macro Flashcards
Full employment
Full employment is when the labour market is ‘at capacity’.
This occurs when there is only frictional and structural unemployment (i.e. cyclical unemployment = 0)
Frictional unemployment
arises from the job matching process.
Structural unemployment
arises from changes to the underlying structure of the economy, resulting in a mismatch between the skills and capabilities demanded and supplied. This can be a result from technological advances or changing tastes. E.g. industrial revolution -> more industries opened.
Cyclical unemployment
arises from business cycle fluctuations
Speculative attack
A speculative attack is a massive selling of domestic currency assets.
Investors sell domestic currency assets if they expect devaluation.
Such selling required central bank to deplete international reserves.
But depleting international reserves makes it more likely central bank will have to actually devalue.
national income accounting identity
Y = C + I + G
private savings
disposable income - consumption
S = (Y - T) - C
S = ((C + I + G) - T) - C
= I + G - T
public savings
T - G
flow variables
are measures per unit of time.
e.g. your wage per fortnight, GDP, consumption investment
stock variables
are measured at a point in time
e.g. your value of assets, value of your liabilities, the physical capital stock
the change over time in a stock is a flow
current account
Is (i) trade balance + (ii) net foreign income balance
capital account
is to do with the net change in ownership of assets and liabilities so records changes in investment.
depreciation (delta)
the rate at which capital becomes obsolete.
over time capital may become less productive or there’s a new technology. e.g. iPhone; if lasts 3 years - the depreciation rate is 1/3 because a third of its value is gone after a year of use.
marginal product (cobb-douglas)
the MP of an input is the amount of extra output from adding a small amount of that input holding all other inputs fixed.
assumption that its positive
marginal product of capital
a(Y/K) > 0
marginal product of labour
(a-1)(Y/L) > 0
diminishing returns
diminishing returns to an input if someone is using more of it decreases its marginal product, again holding all other inputs fixed
First point: more of the input will always give you more output (always a positive marginal products). Second point: will still get positive amount but the amount of positive you get will be less than it was when you had much less of the input (because a flatter slope). (explaining marginal product graphically)
constant returns to scale
constant returns to scale refers to scaling all inputs by the same amount.
double inputs - double outputs
diminishing returns vs constant returns
Diminishing returns to each input individually (holding other inputs fixed)
Constant returns to scale (all inputs scaled together by common proportion).
If the exchange rate is undervalued
excess demand for the currency (because it’s too cheap)
Central Bank sells its currency, building up its international reserves.
if exchange rates are overvalued
excess supply of the currency.
CB buys back its currency, depleting its international reserves.
International risk premia
Exchange rate risk (investing in assets in the foreign currency and hoping that the Australian dollar while devalue relative to the currency that is on the balance sheet, meaning the value of the asset in Australian Dollars is going to go up).
Sovereign risk (political, legal and macro settings)
capital account + current account =
0
Law of one price
tradable goods should sell for the same price everywhere; one prices denominated in common currency.
