Economics Study Notes
Economics Study Notes Table of Contents GDP, Income and Economic Growth ................................................................................................................ 2 Definitions ............................................................................................................................................................................ 2 What is economic growth? ................................................................................................................................................................ 2 Approaches to measuring GDP: ..................................................................................................................................... 2 Limitations of GDP ............................................................................................................................................................. 3 Other shortcomings: ............................................................................................................................................................................ 3 Real GDP versus Nominal GDP ................................................................................... Error! Bookmark not defined. Calculating economic growth rate ............................................................................ Error! Bookmark not defined. The GDP Deflator ............................................................................................................ Error! Bookmark not defined. Calculating price change (inflation rate) ................................................................ Error! Bookmark not defined. Long-‐Run Economic Growth ....................................................................................... Error! Bookmark not defined. What determines the rate of long-‐run growth? ....................................................... Error! Bookmark not defined. Per-‐worker Production Function ................................................................................... Error! Bookmark not defined. Unemployment and Inflation ......................................................................... Error! Bookmark not defined. Definitions ........................................................................................................................ Error! Bookmark not defined. Unemployment Rate ...................................................................................................... Error! Bookmark not defined. Labour force participate rate ..................................................................................... Error! Bookmark not defined. The Costs of Unemployment ....................................................................................... Error! Bookmark not defined. Cost to the economy ............................................................................................................. Error! Bookmark not defined. Costs to the individual ......................................................................................................... Error! Bookmark not defined. Types of Unemployment .............................................................................................. Error! Bookmark not defined. Explaining Frictional and Structural Unemployment ........................................ Error! Bookmark not defined. Labour Market Regulation and Deregulation ........................................................... Error! Bookmark not defined. Minimum Wages .................................................................................................................... Error! Bookmark not defined. Trade Unions ........................................................................................................................... Error! Bookmark not defined. Impacts of the unemployment rate EXAMPLE QUESTIONS ............................... Error! Bookmark not defined. Measuring Inflation ....................................................................................................... Error! Bookmark not defined. The Consumer Price Index (CPI) .................................................................................... Error! Bookmark not defined. The rate of inflation ....................................................................................................... Error! Bookmark not defined. Is the CPI accurate? ............................................................................................................... Error! Bookmark not defined. The Producer Price Index (PPI) ................................................................................. Error! Bookmark not defined. What causes inflation? .................................................................................................. Error! Bookmark not defined. Monetary Policy .................................................................................................. Error! Bookmark not defined. Definitions ........................................................................................................................ Error! Bookmark not defined. Money ................................................................................................................................. Error! Bookmark not defined. The functions of money ...................................................................................................... Error! Bookmark not defined. Commodity vs. Fiat Money ................................................................................................ Error! Bookmark not defined. Measuring Money .................................................................................................................. Error! Bookmark not defined. Money and Growth ............................................................................................................... Error! Bookmark not defined. The Banking System and Money Creation .............................................................. Error! Bookmark not defined. Bank balance sheets ............................................................................................................. Error! Bookmark not defined. The Simple Deposit Multiplier ................................................................................... Error! Bookmark not defined. Monetary Policy and Economic Activity ................................................................. Error! Bookmark not defined. Instrument of monetary policy ....................................................................................... Error! Bookmark not defined. How interest rates affect aggregate demand ............................................................ Error! Bookmark not defined. Is monetary policy always effective and fair? ........................................................... Error! Bookmark not defined. Goals of monetary policy .................................................................................................... Error! Bookmark not defined. Role of the RBA ................................................................................................................ Error! Bookmark not defined. Why is price stability one of the RBA’s monetary policy goals? ....................... Error! Bookmark not defined.
GDP, Income and Economic Growth Chapter 12
Definitions • • • • • • • • • • • • • • • • • •
Macroeconomics – the study of the economy as a whole, including topics such as inflation, unemployment and economic growth Microeconomics – the study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices Final good/service – a new good or service which is the end product of the production process that is purchased by the final user Intermediate good/service – a good or service that is an input into another good or service Price level – a measure of the average prices of goods and services in the economy Potential GDP – the level of GDP attained when all firms are producing at capacity Diminishing returns – if one factor of production is increased while other factors are held constant, the output per unit will eventually diminish Black economy – buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal Consumption – spending by households on goods and services, not including spending on new houses Government purchases – spending my federal, state and local governments on goods and services Investment – spending by firms on new factories, office buildings, machinery and inventories, plus spending by households on new houses Net exports – the value of exports minus the value of imports Transfer payments – payments by the government to individuals for which the government does not receive a good or service in return Value added – the market value a firms adds to a product Economic growth model – a model that explains changes in real GDP per capita in the long run Recession – the period of a business cycle during which total production and total employment are decreasing Contraction – the period of a business cycle during which total production and total employment are falling below trend growth Expansion – the period of a business cycle during which total production and total employment are increasing above trend growth
What is economic growth? • Economic growth is an expansion in a county’s output (i.e. goods and services). • The most common measure of output is: Gross Domestic Product (GDP) -‐ measures the market value of all final goods and services produced within a country in a period of time (usually a year).
