formulas paper 3 Flashcards
Percentage Change (%Δ)
%Δ = (New - Old / Old) x 100
PED (Price Elasticity of Demand)
%Δ in Qd of the product / %Δ in P of the product
Market Equilibrium
When Qd = Qs
YED (Income Elasticity of Demand)
%Δ in Qd of the product / %Δ in the income of the consumer
XED (Cross Elasticity of Demand)
%Δ in Qd of product A / %Δ of P of product B
PES Indicators (Values)
PES > 1 - Supply Elastic
PES < 1 - Supply Inelastic
PES = 0 - Vertical Supply Curve (inelastic), 0 response to ΔP
PES = ∞ - Horizontal Supply Curve (elastic)
XED Indicators (Values)
Positive Value - Substitutes
Negative Value - Complements
PES (Price Elasticity of Supply)
%Δ in Qs of the product / %Δ in P of the product
PED Indicators (Values)
PED > 1 - Price Elastic
PED < 1 - Price Inelastic
PED = 1 - Unit Elastic
PED = 0 - Perfectly Inelastic
PED = ∞ - Perfectly Elastic
YED Indicators (Values)
YED < 0 - Inferior Good
YED > 0 - Normal Good
YED > 1 - Luxury Good
Real GDP
Real GDP = Nominal GDP / GDP Deflator
GDP Per Capita
GDP / Population
AD (Aggregate Demand)
AD = C + I + G + (X - M)
C: Consumption
I: Investment
G: Government Expenditure
X: Exports
M: Imports
GDP (Gross Domestic Product)
GDP = C + I + G + (X - M)
C: Consumption
I: Investment
G: Government Expenditure
X: Exports
M: Imports
Nominal GDP
Quantity of goods x Price
or
Real GDP x GDP Deflator
GNI (Gross National Income)
GNI = GDP + (Income from abroad - Income sent abroad)
MR (Marginal Revenue)
Rate of Change in TR per increase in quantity sold
∆TR / ∆Q
Keynesian Multiplier
1 / MPS + MPT + MPM
or
1 / 1-MPC
or
Changes in Real GDP / Initial Change in Spending
MPC (Marginal Propensity to Consume)
Change in Consumption / Change in Income
MPS (Marginal Propensity to Save)
Change in Savings / Change in Income
MPT (Marginal Propensity to Tax)
Change in Tax / Change in Income
MPM (Marginal Propensity to Import)
Change in Imports / Change in Income
CPI (Consumer Price Index)
( value of basket in Specific Year / value of basket in the Base year ) x 100
Weighted Price Index
( Cost of Basket in a specific year / Cost of Basket in the base year ) x 100
Inflation Rate
( CPI new - CPI old / CPI old ) x 100
Gini Coefficient
Area between the Line of Equality and Lorenz Curve / Entire area underneath the Line of Equality
Unemployment Rate
( Number of Unemployed People / Total Labour Force ) x 100
Total Labour Force
Total Number of Employed People + Total Number of Unemployed people
TR (Total Revenue)
P x Q
P: price
Q: quantity sold
AR ( Average revenue)
TR / Q
TR: total revenue
Q: quantity sold
AP (Average Product)
The output produced on average by each variable factor of production
TP / V
TP: total product
V: variable factor of production
Total Product / Quantity variable factor of production
TC (Total Cost)
TFC + TVC
AC x Q
TFC: total fixed cost
TVC: total variable cost
AC: average cost
Q: quantity produced
MP (Marginal Product)
Rate of Change in TP per increase in variable factor of production
∆TP / ∆V
TP : total product
V : variable factor of production
ATC (Average total cost)
TC / Q
TC: total cost
Q: quantity produced
total cost per quantity produced
AVC (Average Variable Cost)
TVC / Q
TVC: total variable cost
Q: quantity produced
variable cost per quantity produced
AFC (Average Fixed Cost)
TFC / Q
TFC: total fixed cost
Q: quantity produced
fixed cost per quantity produced
MC (Marginal Cost)
Rate of change in TC per increase in extra unit of quantity produced
∆TC / ∆Q
TC : total cost
Q : quantity produced
TFC (Total Fixed Costs)
TC - TVC
TC : total costs
TVC : total variable costs
TVC (Total Variable Costs)
TC - TFC
AVC x Q
TC : total costs
TFC : total fixed costs
AVC : average variable costs
Q: quantity produced
Balance of Payments
Current Account + Capital Account + Financial Account + Errors = 0
Profit
TR - TC
TR : total revenue
TC : total costs
Supernormal (Abnormal) Profit
AR>AC
TR>TC
AR : average revenue
AC: average costs
Marshall Lerner Condition
PED of Exports + PED of Imports > 1
Has to be elastic in order to have auto-correction of a trade deficit.
