portfolio2
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SEMESTER 2 PORFOLIOSonny Bautista
Macroeconomic Models
Economic growth and development
Full employment
Price stability
Circular Flow of income
A simplified model of the economy that shows the flow of money through the economy
House Holds
Government
Firms
T
T G
G
YC
S M
S MX I
Gross Domestic Product
The total money value of all final goods and services produced in an economy in one year
Real GDP: Adjusted for inflation
Nominal GDP: not adjusted for inflation
Boom and Bust Cycle (Business cycle)
In developed economies, we often see a cyclical pattern to growth in real GDP, following four phases: boom, recession, trough, and recovery
DEPRESSION
RECOVERY
BOOM
RECESSION
TROUGH
BOOM
factors of GDP
C + I + G + (X – M)
Private Consumption: The value of goods and services acquired and consumed by households
Investments: Includes business investments on equipment
Government Expenditure:The sum of government spending
Exports and Imports:Represents gross exports and imports of an economy
Demand-Side Policy: Fiscal
Fiscal Policy: The use of government spending and taxation to influence AD, raise revnue, redistibute income and influence consumption patterns.
Problems: Time lags, financial inflexibility, budget deficits, and crowding out
Demand-Side Policy: Monetary
Monetary Policy: the use of the rate of interest predominantly to influence AD (the money supply control can also be used)
Problems: Investment is interest inelastic, one policy fits all, disintermediation
Supply-side Policies
Aim: To increase economy’s productive potential Increasing labour mobility Increasing incentives/decreasing disincentives to work Increasing the productivity of labour Increasing investment, innovation and enterprise
Unemployed
Unemployed: People who are registered as willing, able and available for work at the market clearing wage, but who are unable to find work.
ARTICLE: http://www.bbc.co.uk/news/business-13568334
Housing market fears due to unemployment
Cost of unemployment
Loss of output
Waste of productive potential
Government finances
Social problems
Loss of consumer spending
Involuntary Unemployment
People fired involuntarily from jobs
Article: http://www.floridatoday.com/article/20110528/BUSINESS/105280324/Engine-maker-lay-off-69
Engine markets lay-off 300 employers in florida
Cures for Involuntary Unemployment
Fiscal Policy Cut Taxes Increase government spending
Monetary Policy Reduce rate of interest Increase money supply
Supply-Demand Work-Force Diagram
Real Wage
Labour
Labour Force
AS labour
W1
L1 L2
AD labour
Inflation
A constant rise in prices over a given time period
Costs of Inflation: Redistribution of income Devaluation of money Reduction of investment Reduction of international competitiveness menu costs
Cost-Push Inflation
Cost-Push Inflation: When there is an increase in the costs of factors of production, such as wage increases or increases in oil prices, then firms’ costs are pushed upwards, the SRAS curve shifts from SRAS1 to SRAS2, and the average price level rises from P1 to P2.
SRAS2 SRAS1
P2
P1
Y2 Y1
Avera
ge P
rice
Level
GDP
Demand-pull Inflation
An increase in AD, caused by a sustained increase in any of the components of AD will shift the AD curve from AD1 to AD2 and the average price level will rise from P1 to P2.
SRAS1
P2
P1
Y1 Y2
Avera
ge P
rice
Level
GDP
AD2AD1
Inflation/Unemployment Trade-off
Stagflation: with a standard se tof AD and AS curves, there is an inverse relationship with inflation and unemployment. Keynesian theorist, increase AD to reduce unemployment
Caused -> Stagflation
Stagflation
Stagflation: A persistent high inflation combined with a high
unemployment and stagnant demand in a countries economy
SRAS2
SRAS1
P2
P1
Y2 Y1
Avera
ge P
rice
Level
GDP
AD1
Viewpoints: Monetarist
Beliefs: Markets work Economies tend towards full employment Inflation is caused by excessive money supply growth Governments should intervene really only to control
inflation by controlling money supply growth
Monetarist AS curve
Price level
GDP
LRAS
SRAS
AD will be purely inflationary in the long run, and so policy should focus on increasing AS
Viewpoint: Keynesian
Beliefs: Markets are slow to adjust (time lags) An economy can be in equilibrium below full employment Governments should and can effectively intervene to
stabilize an economy Fiscal is more effective than monetary policy
Keynesian AS curve
Price level
GDP
LRAS
SRAS
AD will increase output/income without increasing inflation as long as the economy is below full employment.