Approaches to measuring GDP: §
§
§
Production method (Value-‐added approach) • Sum of the value of all goods and services produced by industries in the economy in a year minus the cost of goods and services used in the productive process Expenditure method • Sum of the total expenditure on final goods and services by households, investors, government and net exports (the value of exports minus the expenditure on imports) Income method
•
Sum of the income generated from the production of goods and services, which includes profits, wages and other employee payments, income from rent and interest earned
Production Method • GPD = sum of value added by each firm • Two types of output: final output or intermediate output Value added = value of output – cost of intermediate products bought from other firms
Expenditure Method • Consumption (C) o Spending by households on goods and services, not including spending on new houses • Investment (I) o Spending by firms on capital goods and inventories, and spending by households on new houses • Government purchases (G) o Spending by federal governments on goods and services • Net exports (NX) o The net purchases of Australian output by overseas countries (NX = X – M) GDP = C + I + G + NX
Limitations of GDP GDP does not include: • Household production • The black/cash economy Other shortcomings: • Distribution of GDP not captured • Value of leisure not included • Not adjusted for changes in crime/social problems • Not adjusted for pollution or negative effects of production
GDP, Income and Economic Growth Chapter 12
Definitions • • • • • • • • • • • • • • • • • •
Macroeconomics – the study of the economy as a whole, including topics such as inflation, unemployment and economic growth Microeconomics – the study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices Final good/service – a new good or service which is the end product of the production process that is purchased by the final user Intermediate good/service – a good or service that is an input into another good or service Price level – a measure of the average prices of goods and services in the economy Potential GDP – the level of GDP attained when all firms are producing at capacity Diminishing returns – if one factor of production is increased while other factors are held constant, the output per unit will eventually diminish Black economy – buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal Consumption – spending by households on goods and services, not including spending on new houses Government purchases – spending my federal, state and local governments on goods and services Investment – spending by firms on new factories, office buildings, machinery and inventories, plus spending by households on new houses Net exports – the value of exports minus the value of imports Transfer payments – payments by the government to individuals for which the government does not receive a good or service in return Value added – the market value a firms adds to a product Economic growth model – a model that explains changes in real GDP per capita in the long run Recession – the period of a business cycle during which total production and total employment are decreasing Contraction – the period of a business cycle during which total production and total employment are falling below trend growth Expansion – the period of a business cycle during which total production and total employment are increasing above trend growth
What is economic growth? • Economic growth is an expansion in a county’s output (i.e. goods and services). • The most common measure of output is: Gross Domestic Product (GDP) -‐ measures the market value of all final goods and services produced within a country in a period of time (usually a year).
Approaches to measuring GDP: §
§
§
Production method (Value-‐added approach) • Sum of the value of all goods and services produced by industries in the economy in a year minus the cost of goods and services used in the productive process Expenditure method • Sum of the total expenditure on final goods and services by households, investors, government and net exports (the value of exports minus the expenditure on imports) Income method
•
Sum of the income generated from the production of goods and services, which includes profits, wages and other employee payments, income from rent and interest earned
Production Method • GPD = sum of value added by each firm • Two types of output: final output or intermediate output Value added = value of output – cost of intermediate products bought from other firms
Expenditure Method • Consumption (C) o Spending by households on goods and services, not including spending on new houses • Investment (I) o Spending by firms on capital goods and inventories, and spending by households on new houses • Government purchases (G) o Spending by federal governments on goods and services • Net exports (NX) o The net purchases of Australian output by overseas countries (NX = X – M) GDP = C + I + G + NX
Limitations of GDP GDP does not include: • Household production • The black/cash economy Other shortcomings: • Distribution of GDP not captured • Value of leisure not included • Not adjusted for changes in crime/social problems • Not adjusted for pollution or negative effects of production
