Measuring macroeconomics Flashcards
Value added method
Calc GDP using value added for each good produced - by summing values added GDP can be calculated
Transfer payment
govt payments to businesses or households designed to meet a specific objective
capital income
payment to owners of physical and intangible income (25% GDP)
Four groups of users (exp. method)
- Households 2. Firms 3. Government 4. Foreign sectors (purchasing domestic goods)
labour income
wages, salaries, incomes of self employed (75% GDP)
National income accounting identity
Y = C + I + G + NX
Final Goods and Services
Goods and services consumed by the ultimate user- because they are end products of the production process they are counted as part of GDP
Investment
spending by firms on F G&S primarily capital goods an d housing
Why do firms purchase capital goods
to increase their capacity to produce
Purchases spent by 4 groups of users = market value of those goods and services in the
exp. method
Consumption expenditure
spending by households on goods and services such as food, clothing, entertainment
Govt Purchases
Purchases by govts. on F G&S do not inc. transfer payments which are payments made in govt. in return for which no current goods or services are received.
Economics define
The study of how society allocates its scarce resources
Macroeconomics
The study of economy wide phenomena instead of individual markets
Income method
considers that when a good or service is sold the revenue from its sale is dist. to the workers and owners of capital in prod
Comparative Advantage
Everyone does best when each person concentrates on the activities for which his/her opportunity cost is the lowest. I.e. Someone staying home to do house chores while possessing a medical degree has a high opportunity cost of forgoing practicing medicine
What are the 3 ways of measuring GDP
- Production method (value added) 2. Expenditure method 3. Income method
Examples of govt. expenditure
social security benefits, welfare, pensions paid to govt workers etc.
Structural unemployment
Unemployment due to no demand
Inventories
Items which have been produced but not sold in a given period
Frictional unemployment
Temporary unemployment i.e. between jobs
Income method can be summarised as
GDP = labour income + capital income
Non- durables
Shorter lived goods such as food or clothing. Services from haircuts through to education
Durables
Long lived consumer goods such as cars and furniture- houses are not inc. treated as investment
Four categories of expenditure
- Consumption expenditure C 2. Investment I 3. Government purchases G 4. Net exports NX
criteria which allows macroeconomic criteria to be gauged
measure- aggregate output average level of prices
The relationship between GDP and expenditure is expressed by
the national income accounting identity
(1) consumes (2) invests (3) makes govt purchases (4) buys national exports
- households 2. firms 3. govt 4. foreign sector
Expenditure method
Calc GDP by looking at the amount of money spent on goods and services produced in a country in a given period
Cyclical unemployment
Unemployment due to a recession this is the type of unemployment we want to avoid in the economy
What suggests an economy is performing well
Inc living std Avoiding short term macroeconomic extremes - cons unemployment rate, GDP not too high/low Sust. lev. public and foreign debt Balance expenditure / need to provide resources for the future
Residential investment
the consturction of new homes and apartment buildings, for GDP accounting purposes residential investment is treated as an investment by the business sector which then sells homes to households
GDP
the market value of final goods and services produced in a country in a given period> usually a quarter or year
Business fixed investment
Purchases by firms of new capital goods such as machinery, factories and office buildings > for the purpose of calc GDP long lived cap goods are treated as final goods not int. goods
Nominal GDP
a measure of GDP in which the quantities produced are valued at current year prices; measures the current dollar value of production
Real GDP
a measure of GDP in which the quantities produced are valued at prices in the a base year rather than at current prices; real GDP measures the actual physical volume of production
Why is GDP different than measuring wellbeing
It may be an indicator how an economy is performing it does not represent
1. the distribution of wealth per capita
- environment or resource depletion
- black market activity or underground economies
- non market activities- e.g. stay at home parents, volunteering etc. how that contributes to economic growth or contraction
- quality of life e.g. air quality, crime rate, leisure time
Consumer price index
we use the CPI to measure inflation- the change in prices of goods and services between periods
who gathers information for CPI
the ABS
CPI formula =
cost of base year consumption of basket goods and services in current year
divided by
cost of base year consumption of basket goods and services in base year
What is inflation
inflation is the changes in price for an economy over a given period of time
Inflation is calculated by
measuring CPI change
inflation yr 2 = CPI yr 2 - CPI yr 1 / CPI yr 1
x 100
CPI is used to
adjust real vs nominal GDP
a useful
Does CPI represent true inflation
suggested that it can overestimate by 1-2%
- quality adjustment bias: sometimes price increases is associated wirh improved quality of products
- substitution bias: CPI focuses on a fixed basked of goods, consumers may switch more to less/ more expensive goods
Indexing
CPI can be used to calcculate real quantities into nominal quantities
Costs of inflation on the economy
Shoe leather costs
Noise in the price system
Distortion in the tax system
Unexpected redistribution of wealth
Interference with long term planning
Menu Costs
Shoe leather costs
money has the adv of being universally accepted
inflation though > increases the cost of holding money to consumers and businesses
Because it erodes the real purchasing power of any given amount of cash
The longer the cash is held the larger is the reduction in purchasing power
Noise in the price system
Adjusting the price of goods + services in response to demand and supply forces
When inflation is high it is difficult to see if price change is demand or supply or overall change in price level.