Subnormal Profit
AR<AC
TR<TC
AR : average revenue
AC: average costs
Profit Maximization
MR=MC
MR : marginal revenue
MC : marginal cost
When price is at AC=AR…
Normal Profits, Sales Maximized, Break Even, Entry Limit Price.
Dynamic Efficiency
LR Abnormal Profits
Allocative Efficiency
D=S
MSB=MSC
P=MC
D : demand
S : supply
MSB : marginal social benefit
MSC : marginal social cost
P : market price
MC : marginal cost
Productive Efficiency
Minimum point on AC
AC=MC
AC : average costs
MC : marginal costs
X Efficiency
At any point on AC
Minimum Efficient Scale
At the lowest quantity when AC stops decreasing
Shutdown Condition
Will occur when AR<AVC
May Occur when AR=AVC
AR : average revenue
AVC : average variable costs
Marginal Utility
∆ Total Utility / ∆Q
Q : quantity produced
Average Utility
Total Utility / Q
Q : quantity produced
Utility Maximization
Marginal Utility = 0
Social Cost
Private Costs + External Costs
Can be positive or negative
Social Benefit
Private Benefits + External Benefits
Profit Maximization in the Labour market
Marginal Revenue Product = Marginal Cost of Labour
Opportunity Cost of good x for comparative advantage
opp. of good x =
(quantity of good y) / (quantity of good x)
(lower opp. means that country should produce that good)
Value of basket goods for CPI
Price of every good in the basket x quantity consumed of each good
Average Tax
Total Tax / Total Income
Tax for progressive tax systems
Excluded from GDP
Transfer Payments
Related goods
joint supply - 2 goods produced from same FOP
competitive supply - same FOP can only be used to produce 1 good out of multiple goods e.g. land
Free good
good without opportunity cost
Normative statement
opinion/value statements
Positive statement
factual/descriptive statements
Demand curve explanations
diminishing marginal utility
substitution effect
income effect
Supply curve explanations
diminishing marginal returns AKA economies of scale
Primary commodity
goods arising from natural resources, land, agriculture
Manufactured goods
goods produced with labour and raw materials
Sectoral structure of economy
primary sector, manufacturing sector, services sector (entertainment)
Labour market rigidities
(makes wages downward inflexible)
minimum wage,
contracts,
labour unions,
employment protection laws,
unemployment benefits
Public goods
- non-rivalrous
- non-excludable
(often underprovided by market) (market failure) (thus gov. provision)
Common pool resources
- non-excludable
- rivalrous
non-excludable means
resources cannot be restricted/owned, & equally available to everyone equally
rivalrous means use of resources reduces availability for all else
Frictional unemployment
unemployment when workers are between jobs,
short-run, inevitable, better in LR as seeking better jobs/allocation of workers in economy.
Caused by (asymmetrical information) between employers and workers as they cannot connect is frictional unemployment
Seasonal unemployment
when demand for labour changes seasonally (life-guards, farmers, tourism sector)
Structural unemployment
long-term unemployment
caused by fundamental changes
mismatch between the skills workers possess and the skills employers demand
CPI definition
consumer price index, the measure of cost of living for typical household, by comparing value of basket of goods and services in one year with the value of the same basket in a base year. Inflation is the % change in value of basket. Positive is inflation. Negative is deflation.
weighted CPI - the goods and services are weighted and given more significance based on their importance
Sustainable debt
level of debt where government has enough revenues to meet debt obligations e.g. interest, repayment, without accumulating arrears (overdue debt payments), whilst sustaining economic growth as limited government spending for debt servicing harms economic growth
Measuring government debt
government debt is measured as a share of GDP debt-to-GDP ratio
Macroeconomic objectives
Low unemployment
Low and stable inflation
Environmental sustainability
Increasing potential output or long-run economic growth
Equity in income distribution
Sustainable levels of government debt
Poverty
inability to satisfy minimum consumption needs
2 types:
- absolute poverty (not have enough income to meet basic human needs)
- relative poverty (the inability to afford goods and services and lifestyle typical to the society) (below 50% median income)
Impact of inequality on economic growth
- Periods of economic growth end sooner in countries with unequal income distributions.
Possibly because greater inequality lowers growth because lower income groups cannot invest in human and physical capital, making people more uneducated leading to lower productivity.
