IB Economics SL: Macroeconomics

IB Economics SL: Macroeconomics

1. Measuring National Income

   • National Income = National output = National Expenditure
     • Methods
       • Income
         • Sum of payments to factors of production
       • Output
         • Sum of value of final output produced by various industries
       • Expernditure
         • GDP = Consumption + Investment + Government spending + Net expeort
     • GDP
       • Total value of output produced in an economy in a given time period
       • GNI = GDP + Net income from abroad
         • NNI = GNI - depreciation (capital consumption)
         • Real GDP/GNI = nominal GDP/GNI - inflation
         • GDP/GNI per capital (divide by population)
         • Green GDP = GDP - environmental costs of production
       • Doesn't take into account: spillover effects, degradation, black market, improvement in quality
   • Circular Flow of Income
     • An interaction between Households, Government and Firms
     • Injections (J)
       • Government Expenditure, Investment, Export
     • Withdrawals (W)
       • Taxation, Saving, Import
     • Equilibrium J = W
   • Business Cycle Model
     • A pattern of Growth
       • Boom (extended period)
         • High inflation, Shortage of resources, Rising property values
       • Recession (2 quarters)
         • Unemployment, Falling consumption and investment, Business failures
       • Trough (Minimum GDP)
         • Long term unemployment
       • Recovery (Growth post-recession)
         • Increasing consumption, employment, investment and inflation
       • Boom = +ve output gap Trough = -ve output gap

2. Macroeconomic Models

   • AD/AS Analysis
     • Equilibrium AD = AS
     • AD
       • Total demand for an economy's goods and services
       • AD= Consumption + Investment + Govern Expenditure + Net Export
         • Changes in those will cause a shift in AD
           • Consumption
             • Consumer Confidence Interest rates, Wealth Income taxes, Debts
           • Investment
             • Interest rates, Taxes on profits and investment, Business confidence , Corporate debt
           • Government spending
             • Political and economic priorities
           • Net Export
             • Exchange rates, Protectionism, Income levels of trading partners
           • Fiscal and Monetary policies
             • Change in Tax and Interest Rates influences AD
     • AS
       • Total value of goods and services that an economy can produce in a give time period
       • Short Run AS Shifts
         • Variable costs, Taxation and Subsidies, Labor costs, Supply-side shocks
       • Long Run AS Shifts
         • Productivity/ Efficiency, Technology, Institution
         • Keynsian
           • Different levels of spare capacity in an economy
           • Shifts when improvement in quantity and/or quality
           • At high spare capacity, deflationary gap exists At low spare capacity, "bottleneck" appears, At full capacity, increase in AD is inflationary
           • Demand side then supply side policies
         • Monetarist/ Neo Classical
           • Always at fully capacity (vertical line)
           • Shift when change in quantity and quality, not price level
           • Short-term changes in AD will be counteracted in long-term
           • Supply side policy
     • Keynsian/ Monetarist debate
       • Keynesian
         • Market are slow to adjust, economy can be at equilibrium below max employment, Government should intervene, fiscal > monetary
       • Monetarist
         • Markets work, Economies tend to full employment, Inflation is caused by excess money supply, minimum government intervention

3. Supply/ Demand side policies

   • Demand side
     • Fiscal
       • the use of government spending and taxation to influence AD, raise revenue, redistribute income and influence consumption patterns
       • Government budget
         • Budget deficit
           • Govern.Spending > Tax
         • Budget surplus
           • Govern.Spending < Tax
         • National Debt
           • Accumulation of past deficits
         • G Expenditure
           • Payments, Investments, Social benefits
         • G Revenue
           • Direct and Indirect Taxes, Privatized national industries
       • Automatic Stabilizers
         • GDP grows, Budget surplus GDP falls, Budget deficit
           • Stabilize Short term fluctuation
       • Strength/ Weaknesses
         • Strengths
           • Targetable
           • Direct impact on AD
           • Role in recession
         • Weaknesses
           • Time lag
           • Crowding out
             • Lack of fund for private sector
           • Political influence
           • Inflexible
       • LRAS* effects
         • Favorable environment for businesses and employment, government spends on infrastructure -> potential output
     • Monetary
       • the use of the rate of interest predominatnly to influence AD (Money supply control and exchange rate)
         • Money supply affects interest rates
       • The role of the central bank
         • Banker to the government
         • Regulate commercial banking system
         • Manage government's borrowing via bonds
         • Set interest rates for macro objectives
         • Manage supply of money via nominal interest
         • Manage foreign currency resereves
       • Inflation targeting
         • Focus on rate of inflation
           • Symmetric/ Asymmetric
             • Using interest rates
       • Strength/ Weaknesses
         • Strengths
           • Independence of central banks - no political influence
           • Relative speed of change, faster than fiscal
         • Weaknesses
           • Investment can be interest-inelastic
           • Time lags
           • One policy fits all
           • Ineffective against cost-push inflation
           • Ineffective during recession, due to low confidence
   • Supply side
     • Interventionist-based
       • Investments in
         • human capital
         • new technology
         • Infrastructure
       • Industrial policies
       • Could be ineffective on ELDC due to government deficit
     • Market-based
       • Deregulation, privatization and encouraging competitition
       • Labor market reforms
       • Incentives to work and invest (firms)
       • However, could increase monopoly power for firms
         • Reduction in health and safety for workers