Can make the market inefficient - i.e. is demand high or has the cost of the item increases (inflation)
Distortion in the tax system
Taxes in AUS are not indexed to inflation
As inflation increases ~nominal wages may inc but real wages may not
Therefore ppl may pay inc income tax even if their real wages have fallen
Unexpected redistribution of wealth for INFLATION
Inf can cause unexpected winners and losers
Money lending hurts banks because the purhcasing power or value of the $ has decreased and therefore lenders are paying back a decreased amount
Note that redistribution of wealth doesn’t destroy wealth it just transfers it from one group to another in the economy
Interferance long term planning
Inflation can interfere with the ability of households and firms to plan for the long-run
i.e. how does a university student need to save for retirement in an erratic economy
Menu costs
Cost of having to change prices
includes: reprinting menu’s, posters, changing website prices
Interest rate
the proportion of a loan that is charged as interest to the borrower typically expressed as an annual percentage of the loan outstanding
NOTE: when you have money sitting in a bank account the bank is effectively a borrower
Real interest rate
the percentage inc in the real purchasing power of a financial asset or investment
Deflation
is a situation in which the prices of most goods and services are falling over time so inflation is -ve
The effect of deflation on RIR is concern because
It discourages various types of important expenditure i.e. firms are less willing to invest
Nominal interest rate
refers to the interest rate before taking inflation into account
What happens when deflarion = real interest rate
nominal IR would = 0 which one could do the same by holding cash which pays 0% interest
If deflation inc then infl would become -ve
0% is the lower limit for nominal interest then any inc in deflation = inc in the real interest rate therefore discouraging expenditure and making monetary policy harder to implement
Savings
current income - spending
can apply to ind, households, firms, govt
Saving rate
important to macro ec
is the amount of savings divided by the income
i.e. 60/600
Wealth
assets - liabilities
where
assets are anything of value a person owns
liabilities are debt that someone owes
Balance sheet
Used by accountants to work out wealth
Stock
a measure that is defined at a point in time
eg. wealth on the 20th of march
Flow
a measure that is defined per unit of time
e.g. 20$ per week
Capital gains and losses
wealth can change because of change in the value of assests
Change in wealth =
savings + capital gains - capital losses
Three types of saving
Lifecycle saving
Precautionary saving
Bequest saving
Lifecycle saving
to meet long term objectives
Precautionary saving
protect oneself against unexp setbacks such as a job loss
Bequest saving
to leave money or inheritence to your heirs e.g. children or charity
Australias savings have declined because
age pension and superannuation reduce need to save for retirement
availability of mortgages increase
unemployment decreased
home ownerships with smaller deposits
good performing stock market = large capital gains
People save because
making financial investments -govt bonds, stocks ect
people recieve interest on their investment which increases wealth
in savings RIR = most relevant
Measurement of national saving inc
firms , households, govt
Firms pay:
Firms save
pay a proportion of sales, reciepts as wages - payments to suppliers, interest, rent divendends and tax
save or retain a propotion of proceeds as retained earnings and an allowance for depreciation of equipment ect = business savings
Households recieve
recieve income in the form of wages, interest, rent and divendends
proportion used for consumption and depreciation of white goods while the rest = savings and taxes
Government recieve
tax payments from firms and households and the budget represents the govt saving
Aggregate spending categories
investment is easiest to classify because it is done to expand the economy’s future productive capacity or to produce future housing capacity
Household and government spending meets a combination of current consumption and future needs
Measurement of national savings
NIAI suggests that for the economy as a whole
production (and income) = total expenditure
We can use this eqn to work out national savings
assuming NX= 0
therefore Y=C + G + I
To work out savings for Y= G + I + C we =
Savings = Y (GDP) - (C) Consumption - (G) Government
S= Y-C-G+T-T includes:
taxes paid from priv sec to govt minus transfer payments and is rearranged to give us
S= (Y-T-C) + (T-G_
Hence Spriv = Y-T-C
Spub = T-G
and National Savings = Spriv + Spub
Govt budget deficit
the excess of govt spending over tax collections
Govt budget surplus
the excess of govt tax collectiions over govt spending the govt budget surplus equals public saving
Investment
Investment is the creation of new capital goods and housing. It is critical to increasing productivity and improving living standards.
