Economics 1 - CIIA
Concepts, Major Macroeconomic, Variables and the IS-LM Model
Concepts, Major Macroeconomic, Variables and the IS-LM Model
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| Cartes-fiches | 30 |
|---|---|
| Langue | English |
| Catégorie | Economie politique |
| Niveau | Autres |
| Crée / Actualisé | 25.03.2014 / 26.01.2020 |
| Lien de web |
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National income identity formula ?
Y = C + I + G + NX
Y = GDP, C = private consumption, I = Investitions,
G = Gov. expend., NX = Net export
GDP (Gross Domestic Product)
what does it mesaure ?
total value of final goods and services, produced by an economy
during a particular period.
GDP can be calculated and decomposed in three ways
- Expenditure decomposition: main use of the final products
(C+I+G+NX)
- Value added decomposition: which sectors generate how much value
(diff. between revenue and expend. for intermed. products)
- Decomposition by factor incomes (capital income, labor income,
indirect taxes)
GNP (Gross national product)
measures the "total value of final goods and services
produced by productoin factors owned by domestic residents"
- diff. between GDP and GNP is net income received
from abroad (GNP = GDP + NIRA)
NIRA (net income received from abroad)
calculated by adding up the income received from all
domestically-owned foreign assets and then subtracting
the income paid on all foreing-owned domestic assets.
- GNP is very close to GDP for most countries.
- Countries that has more foreign assets than for.
liabilites is called a foreing creditor (GNP > GDP)
- Net debtor countries, with negative net foreing assets,
(GNP < GDP)
- for closed countries (GNP = GDP)
GNP = GDP + NIRA = C + I + G + NX + NIRA
CB = current acc. balance
CB = GNP - (C + I + G)
- a country that spends more than it produces
is running a current accoutn deficit (CB < 0).
- a country that produces more than it spends
has a current account surplus (CB > 0).
S (national savings)
S is defined as part of total production that is neither
consumed by individuals nor spent by Government.
S = GNP - C - G = CB + I
CB = S - I
SG = T - G
goverment revenue from taxes (T) which is saved
SP = GNP - T - C
S = (GNP - T - C) + (T - G)
when tax revenues fall short of government expend,
country has a budget deficit (BD)
BD = G - T = -SG
CB = SP - I -BD
current account deficits an arise from
high budget deficits
from low private net saving
or from both
GDP and GNP are measured in current market prices
that is : GDPt = pit * qit ; p price of final good/service i in year t
q quantity of final goods/services i in year t
GDP grows when prices rise (inflation) or
when more quantities are produced.
- to account for changes in production, we need to
fix prices in a base year to measure real GDP
Inflation
measured in two ways
- GDP deflator
- consumer price index (CPI)
(GDP nominal / GDP real) * 100 = GDP Deflator
100 / 80 * 100 = 125 (prices have gone 25% up from 80 to 100)
CPI
measures the value of a basket of goods and services
consumed by a representative household
CPI = market basket in the year you're looking for / market basket in base year * 100
market basket 09: 20
10: 40
40 / 20 * 100 = 200 = prices have gone up by 100 % from 2009 to 2010
Inflation measured in both ways usually move together,
but there are some important differences:
- CPI includes imported goods and services
- GDP deflator includes investment goods and
government expenditures
- CPI is a fixed-weight index, the GDP defl. a variable
weight index.
- nominal variables are measured in current prices,
real variables are measured in prices of a base year.
- Either the CPI or GDP defl. can be used to convert
nominal var. into real.
Example: Suppose W t+k is the nominal wage in year t+k.
What is the wage in prices of base year t (the real wage) ?
- Because prices have increased by factor P t+k / Pt, the real wage is
Wreal t+k = W t+k * P t / P t + k
Interest rates
variety of interest rates differ by many factors
(maturity, borrower type, asset seniority..)
- Most rates move together, Macroeconomics simplifies
and only consider on interest rate.
Nominal interesat rate
for investment in time interval
- for example if i = 0.05 then 1$ inested at t
will worth 1.05$ at t+1
Real interest rate
real interest rate bla bla bla
ex-ante Fisher parity
ante fisher
basic model of the real market in a closed economy
asdfsfd
Aggregate demand in a closed economy
Formula ?
Z = C + I + G
C = income - taxes plus transfers =
disposable income (YD)
YD = Y - T or
C = C(YD) = C(Y-T)
if disposable income increases, households
tend to to consume more.
C(YD) = c0 + c1 * YD
c0 + c1 constant parameters
Keynsian consumption function
Savings
private savings SP=Y - T - C = Y - C(YD)
= (1-c1) YD - c0
MPC = (1-c1), marginal propensity to consume
Savings are also increasing in disposable income
(1-c1) < 1 is the marginal propensity to save (MPS)
-> MPS + MPC = 1
Investment
Firms build up capital when expected marginal
product of capital (EMPK) exceeds real cost of capital.
EMPK expresses the additional revenue of an
additional unit of capital. It declines with the overall level
of the capital stock.
- cost of capital includes depreciation and real interest rate
(cost of borrowing or opportunity cost of investment)
optimal level of stock, called desired capital stock = K*
- increase of real intereset rates reduces K*; firms invest less
- higher aggr. income leads firms to invest more, raisin K*
- therefore, investment is decreasing in r and increasing in Y
I = I(r, Y) real interest rates, Y output
I(r,Y) =d0 - d1 * r + d2 * Y
d0 not influenced by r,Y
d1 influenced by r
d2 marginal capital coefficient, the higher the more capital-intense
- d2 must be less than 1 - c1
Fiscal policy (government expenditure)
remember
BD = G - T
-BD = SG = budget surplus = government savings
aggregate demand
for goods and services is a function of the real interest
rate r and income Y
= G + T regarded as main instruments of fiscal policy
in this model
Z(r,Y) = Y(Y-T) + I(r,Y) G
= c0 + c1(Y-T) + d0 - d1r + d2Y + G
Equilibrium in the goods market
- in equilibirum income equals output (aggr. demand
for final goods)
Y = Z(r,Y) = C(Y-T) + I(r,Y) + G / this is the IS relation
it can be written as investment = saving
I(r,Y) = SP + SG = S
with the linear specifications for C and I, output is
Y = 1 / 1 - (c1 +d2) * c0 - c1 + d0 - d1r + G)
1/1-(c1+d2) is called the multiplier
c0 -c1T ... is called autonomous spending
..
if we wish to highlight the effect of a modification of G, T or r
on Y, we must rewrite the expression in terms of variation.
Š
explanation of multiplier effect
-
d
