Samenvatting Principles of Economics Macro economie
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Macro economie
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Nyenrode Business Universiteit (Nyenrode)
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Principles of Economics
A thorough summary of everything concerns macroeconomics. This summary has caused almost my entire year of study to pass the exam. Therefore, do not shortage yourself and especially do not work too hard, learn this summary and you will be an expert to macroeconomic area.
College aantekeningen ECT - Economics and Tourism (CBTO1ECT) Principles Of Economics, ISBN: 9780077132736
Samenvatting Principles Of Economics, ISBN: 9780077132736 ECT - Economics and Tourism (CBTO1ECT)
Economics for IB Midterm Summary
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Macro economie
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Chapter 13
In capitalist countries the GDP (Gross Domestic Product, a measure of the market value of
the output of the economy in a given period. In other words the aggregate output) has
grown over the long run, but not smooth. In this chapter we focus on fluctuations of the
growth curve.
Economies have booms and recessions. Two definitions for recessions:
● NBER definition: output is declining. A recession is over once the economy begins
to grow again.
● Alternative definition: the level of output is below its normal level, even if the
economy is growing. A recession is not over until output has grown enough to get
back to normal.
Business cycle: Alternating periods of faster and slower (or even negative) growth rates.
The economy goes from boom to recession and back to boom.
Unemployment goes down in booms and up in recessions.
Okun’s law: The empirical regularity that changes in the rate of growth of GDP are
negatively correlated with the rate of unemployment. So higher GDP means lower
unemployment.
Okun’s coefficient The change in the unemployment rate in percentage points predicted to
be associated with a 1% change in the growth rate of GDP.
Economists use aggregate statistics to describe the economy as a whole.
The GDP is the output of all producers in a country.
national accounts The system used for measuring overall output and expenditure in a
country.
Three different ways to estimate GDP:
● Spending: The total spent by households, firms, the government, and residents of
other countries on the home economy’s products.
● Production: The total produced by the industries that operate in the home
economy. Production is measured by the value added by each industry: this
means that the cost of goods and services used as inputs to production is
subtracted from the value of output. These inputs will be measured in the value
added of other industries, which prevents double-counting when measuring
production in the economy as a whole.
● Income: The sum of all the incomes received, comprising wages, profits, the
incomes of the self-employed, and taxes received by the government.
,Import and export
Someone in China may buy rice from someone in Japan, implying that the expenditure is
Chinese while the income is Japanese. In this case it counts as a Japanese GDP, so GDP
includes export but excludes import.
The government is also added in the circular flow, households pay taxes and the
government provides public services used by households. We say that the value added of
government production is equal to the amount it costs the government to produce.
Different components of GDP are: Consumption C, Government spending G, Investment I,
Exports X, Imports M. GDP=Y
consumption (C) Expenditure on consumer goods including both short-lived goods and
services and long-lived goods, which are called consumer durables.
Investment is the spending by firms on new equipment and new commercial buildings; and
spending on residential structures (the construction of new housing).
Net exports X-M is also called the trade balance. It is a deficit if the trade balance is
negative and a trade surplus if it is positive.
Three things need to be kept in mind when using the concept GDP:
It is a conventional measure of the size of the economy.
Distinguish aggregate GDP from GDP per capita.
GDP per capita is a flawed measure of living standards.
The term shock is used in economics to refer to an unexpected event, for example extreme
weather or a war.
People use two strategies to deal with shocks that are specific to their household:
Self-insurance Saving by a household in order to be able to maintain its consumption when
there is a temporary fall in income or need for greater expenditure.
Co-insurance A means of pooling savings across households in order for a household to be
able to maintain consumption when it experiences a temporary fall in income or the need for
greater expenditure.
Altruism is the willingness to bear a cost in order to benefit somebody else.
, A stabilising factor in any economy comes from the desire of households to keep the level of
their consumption of goods and services constant. People prefer to smooth their
consumption because there are diminishing marginal returns to consumption at any given
time.
Shocks in the economy will be dampened because spending decisions are based on
long-term considerations. A lack of information is a big problem for this.
There are three other things that constrain the ways in which households can smooth their
consumption when faced with income shocks. The first two concern limits on self-insurance,
the third is a limit on co-insurance:
● Credit constraints or credit market exclusion: This restricts a family’s ability to
borrow in order to sustain consumption when income has fallen. The amount
someone can borrow is limited.
● Weakness of will: A characteristic of human behaviour that leads people to be
unable to carry out the plans—for example, saving in anticipation of a negative
income shock—that they know would make them better off. The inability to commit
to a course of action (dieting or foregoing some other present pleasure, for
example) that one will regret later. It differs from impatience, which may also lead a
person to favour pleasures in the present, but not necessarily act in a way that one
regrets.
● Limited co-insurance: So that those with a fall in income cannot expect much
support in sustaining their incomes from others more fortunate than them.
Firms have to keep on investing, because if they don’t they won’t be able to compete with
their competitors. Overinvesting however can cause an over investment.
capacity utilization rate A measure of the extent to which a firm, industry, or entire
economy is producing as much as the stock of its capital goods and current knowledge
would allow.
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