4. Economic Growth

   • an increase in real GDP over a given time period
   • Actual Growth
     • Below full employemnt
   • Potential Growth
     • Long-term trend growth
   • Consequences
     • Benefits
       • Per capital income growth
       • Higher living standards
       • higher tax revenue
       • Employment rise
       • Easier to redistrubute income
     • Drawbacks
       • Inflation
       • Externalities of resource depletion
       • Increase import and current deficit
       • Unequal ditribution of income
       • Unbalanced growth if focused only on consuption

5. Unemployment and Inflation

   • Unemployment
     • Unemployed
       • The people who are registered as willing, able and available for work at the market-clearing wage, but who are unable to find work
     • Unemployment Rate
       • the number of people unemployed as a percentage of the labor force
     • Underemployment
       • when workers who want full-time jobs are only able to find part-time jobs. Low wages and output per worker are reflections of work with low rates of productivity
     • Hidden Unemployment
       • the part of the working population excluded fro any measure of unemployment because of the definition of unemployment used
     • Measure of Unemployment
       • No consider of regional, gender , age and ethnic variations and disparities
     • Costs of Unemployment
       • Loss of output
       • Waste of productive potential
       • Loss of skills
       • Loss of tax revenue -> social benefits
       • Social problems
       • Loss of consumer spending
       • Increased income disparity
     • Types of Unemployment
       • Cyclical(Demand deficit)
         • Recession
           • Wages Stick Downward!
       • Frictional
         • Give incentive for work, reduction in unemployment benefits
       • Seasonal
       • Structural
         • a mismatch between skills and opportunities caused by technological change, a fall in demand for a particular job/ change in taste
         • Solution: Education, Training(apprenticeships and relocation of labor
     • Natural Rate of Unemployment
       • any unemployment that exists when the AD for labor = AS for labor
         • Solution: Supply side policies, due no demand deficits, AS vertical
   • Inflation
     • a sustained price rise over period of time
     • Types of Inflation
       • Cost-push
         • Rising raw materials/labor costs or/and indirect tax
           • Demand side: ineffective, Supply side: only works in LR
       • Demand-pull
         • Reduced tax, interest rates, exchange rate; Increase in govern.spending, consumer confidence, economic growth
     • Measure of Inflation
       • PPI
       • CPI
       • A basket of factors of production (PPI)/ consumed goods (CPI)
         • Measure change based on 100
           • Drawbacks: Not considered regional, income group, new products changes and disparities
     • Disinflation (fall in rate of inflation)
     • Core inflation (excludes the impacts of volatile prices)
     • Consequences
       • Redistribution of income
       • Devaluation of money/ low purchasing power
       • Reduction of investment
       • Reduction of international competitiveness
       • A potential wage-price spiral
       • Shoe-leather and menu costs
         • Shoe-leather: opportunity costs of consumer counter acting inflation
         • Menu costs: Additional costs to firms in changing the prices
       • Anticipated: less fluctuation Unanticipated: protection of own interest resulting in reduction in economic growth
     • Cures of inflation
       • Demand side
         • Monetary
           • Increase in interest rate
         • Fiscal
           • Reducing g. spending, increase taxation
       • Supply side
         • Increase supply
       • Evaluation
         • Balance in AD & AS, Control Inflation while increasing economy's productive capacity
         • Increase output at low cost give the economy room to grow without inflation
       • Extreme cases
         • Deflation
           • a constant fall in prices over a given time period
           • Demand-side
             • Recession, fall in everything, dangerous
               • Solution: increase in AD
           • Supply-side (Desirable)
             • Lower Commodity prices
               • Productivity gain, competitive wages and lower tax

6. Distribution of Income

   • Measuring D of I
     • Lorenz Curve
       • Gini Coefficient (Degree of inequality)
       • shows the proportion of a nation's income that is earned by given % of the population
   • Government tax and benefit system
     • Transfer of payment (tax to unemployment benefits)
     • Type of tax
       • Progressive (Rate increase as income increase)
         • Direct tax (taxes on income and wealth paid by authorities)
       • Regressive (Rate decreases as income increases)
         • Indirect tax (taxes on spending that are paid by suppliers, oppose to consumers)
       • Proportional (avg. rate is constant)
     • Promoting of health care/education
     • Direct provision of clean water and sanitation
   • Poverty
     • Poverty line
       • Below: Absolute poverty
       • Compared to median income: Relative poverty
     • Consequences
       • Social problems, Lack of access to education and health care, low living standards
     • Causes
       • Low incomes, employment, unequal distribution of resources, poverty cycle