with low rates of productivity
  4. Hidden Unemployment
    1. the part of the working population excluded fro any measure of unemployment because of the definition of unemployment used
  5. Measure of Unemployment
    1. No consider of regional, gender , age and ethnic variations and disparities
  6. Costs of Unemployment
    1. Loss of output
    2. Waste of productive potential
    3. Loss of skills
    4. Loss of tax revenue -> social benefits
    5. Social problems
    6. Loss of consumer spending
    7. Increased income disparity
  7. Types of Unemployment
    1. Cyclical(Demand deficit)
      1. Recession
        Wages Stick Downward!
    2. Frictional
      1. Give incentive for work, reduction in unemployment benefits
    3. Seasonal
    4. Structural
      1. a mismatch between skills and opportunities caused by technological change, a fall in demand for a particular job/ change in taste
      2. Solution: Education, Training(apprenticeships and relocation of labor
  8. Natural Rate of Unemployment
    1. any unemployment that exists when the AD for labor = AS for labor
      1. Solution: Supply side policies, due no demand deficits, AS vertical
2. Inflation
  1. a sustained price rise over period of time
  2. Types of Inflation
    1. Cost-push
      1. Rising raw materials/labor costs or/and indirect tax
        Demand side: ineffective, Supply side: only works in LR
    2. Demand-pull
      1. Reduced tax, interest rates, exchange rate; Increase in govern.spending, consumer confidence, economic growth
  3. Measure of Inflation
    1. PPI
    2. CPI
    3. A basket of factors of production (PPI)/ consumed goods (CPI)
      1. Measure change based on 100
        Drawbacks: Not considered regional, income group, new products changes and disparities
  4. Disinflation (fall in rate of inflation)
  5. Core inflation (excludes the impacts of volatile prices)
  6. Consequences
    1. Redistribution of income
    2. Devaluation of money/ low purchasing power
    3. Reduction of investment
    4. Reduction of international competitiveness
    5. A potential wage-price spiral
    6. Shoe-leather and menu costs
      1. Shoe-leather: opportunity costs of consumer counter acting inflation
      2. Menu costs: Additional costs to firms in changing the prices
    7. Anticipated: less fluctuation Unanticipated: protection of own interest resulting in reduction in economic growth
  7. Cures of inflation
    1. Demand side
      1. Monetary
        Increase in interest rate
      2. Fiscal
        Reducing g. spending, increase taxation
    2. Supply side
      1. Increase supply
    3. Evaluation
      1. Balance in AD & AS, Control Inflation while increasing economy's productive capacity
      2. Increase output at low cost give the economy room to grow without inflation
    4. Extreme cases
      1. Deflation
        a constant fall in prices over a given time period
        Demand-side
        Recession, fall in everything, dangerous
        Solution: increase in AD
        Supply-side (Desirable)
        Lower Commodity prices
        Productivity gain, competitive wages and lower tax
Distribution of Income
1. Measuring D of I
  1. Lorenz Curve
    1. Gini Coefficient (Degree of inequality)
    2. shows the proportion of a nation's income that is earned by given % of the population
2. Government tax and benefit system
  1. Transfer of payment (tax to unemployment benefits)
  2. Type of tax
    1. Progressive (Rate increase as income increase)
      1. Direct tax (taxes on income and wealth paid by authorities)
    2. Regressive (Rate decreases as income increases)
      1. Indirect tax (taxes on spending that are paid by suppliers, oppose to consumers)
    3. Proportional (avg. rate is constant)
  3. Promoting of health care/education
  4. Direct provision of clean water and sanitation
3. Poverty
  1. Poverty line
    1. Below: Absolute poverty
    2. Compared to median income: Relative poverty
  2. Consequences
    1. Social problems, Lack of access to education and health care, low living standards
  3. Causes
    1. Low incomes, employment, unequal distribution of resources, poverty cycle

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IB Economics SL: Macroeconomics

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	Created by Han Zhang almost 10 years ago