- Higher income groups save & import more
- civil unrest
Marginal tax rate
income tax rate paid on additional income as a percentage
Average tax rate
income tax paid divided by total income as a percentage
sources of gov. revenue
sources of budget surplus: all types of taxes, profit of government provided g&s, sale of government owned assets (privatisation)
sources of Government expenditure
sources of budget deficit: current expenditures (day-to-day expenditure by government e.g. operational costs, debt servicing, provision of subsides, wages), capital expenditures (public investment, infrastructure investment, physical capital), transfer payments
Benefits of free trade
increased competition thus efficiency, lower prices, choice, accessibility, foreign exchange, larger markets, economies of scale, specialisation, technology transfers, interdependence, growth
Evaluation of comparative advantage theory
assumes that increases global production and consumption, improving global allocation of resources. However, factors of production, technology, labour, capital can change over time improving quality, quantity, decreasing costs of production, so comparative advantage of producing a good can change. Changing production from a good without comparative advantage to a good with comparative advantage can in of itself have high opportunity costs which prevent specialisation away from disadvantageous production to advantageous production. Imperfect free trade. Quality of producing a good is the same by every country. Comparative advantage changing with economic growth from agricultural sector to manufacturing sector, however, persisting in comparative advantage and production in agricultural sector may hinder development into manufacturing sector. Vulnerability from over-specialisation, becoming too dependent on specific exports, and specific imports
Economic integration
refers to economic co-operation between countries and co-ordination of their economic policies (usually an agreement to reduce trade barriers)
Preferential trade agreement (PTA)
agreement between countries to lower trade barriers from imports from one another.
All PTA’s objective is to promote trade liberalisation.
Bilateral trade agreement is a PTA with 2 countries.
Multilateral trade agreement is a PTA with many countries.
Regional trade agreements is a PTA between a group of countries within a geographical region.
levels of econ. intergration in trading blocs
Lowest degree of economic integration trading bloc - free trade area (agreement) is a group of countries which agree to gradually eliminate trade barriers.
Middle degree of economic integration trading bloc - customs union is a group of countries that has fulfilled the free trade area agreement and eliminated trade barriers between members. Additionally, each country in a customs union must agree on new trade policies towards non-member countries AKA common external policy
Highest degree of economic integration trading bloc - common market is (development past a customs union to include) when countries allow free movement of factors of production within the common market (e.g. labour) can travel freely and find employment in all member countries.
trading bloc
Trading bloc - trading bloc is a group of countries that have PTA (multilateral) agreeing to reduce tariffs and other protections
Disadvantages of trading blocs
trade diversion | trade conflicts between trading blocs, slowing down PTAs and WTOs global trade liberalisation. | loss of sovereignty due to common external policy
Trade diversion - although a country outside of a trading bloc may have C.A. , there may be greater imports from a country within the trading bloc without C.A. instead of perfect C.A.
Advantages of trading blocs
- advantages of free trade + increased FDI, bargaining power, trade creation
purpose of trade
promoting trade promotes economic development
- trade specifically important for developing countries to achieve econ. growth
- 2 key gov. policies to stimulate trade 4 econ growth
(1 protectionism) (2 free-market) - intention of these policies (increase employment but also to break away from over dependance on primary products and rely on technology based production instead)
e.g. manufacturing - import substitution industrialisation
seeks to in LR achieve industrialisation
use protectionist policies on imports of manufactured goods to give domestic manufacturing industries to grow. thus moving away from primary commodity dependence
(protects domestic jobs) (no reliance on MNC for growth & development & avoids MNC negatives) (CONS: LR restricts growth from protectionist retaliation, restricting import of capital goods, restricting size of markets open to trade, and super bad if domestic industries cannot gain comparative advantage then LR unemployment, world efficiency losses, neg of protectionism etc) - export promotion (complete free trade, 0 protectionism) (pros: encouraging job growth & competition, revenues gained from trade then used to advance tech & manufacturing base) (e.g. asian tigers) (pros; SR developing countries can exploit comparative advantage in primary products, then gain loads in SR, then in LR those revenues can fund human capital then developing manufacturing industry) (CONS: protectionism may occur abroad limiting this, income inequality due to not all industries trade, cons of MNCs)
- trade liberalisation
