Flashcards
BLUE Notebook (Starting from GDP)
Cards in this deck (60)
- 1What is recession?Total amount of goods and services produced in an economy declines
- 2What is GDP ?Total market value of
final goods and services produced by
RPUs
in a specific period of time - 3Why sometimes firm's contribution is smaller than the its sales revenue?1. Use up intermediate goods produced by other firms, so value added of other firms should be deducted
2. sales include past inventories - 4Nominal GDP VS real GDPNominal GDP: Pc x Q
Real GDP: Pb x Q - 5What are the limitations of national income statistics?1. difference in price (sol: use real GDP)
2. difference in population size
(sol:use per capita real GDP)
3. Inaccuracy of estimating the value of illegal production, unreported production and non-marketed production
4. External costs of production
5. Value of leisure
6. Income distribution
(sol: consider income distribution)
7. Composition of GDP - 6What is Labor force?All people aged 15/above including employed or unemployed
*employed; all people aged 15/above who work for payment or profit or have a formal job attachment
*underemployed; a person who is involuntarily working less than 35 hours per week and is available for and seeking additional work
*unemployed; all people aged 15/above who are without a job and are available for and seeking jobs - 7Then what is non labor force?people who are not employed or unemployed, they maybe
1. people aged under 15
2.retirees
3.permanently disabled
4.house-wives
5.full-time students - 8Costs of unemploymentTo the unemployed:
1. Lower living standard
2. Loss of work experience or skills
3. Affect family harmony
To the Govt:
1.Financial burden
To the Society:
1. Loss of national output
2.Loss of human capital accumulation
3. Social problem - 9Price index- Consumer price index (CPI) and GDP deflatorCPI: measure the price change of goods and services consumed by households
=(current-year value of a fixed basket/
base-year value of the same basket) x 100
GDP deflator: price level of goods and services related to GDP in a specific period relative to the price level in the base period
=nominal GDP/real GDP - 10What are the uses of the price indices?1. Measuring inflation
2.Measuring the purchasing power of money
3. Measuring the cost of living - 11Why CPI tends to overestimate the effect of rising price on the cost of living?1. Consumption substitution;
CPI measures the price change of a fixed basket of goods and services, however, consumers turn to goods with smaller price increase. Therefore, increase in cost of living is smaller than CPI.
2. Quality improvement;
The higher the price reflect an improvement in quality of the same basket of goods, which does not reflected by CPI - 12Difference between CPI and GDP deflatorIncluding imports: CPI but not GDP deflator
On weighting: Fixed for CPI and variable for GDP deflator - 13Principles of taxation (Good tax system)1. Equity: the tax payments should be in proportion to the tax payers' income
2. Certainty: the tax obligation of the tax payers should be stated with certainty and not be arbitrarily interpreted or changed by the govt
3. Convenience: the time and methods of the tax payment should be convenient to the taxpayers
4.Economy: the administrative costs of tax collection relative to tax revenue should be minimized - 14Other principles considered by HK Govt1. The ability-to-pay: People with higher income should pay higher tax rate (progressive tax)
2. The benefit: people who receive benefits from government should be taxed
3. The territorial source: only income derived within HK is taxed, regardless of the residence of the taxpayer - 15Difference between direct tax and indirect taxDirect tax: Cannot shift tax burden to others
Indirect tax: vice versa - 16How to calculate tax rate?(tax/taxable income)x 100%
- 17The three types of tax1. Progressive tax:
When income increase, tax rate increase
2. Proportional tax:
When income increase, tax rate remains constant
3. Regressive tax:
When income increase, tax rate decrease - 18Effect 1; Increase in tax allowance on income inequalityLow and middle income groups:
1. taxable income decrease
2. tax payable decrease
3. disposable income increase
High-income group (paying standard rate):
1. taxable income remain constant
2.tax payable remain constant
3.disposable income remain constant
......
Improve income inequality - 19Effect 2; tax rebates to tax-payers on income inequalityLow and middle income groups:
1. taxable income remain constant
2.tax payable decrease
3.disposable income increase
High-income groups (paying standard rate):
1.taxable income remain constant
2.tax payable decrease
3.disposable income increase
.....