What determines a firms decision to invest
the cost benefit principle- is the expected costs less than the benefit (equal to the value of the marginal product it provides)
Financial Market
Through the workings of the financial markets, the supply of savings (by households, firms and the government) fund the demand for savings (by firms that want to buy new capital)
Supply and demand model
Allows us to analyse the financial markets
hence in equilibrium national savings= investment
Supply of savings (S) is an upward sloping curve
Ilustrates the amount of national savings that households, firms and govt are willing to supply at each value of the interest rate
Evidence suggests that increases in the real interest rate stimulates savings
Savings are demanded by firms wishing to invest in new capital goods,
Firms make capital inv by:
a. borrowing in the financial market
b. using its own accumulated profits
Demand for saving is the curve (I)
It is downward sloping because a higher RIR raises the cost of borrowing and decreases firms willingness to invest
In equilibrium the desired inv (deman for savings) and desired national savings (supply of savings) are equal
Where the two curves intersect gives us the economys level of savings and investments and the real interest rate that will ‘clear’ the market for savings, r. The real interest rate acts as the ‘price’ for savings
If s > I
There would an excess supply of savings which would push down the real interest rate
If S < I
there would be an excess of demand for savings which would psh up the real interest rate
change/ RIR causes movement along the curve
Factors which cause the demand for investment to change
New tech- shift of demand
Inv tax credit policy -shift of demand
Anything changing marginal product of inv will shift the demand for inv funds bcoz-
i. anything that dec the marginal product of the inv will reduce the demand for inv funds
ii. anything that inc the marginal product of the inv will raise the demand for inv funds
Inc in demand > shift right
Dec in demand > shift left
Factors which will cause the supply of savings to change
Change in govt budget
Any factor that changes saving in the economy will shift the supply of savings- because
Spub and Spriv so anything that causes groups of users to change their saving rate will shift the supply curve
An inc in the supply of savings > shift right
A dec in the supply of savings > shift left
A govt budget surplus (T- G > 0) inc supply of savings and shift out the savings curve
A govt budget deficit implies (T-G <0) would dec the supply of savings and will shift the savings curve from S1 to S2
Perfectly Competitive Labour Market Model
Assumes the firms and workers are ‘price takers’
i.e. firms cannot influence the price they recieve for their products or workers similarly the price (wages) they recieve in return for their services but that these are decided by the overall conditions of the market
Demand for labour
Depends on both the productivity of the workers and the price the market sets on workers output
Key labour market trends
- since the 1970s Australia and other industrial countries have enjoyed substantial growth in REAL earnings
- Since the 1970s real wage growth has slowed particularly for men- attributed to one of the reasons for inc labour force participation of women
- there has been an increase in inequality among top earners and bottom earners with top earners having a higher inc in real wages- this has caused a two-tier labour market with lots of jobs for the educated and minimal jobs for unskilled
- The proportion of the population working has inc from 58% to 65% over the last 50 years
- Diff countries have experienced diff unemployment rates ~aus is 6% compared to 10% in Europe
Productivity of workers
the more productive workers are the greater the value of the goods and services they make, the greater number of workers an employer will want to higher at a given wage rate
Firms can do cost benefit analysis to determine the number of workers they employ considering
i. additional cost of hiring one more worker (marginal cost)
ii. the benefit of hiring one more worker (value of marginial product)
A worker is hired if marginal benefit > marginal cost
