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Summary: economics and policy 1

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  • Chapters 20 till 28
  • January 18, 2022
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  • 2021/2022
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Note’s economy and policy 1

Lecture 01 – Introduction + macroeconomics chapter 20

Microeconomics: The study of how households and firms make choices,
how they interact in markets, and how the government attempts to influence
their choices.

Macroeconomics: The study of the economy, including topics such as
inflation, unemployment, and economic growth.

When we want to study the overall economy-level actions of people
and governments,
the models and tools of macroeconomics become useful.

Players in economy:
Private sector: Households (consumers) and Firms (businesses).
Public sector: Government
Rest of the world (international business)

Macroeconomics focusses on the aggregate (sum of Individuals). There are 3
key issues of macroeconomics.

Output: Aggregate output = the quantity of goods and services produced in
a specific country (GDP)

Unemployment: percentage of the labor force that is unemployed (actively
looking for a job).

Inflation: Increase in the overall price level (making somebody’s purchasing
power less).
- Deflation: prices are decreasing
- Hyperinflation: Extreme inflation

The business cycle:

Expansion vs Contraction

Recession: 2 consecutive Q’s
there is negative growth
Depression: long and deep
recession

,The circular flow of goods and services:

The initial circular flow: The expanded circular flow:




Critique on the circular
flow:

- The environment is not considered in the circular flow.
- Family care for example, isn’t part of the circular flow and of GDP
- Human behavior  research shows that we behave sometimes
irrational, or we are motivated to do good instead of responding to
monetary incentives

Three market arenas:

Goods and services market: firms supply goods and services (households,
government and firms demand goods and services).

Labor market: households supply labor (firms and government demand
lab)

Money market (or financial market): households might use excessive
savings to invest in stocks and/or bonds. Government and firms can raise
capital by issuing shares / treasury bonds).

- Share: tiny part of the firm that pays a dividend
- Treasury bond: a loan to the government that pays an interest

The role of the government:

Fiscal policy: Fiscal is taxes, so are aces decreased (expansionary) or
increased (contractionary).

, Monetary policy (central banks): interest rates. When rates go up the
price of money increases so demand for credit decreases. When rates go
down, demand for credit goes up so there will be more in circulation.
Lecture 02 – Measuring national output and national income (ch. 21)

Gross domestic product (GDP): a measurement of the total production in
a country.

GDP: The total market value of country’s output, it is the market value of all
final goods and services produced within a given period of time (typically a
year) by factors of production located within a country.

- Measuring the value of goods and services in monetary terms
(prices at which they are sold) is the most practical and common
way.
- Double counting: occurs when the value of an item/service is
counted twice or more, each time when that item/service is
purchased before it was sold to the final consumer.

GDP vs. GNP:

GDP is the market value of all final good and services produced within a
given period of time (typically a year) by factors of production located
withing a country.

- The factors of production: land, labour and capital.

Gross national product GNP: The output produced by factors of
production owned by a country’s citizens regardless of where the output is
produced.

How to measure GDP:

GDP = C + I + G + (X – M)

C = personal consumption expenditures is the total payment for consumers
goods and services.
I = Gross private domestic investment purchases of new capital (housing,
plants, equipment, and inventory)
G = Governmental consumption and gross investment (expenditures on
goods and services).
X – M = The value of Export
(X) minus the value of imports
(M) (Net exports).

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