Worsen income inequality as those very low income groups don't get the tax rebate as they don't have to pay tax - 20Effect 3; Widen marginal tax bands on income inequalityLow and middle income groups:
1.taxable income remain constant
2.tax payable decrease
3.disposable income increase
High income group (paying standard tax rate):
1. taxable income remain constant
2.tax payable remain constant
3.disposal income remain constant
....
improve income inequality - 21Effect 4; Decrease marginal tax rate of each tax bands on income inequalityLow and middle income groups:
1. taxable income remain constant
2.tax payable decrease
3. disposable income increase
High income groups (paying standard tax rate):
1. taxable income remain constant
2.tax payable remain constant
3.disposable income remain constant
.....
improve income inequality - 22Effect 5; Impose general sales tax on income inequalityLow and middle income group:
1. taxable income remain constant
2.tax payable increase
3. disposable income decrease
High income group(paying standard tax rate):
1.taxable income remain constant
2.tax payable increase
3.disposable income decrease
....
worsen income inequality as GST is regressive in nature - 23Effect 6; decrease standard tax rate on income inequalityLow and middle income group;
1. taxable income remain constant
2.tax payable remain constant
3.disposable income remain constant
High income group (paying standard tax rate):
1. taxable income remain constant
2.tax payable decrease
3.disposable income increase
....
worsen income inequality - 24What is money?Anything generally accepted as medium of exchange
- 25What is barter economy?exchange 1 good for another directly
Limitations:
1. double coincidence of wants
2.no common measure value as value expressed in terms of another good
3.indivisibility of goods - 26List out all functions of money1. Medium of exchange and means of payment
2. Store of value
3. unit of account
4. Standard of deferred payments - 27What are the properties of a good form of money?1. generally accepted
2.scarce
3.divisible
4.durable
5.portable
6.homogeneous
7. having denominations - 28What are the types of deposits in HK?1. demand deposit: No interest
2. saving deposit: medium interest
3.time deposit: higher interest
4.negotiable certificates of deposit: higher interest - 29The types of banksCentral bank: non profit public body and responsible for the monetary affairs of an economy
Commercial bank: profit-making - 30What are the characteristics of central bank?1. issue currency
2.formulate monetary policy
3. government's banker and advicer
4. supervise commercial banks
5.lender of the last resort
6.discount window services
7.market clearing house - 31Commercial banks-3 tier banking system in HK1. Licensed bank
minimum paid-up capital: $300m
types of deposits: all
minimum deposit amount: any
maturity: any
2. Restricted-license bank
minimum paid-up capital: $100m
types of deposits: TD and NCD
minimum deposit amount: greater than or equal to $500000
maturity: any
3. Deposit-taking companies
minimum paid-up capital: $25m
types of deposits: TD and NCD
minimum deposit amount: greater than or equal to $100000
maturity: at least 3 months - 32What is the fractional reserve system?All banks are required to keep only a fraction of their total deposits as legal reserve
- 33Important formulasbank reserve ratios (rr) =(reserves/deposits)x100%
Monetary base(M0) =Cp + R
max deposits created= reserve/rrr
max banking multiplier= 1/rrr
actual banking multiplier= D/R
max loan=max D-max R
Fall short of reserve=
(1-rrr) x initial withdrawal - 34Why banks keep excess reserve?1. meet withdrawal needs of customers (voluntary)
2. insufficient demand for bank loans (involuntary)
3. keep more reserves to prevent bank run (conservative)
**cost of keeping excess reserve: forgo the interest earned from lending out the excess reserve - 35What is fully loaned up?Banks do not keep excess reserve
- 36Assumptions of credit creation1. Fractional reserve system
2. bank chooses to keep no excess reserves-sufficient demand for loans
3.no cash leakage from the banking system - 37Steps on money creation1. New deposit/reserve (eg the central bank just issued $100)
2. New excess reserve
3.lend out as loans
4.all loans redeposited into the banking system
5.new deposits can create new excess reserve and loans
6.process goes on and on until
required reserve=actual reserve
7.max deposit (calculation) - 38Steps on money contraction1. Withdraw money/ increase the rrr
2.fall short of reserve (calculation)
3.Call back loans
4.Further withdraw money from deposit to repay bank loans
5.Withdrawal will make actual cash reserves in other banks fall short of legal requirement
6.banks continue call back loans
7.Process continue until there is no shortage of reserve - 39What is money balance?Can be nominal or real. Referring to the quantity of money that people actually hold at a certain moment
- 40What is money demand?The quantity of money that people plan to hold at a certain moment.
