178200 FINAL REVISIONS.docx

178200 FINAL REVISIONS.docx

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178200FINALREVISIONS

178200FINALREVISIONS

WEEK1Thescienceanddataofmacroeconomics&nationalincomeChapter:

1,2,3

Chapter2

RealGDP;consumerpriceindex;unemploymentrate;Okun’slaw

1.GDP:

themarketvalueofallfinalG&Sproducedwithinaneconomyinagivenperiodoftime.

2.2waystoviewGDP:

1）thetotalincomeofeveryoneintheeconomy2）thetotalexpenditureontheeconomy’soutputofG&S.

3.Everytransactionthataffectsexpendituremustaffectincome,viceversa.

4.Stocksandflows:

astockisaquantitymeasuredatagivenpointintime,whereasaflowisaquantitymeasuredperunitoftime.GDPisaflowvariable.

5.Usedgoods:

thesaleofusedgoodsisnotincludedaspartofGDP.

6.Thetreatmentofinventory?

?

?

?

?

1）Inventorytobeunsold:

+profit=-wage,soGDPisunchanged.2）Inventorytobesold:

GDPincreases3）inventoryasusedgoods:

GDPisunchanged.GENERALRULE（P22）?

?

?

7.Valueaddedofafirm=valueofthefirm’soutput-thevalueoffinalG&Sthatfirmpurchases

GDPisalsothetotalvalueaddedofallfirmsintheeconomy.

8.RealGDPversusNominalGDP

NominalGDP:

thevalueofG&Smeasuredatcurrentprices,whichcanincreaseeitherbecausepricesriseorbecausequantityrise.

RealGDP:

thevalueofG&Smeasuredusingaconstantsetofprices-----showswhatwouldhappenedtoexpenditureonoutputifquantitieshadchangedbutpriceshadnot.

9.TheGDPdeflator=nominalGDP/realGDP

Itmeasuresthepriceofoutputrelativetoitspriceinthebaseyear.

10.ThecomponentsofExpenditure

1）Consumption:

G&Sboughtbyhouseholds.（Nondurablegoods,durablegoods,services.）

2）Investment:

goodsboughtforfutureuse.（businessfixed,residentialfixed,inventory）

3）Governmentpurchase:

G&Sboughtbyfederal,stateandlocalgovernments.

4）Netexports:

exports-imports

11.CPIversusGDPdeflator:

1）TheGDPdeflatormeasuresthepricesofallG&Sproduced,whereastheCPImeasuresthepricesoftheonlyG&Sboughtbyconsumers.

2）TheGDPdeflatorincludesonlythosegoodsproduceddomestically.（importedgoodsinnotapartofGDP.）

3）CPIiscomputedusingafixedbasketofgoods,WhereasGDPdeflatorallowsthebasketofgoodstochangeovertime.

12.ApriceindexwithafixedbasketofgoodsisLaspeyresindex,whileapriceindexwithachangingbasketaPaascheindex.

13.Unemploymentrate:

3categories:

employed,unemployed,notinthelabourforce.

Discourageworkersarecountedasnotbeinginthelabourforce.

Labourforce=employed+unemployed

Unemploymentrate=unemployed/labourforce

Chapter3

Circularflowdiagram（Figure3-1）

1.Factorsofproduction:

theinputsusedtoproduceG&S.（capitalK,labourL）

2.Theproductionfunction:

Y=F（K,L）-----constantreturnstoscale

3.Factorprices:

theamountspaidtothefactorsofproduction.

4.Profit=revenue–labourcosts-capitalcosts

=PY-W（wage）L-R（rentalpriceofcapital）K

=PF（K,L）-WL-RK

5.Themarginalproductoflabour（MPL）=F（K,L+1）-F（K,L）

Mostproductionfunctions----diminishingmarginalproduct

Themarginalproductoflabouristheslopeoftheproductionfunction（holdcapitalconstant---assumption）.