(freeing up markets without any interferences from governments, reduce gov. spending, control over debt/budget deficit, deregulation, market liberalisation, privatization, trade liberalisation, free exchange rates, no protectionism) (PROS: less market failure, effective use of resources, sustainable LR growth from AE, stability in econ, investment & FDI, more jobs etc) (CONS: SR econ inequality, more poverty creation from MNCs, cons of MNCs, neg. externa enviro, fiscal cuts in e.g. healthcare preventing human capital) - bilateral trade agreements & region PTAs
(encouraging econ integration, pros of free trade, gains of specialisation etc, lower transport costs from greater access, greater profit & jobs, more growth) (CONS: risk of coincidence of wants, increase in COP because import at higher costs outside of PTA, more barriers outside PTA, overseas trade barriers) - diversification
(PROS: crucial to get away from agricultural dependance, towards LR sustainable growth, diversification is develop manufacturing base, greater avenues of growth, avoids resource curse argument of exporting primary goods as they have fluctuating & volatile prices, promotes new tech, exports more varied G&S thus opening greater change 4 profit, job&income creation, more skills in workforce & good for LR productivity,) (CONS: tariff escalation, & higher tariffs on manufacturing goods, if education cannot generate higher skilled workers then this may not be feasable)
barriers to trade & development
- limitations to reliance on trade
- ‘resource curse’ (developing countries rely on export of primary commodities 4 growth, trade & development) however this dependence is vulnerable to price falls of primary goods (then export rev. falls, purchasing inputs is harder, income fall, profits fall, less investment), vulnerable to depletion of primary resources as they are not infinite resource (thus closing key avenue for growth) thus primary commodity exports is unsustainable pursuit of development, vulnerable to slow demand for primary commodities thus falling price of primary commodities
- susceptible to price fluctuation because inelastic PED & PES for primary goods (necessity goods, less substitutes, long time to produce/harvest) thus any shift to D or S then there will be huge price swings (bad for LR stability , less investment , uncertain export revenue)
- access to international markets is super limited for developing countries (bc. developed countries have protectionist policies on primary goods) (also tariff escalation as tariffs on manufactured goods are higher thus discouraging manufacturing exports for developing countries) (non-convertible currencies of developing countries reducing potential for trade)
- LR decline in terms of trade for deve countries
(export prices relative to import prices fall making it harder to sustain revenue thus growth & develop) (purchasing capital is more difficult & countries trade in primary commodity dependance)
(LR decline terms of trade will decline from specialisation in export of primary commodities. this is because YED for exports & imports due to wealth effect | primary commodities are inelastic YED thus as world is wealthier the demand for manufacturing goods increases NOT primary goods which are capital imports that developing countries do NOT export and thus cannot benefit from, thus increasing price of manufactured goods massively more relative to primary goods thus primary exporting countries do not benefit from world econ growth & imports for developing country also become more expensive harming quality of life) - terms of trade is index of export prices/index of import prices x100
FDI & development
FDI is when firm has major head quarters in another part of the world but operates in a branch or part of business in another part of world
MNCs would what to do this because: (1) developing countries are abundant in natural resources (2) the markets where MNCs do FDI could be emerging big markets which lots of potential for profit (3) lower costs of labour in developing countries (4) developing countries have less regulations and standards
Pros:
- FDI is injection, more employment, increase LRAS
- more investment thus human capital
- positive effect on BoP (balance of payments)
- MNCs can promote infrastructure development like human capital 4 progress
- increased domestic productivity to compete against MNCs
- technological transfer as MNCs are better at research & development
- increased tax revenue from MNCs (more income tax from jobs, corporation tax from MNCs, VAT aswl)
Cons:
- employment benefits may be SR no guarantee MNCs will stay. No guarantee MNCs will employ domestic workers
- MNCs may exploitative & use power for better tax position, influence politics
- MNCs may deplete resources
- environmental costs
- tax revenue collection may be lower than expected bc. gov give tax breaks to MNCs
- MNCs may get around taxes
Foreign Aid & Development
https://www.youtube.com/watch?v=SyFV65I6y9E&t=41s&ab_channel=EconplusDal
Foreign aid fills savings gap in developing countries to promote dev.
lack of savings is barrier to development
Forms of aid:
(1) official development assistance
(2) unoffical not from a country
(1) humanitarian aid
- allivate SR suffering
- food, medical, emergyency aid
(2) development aid
- LR loans
- Tied aid
- Project aid
- Technique assistence aid
- commodity aid
- injection into economy
depreciation is a shift in..
increase in supply for currency
apreciation is a shift in..
increase in demand for currency
current account has:
trade balance
income
current transfers
financial account has:
FDI
portfolio investment
reserve/official assets
official borrowing
capital account has:
capital transfers
transactions of in-producted, non-financial assets