Mt+Ma - 41What is Money transaction (Mt)?To finance daily expenditures, make purchase (medium of exchange)
- 42What is Money asset (Ma)?To hold money as asset
(store wealth) - 43Compare bonds/other non-money asset and money1. Money interest (i.e nominal interest): V/X
2.liquidity: lower/highest
3.risk: higher/lower
*forgo return of holding bonds=nominal interest rate - 44Factors affecting Mt1. payment technology increase
2.time interval between income receipts increase
3.saving increase----income increase
4.price level increase
5.synchronization between receipt and payment increase - 45Factors affecting Ma1.risk of holding interest-yielding assets increase
2.cost of switching assets increase
3.wealth increase
4.inflationary expectations
5.expected bond price decrease - 46How central bank affect M0 and banking multiplier?1. decrease rrr:
max. banking multiplier increase
bank keep less reserve as required reserve
increase excess reserve (loan)
multiple creation of money
money supply increase
2.decrease discount rate:
decrease cost of borrowing
increase borrowing
increase reserves
increase loan (because have a higher profits with lowered discount rate)
multiple creation of money
money supply increase
* discount rate: interest rate that the central bank chargers when it lends money to banks
3.Open Market Operation
#A---Purchase
a.Pay
b.money circulate in public
deposit into banks
c.reserve increase
d.immediate increase money supply
e.increase in reserve further create deposits
f. increase in money supply (money creation)
#B---Sale
a.receive money from buyers
b. money circulate in public deposit less into the bank
c.immediate decrease money supply
d.decrease in reserves further reduce deposits
e.decrease money supply (money contraction)
4. Issuing currency
M0 increase
credit creation
increase money supply - 47What is inflation?persistent increase in the general price level
*caused primarily by govts' printing more paper money/cheap-metal coins, which increase money supply and decrease each piece of money's preciousness
*once-and-for-all increase in prices is not inflation (eg when a sales tax is imposed) - 48What is deflation?persistent decrease in the general price level
- 49What is disinflation?persistent increase in the general price level but at a declining rate
- 50How to measure inflation or deflation?measure by %change in price index
*positive: inflation
*negative: deflation - 51Formula for nominal interest rateNominal interest rate (n%)=
real interest rate (r%)+inflation rate (I%)
*expected/actual - 52What is the cost of holding bond?1. nominal interest rate of holding money=0% (because money is not interest bearing)
2. real return of holding money= -I% - 53What is the cost of holding money?1. nominal return of holding bond=n%
2. real return of holding bond= n%-I%=r% - 54What is the redistributive effects on inflation?It happens only when inflation is unanticipated, resulting redistribution of income among people in society.
- 551.1 Fully anticipated inflation1. because of inflation, purchasing power of a future payment decrease
2.if it is fully anticipated,
3.people will ask for inflation premium to cover the loss in purchasing power from inflation
4. in turn can adjusted to eliminate the effect
5. No redistributive effect as result - 561.2 Unanticipated inflationCase 1; Fixed receipts and payment
1. purchasing power of money decrease
2. amount they pay or receive will reduce unexpectedly in real terms
3. As future income payers: gain
As future income receivers:lose
Case 2; Unanticipated deflation or over-anticipated inflation
1. purchasing power of money increase
2.amounts they pay or receive will increase unexpectedly in real terms
3.As future income payers: lose
As future income receivers: gain - 571.3 Unanticipated/ Under-anticipated inflation ** actual inflation rate is greater than the anticipated inflation rateAs future income payer: gain
1. Because inflation premium they paid is less than the actual fall in purchasing power of money
2. Therefore the amount they paid is reduced unexpectedly in real terms
As future income receiver: lose
1. Because inflation premium they received is less than the actual fall of the purchasing power of money
2. therefore the amount they received is reduced unexpectedly in real terms - 58In general, who will gain when redistribute income from public to govt?Govt: gain
Public: lose
1. Progressive tax:
The higher your nominal income, the higher tax rates you need to pay (i.e pay more tax not only in money term but also in real terms)
2. Issuing govt bonds:
Future income receivers: people holding government bonds
Future income payers: govt
...debt is reduced in real term
3. Inflation tax:
Government finance expenditure by printing money which increase money supply, price level (according to QTM) and so decrease purchasing power of money. Since public are the cash holders, the purchasing power is transferred to the government. - 59The Quantity Theory of Money (QTM) *** points out that a continuous increase in MS will result in inflationREFER TO YOUR NOTEBOOKKKKKK!!!!!!!
- 60Exchange rate and BOPREFER TO YOUR NOTEBOOKKKKKK!!!!!!!
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- Form 6 Economic and Public Affairs (EPA) Flashcards on BLUE Notebook (Starting from GDP) , created by ellie kwok on 14/08/2017.
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