6.Theincreaseinrevenuefromanadditionalunitoflabour

∆profit=∆revenue-∆cost=P×MPL-W

ManagercontinuestohirelabouruntilMPL=W/P（W/Pistherealwage）

7.Themarginalproductofcapital（MPK）=F（K+1,L）-F（K,L）

Mostproductionfunctions----diminishingmarginalproduct

8.Theincreaseinprofitfromrentinganadditionalmachine

∆profit=∆revenue-∆cost=P×MPK-R

ThefirmcontinuestorentmorecapitaluntiltheMPK=R/P（realrentalprice）

9.Nationalincome

Y=（MPL×L）+（MPK×K）+Economicprofit

10.EULER’STHEOREM:

Iftheproductionfunctionhasconstantreturnstoscale,theeconomicprofitis0.

F（K,L）=（MPL×L）+（MPK×K）

11.Accountingprofit=economicprofit+（MPK×K）

12.Underconsumptions:

constantreturnstoscale,profitmaximization,competition,economicprofitiszero------------the“profit”inthenationalincomeaccountsmustbemostlythereturnofcapital.

13.Totaloutputisdividedbetweenthepaymentstocapitalandthepaymentstolabour,dependingontheirmarginalproductivities.

14.Achangeinthesupplyofafactoraltersequilibriumfactorpricesandthedistributionofincome.

15.TheCobb-DouglasProductionFunction:

Capitalincome=MPK×K=αY

Labourincome=MPL×L=（1-α）Y

F（K,L）=A

（A>0,0<α<1）

16.ThemarginalproductsfortheCobb-DouglasProductionFunction:

MPL=（1-α）A

=（1-α）Y/L

MPK=αA

=αY/K

TheMPLandMPKareproportionaltooutputperworkerandoutputperunitofcapitalrespectively.

Y/L:

averagelabourproductivity

Y/K:

averagecapitalproductivity

Thefactorsharesdependonlyonα,notontheamountsofcapitalorlabourorA.

17.AllocationofGDP:

Aclosedeconomy:

Y=C+I+G

1）Consumption:

Disposableincome=Y-T

Householdsdividetheirdisposableincomebetweenconsumptionandsaving.

Consumptionfunction:

C=C（Y-T）

Marginalpropensitytoconsume（MPC）:

theamountbywhichconsumptionchangeswhendisposableincomeincreasesbyonedollar.Itistheslopeofconsumptionfunction.

Consumptiondependspositivelyondisposableincome.

2）Investment:

Thequantityofinvestmentgoodsdemandeddependsontheinterestrate.

Investmentfunction=I（r）

Itslopesdownwards,becauseasinterestraterises,thequantityofinvestmentdemandedfalls.

Investmentdependsnegativelyontherealinterestrate

3）Governmentpurchase:

Transferpayments（ex:

welfareforthepoor）isnotincludedinG.Theyaretheoppositeoftaxes-----increasethedisposableincome.

T=taxes-transferpayments

18.EquilibriuminthemarketforG&S:

thesupplyanddemandforthegoodsandservices

Y=C（Y-T）+I（r）+G

G&Tarefixedbypolicy,andYisfixedbythefactorsofproductionandtheproductionfunction.Interestrateristheonlyvariable.

Atequilibriuminterestrate,Supply（Y）=Demand（C+I+G）

19.Equilibriuminthefinancialmarkets:

thesupplyanddemandforloanablefunds

Y-C-G=I

Nationalsaving,S=Investment,I

S=（Y-T–C）+（T–G）=Privatesaving+Publicsaving=I

Y-C（Y–T）-G=I（r）

G&TarefixedbythepolicyandYisfixedbythefactorsofproductionandtheproductionfunction.

So,S=I（r）-----Sisfixed（verticalline）.Savingisthesupplyofloanablefunds.

20.Changesinsaving:

theeffectsoffiscalpolicy

1）Anincreaseingovernmentpurchases

Totaloutputisfixed----theincreaseingovernmentpurchasemustbemetbyadecreaseinsomeothercategoryofdemand------Y–Tisunchanged-----Cisunchanged-----the↑inGmustbemetbya↓inI----toinduceinvestmentto↓,interestratemust↑----GCROWDOUTI.

（Figure3-9）

2）Adecreaseintaxes

↓taxes----↑disposableincome----↑consumption

∆↑consumption=∆T×MPC

ThehigherMPC,thegreatertheimpactofthetaxcutonconsumption.

Yisfixed;Gisfixedbythegovernment----the↑inCmustbemetbya↓inI----toinduceinvestmentto↓,interestratemust↑----areductionintaxes,likeanincreaseingovernmentpurchases,CROWEDOUTinvestmentandraiseinterestrate.

（Figure3-9）

Governmentpurchasesandtaxesaretheexogenousvariablesoffiscalpolicy.

21.Changesininvestmentdemand

1）Technologicalinnovation:

Technologicalinnovationleadstoanincreaseininvestmentdemand.

2）Governmentencouragesordiscouragesinvestmentthroughthetaxlaws:

Governmentincreasepersonaltaxandusestherevenuetoprovidemoreinvestmentprojectsprofitable-----leadstoanincreaseininvestmentdemand.

（Figure3-11）---Equilibriumamountofinvestmentinunchanged,savingscheduleisvertical.

（Figure3-12）----allowconsumptiontodependontheinterestrate,savingscheduleisupwardsloping.

Week2MoneyandinflationsChapter:

4

Chapter4

Classicaltheoryofmoney;Moneysupply;Moneydemand;monetarypolicy;

Costofinflation

1.Thefunctionofmoney:

1）storeofvalue2）unitofaccount3）mediumofexchange

2.TypesofMoney:

1）Commoditymoney（e.g.,gold）2）Fiatmoney（e.g.,legaltender）

3.MonetaryPolicy:

howtheMsiscontrolled[bythecentralbank]

Moneysupply:

thequantityofmoneyavailableinaneconomy.

OMO（open-marketoperations）---thepurchaseandsaleofgovernmentbonds.（FEDusesdollarstobuygovernmentbondsfrompublic,dollarstothepublic,thepurchaseincreasethequantityofmoney---moneysupplyincreases.）

thediscountrate

requiredreserveratio

4.MeasuresoftheMoneySupply

C,M1,M2[fortheUS]

M1,M2,M3[forNZ]

Genericmonetaryaggregates:

NarrowMoney;BroadMoney[IMF-IFS]

5.Thequantityoftheoryofmoney

Developedbyclassicaleconomistsinthe19thandearly20thcentury

TheoryofhownominalGDPisdetermined

TheoryofMDbecauseittellshowmuchmoneyisheldforagivenGDP

Mostimportantfeature:

interestrateshavenoeffectonMD.

6.Transactionsandthequantityequation

Money

velocity=price

transactions

MVt=PT

（whereP=avgepricepertransaction;T=#transactionsconductedinayear;PT=valueoftheTintheeconomy）.

The[transactions]velocityofmoney,Vt=PT/M=theavgenumberoftimesperyearthatadollarisusedtopayfortransactions.

7.Fromtransactiontoincome

ThenumberoftransactionsTisreplacedbythetotaloutputofeconomyY.AssumeT=ϕY

MVt=ϕPY→MVt/ϕ=PY→MV=PY⇒V=PY/M

WhereV=Vt/ϕistheincomevelocityofmoney.

Hence,Velocity=（NominalGDP）/（MoneySupply）

%∆M+%∆V=%∆P+%∆Y.

IfweassumethatVandYareconstant,（V=V*&Y=Y*）theQtyEqtnistransformedintotheQtyTheoryofMoney–atheoryoftheeffectsofmoneythatassertsthattheqtyofmoneydeterminesthedollarvalue