Oxford IB Diploma Programme: IB DIPLOMA COURSE BOOK ECONOMICS
I took IB HL Economics and received a score of 7. This is chapter 11 and 19 (Aggregate Demand and Supply to Supply Side Policies) of Macroeconomics for those of you who take HL or SL Economics. The notes are short and concise, and they have been revised multiple times during my high school years.
IB Economics Notes - Detailed Overview of Key Concepts and Examples
BALANCE PAYMENT ECONOMICS (QUICK REVISION NOTES)
EXCHANGE RATES ECONOMICS (QUICK AND COMPACTED NOTES)
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MACROECONOMICS
OBJECTIVES
1) Full employment: most people who are willing and able to work should be able to find work = equilibrium
- High unemployment → social + economic challenges
2) Low inflation: APL of goods and services should increase over time
- Unanticipated fluctuations in PL = undesirable
- Some inflation is good because price level is increasing; shift is right-hand side on LRAS
3) Steady rate of economic growth: nation’s output of goods and services should increase year after year (avoid recession); improve
standard of living
4) Income distribution: nation’s income should be distributed relatively equally across various levels or classes of society; ensures
opportunity for all
- Grossly unequal distribution of income → social, political, economic unrest
- Equity over equality; equality in the form of equity
,11: MEASURING NATIONAL ECONOMIC PERFORMANCE
IMF, OECD, World Bank attempts to figure out richest people
Money can be either:
- Leakage: money that exits the system
- Injection: money that enters the system
Circular Flow in open economy (LIIE):
→ Injections and leakages have tendency to become equal; however, it is
very unlikely that they will be equal.
Output = income: essential idea that all spending in economy equal income
received
Income flow (from FoP) = expenditure flow (on g & s)
- Two flows must equal value of total g & s (output flow), because
each good and service multiplied by its price will add up to total
output
- = consumer expenditure, because spending by consumers = each
item bought multiplied by price
Size of injection + leakage
- If injection < leakage, income flow is smaller
- If injection > leakage, income flow is greater
Sectors
1) Government sector: draw money out using tax; however, re-enters model through government spending
2) Foreign sector: imports and exports
3) Financial sector:
- Savings slow down flow of expenditure → income
- Savings from bank available to borrowers who inject money through investment
Method of measuring national income:
1) Expenditure approach: total spending on final new goods and services in a given year
*does not include intermediate: goods that will be input goods/raw materials for other production
a) Consumption (C): durable and nondurable goods and services purchased by private individuals and households →
SEPARATE from consumption
- Durable goods: goods that last more than one year (ex. Refrigerator, televisions)
- Nondurable goods: rapidly consumed goods that do not last long as a year (ex. Food, magazines, beauty
products)
- Services: actions performed by firm (ex. Legal services, insurance, sales firms)
b) Investment (I): spending by firms and households
- Firms spend on capital goods like BEM; business, equipment, machinery
- Households spend on housing and new construction (resale value)
c) Government spending (G): spending on gov. purchases such as salaries + capital goods
- Does NOT include transfer payments (tax revenue redistributed to pensioners, veterans, and unemployed)
because it is not a new production; direct gov. entitlement programs
d) Net exports (X-M): treat all exports as an inflow
- Net exports = export revenues - import payments
→ (total income from sale of exports to foreigners) - (total amount spent by nation’s households, firms, gov. on
goods and services imported from other countries)
- Expenditure approach; GDP = C + I + G + (X-M)
- - : more import
- + : more export
→ good, because there is no overlapping + delineate each economic actor
= quantity how confident and well households are doing
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, 2) Income approach: roughly approximates returns for factors of production (wages, interest, rent, profit)
- Looks at market view of the circular flow of income
3) Output approach: total value of all final goods and services produced in a year
- Attempts to take raw material and makes value
Why measure economic performance? = PEC
1) Political power to people
- Gives one ability to understand/interpret own experience of economy + fiscal policies
- Voters can assess effectiveness of leaders
2) Evaluation of economic performance
3) Change policy accordingly
Gross domestic product (GDP): total value of all final goods and services within borders of a country (in a
macroeconomy) in a given time period = measure of economic activity
- Real GDP: measures of output that factor out price changes and should show more accurate measure of true output from one
year to next
- Nominal GDP: value of goods and services produced in country in a given year, expressed in the value of the prices charged for
that year
- Inflation: when price level increases; nominal GDP exaggerates value of output compared to real
- Deflation: when price level decreases; “ underestimates “
-
- Per capita GDP: national income (total output) divided by population
How useful and accurate? (short comings) → per capita income levels do not necessarily constitute to welfare levels (LOU):
- Lacks information:
- X value composition of output (ex. Hospitals vs. weapons)
- X measure other aspect of quality of life (ex. Trust for gov.)
- X information about distribution of income
- X purchasing power; does not take into account what that dollar means
- Purchasing power parity (PPP) based on law of one price; identical good should cost the same in all countries,
thus reflects the exchange rate
- Overestimates well-being:
- Counts money spent to negative social behaviours and transactions (ex. Jails, wars, consumption of unhealthy products)
- Under-reports the loss of natural resources: often spending resources include those that harm the environment (ex.
Degradation of rainforest, strip mining of metals)
- Underestimates well-being:
- Extended life expectancy x included
- Black and underground market (shadow economy) x included
- Unpaid output such as volunteers, parenting, self-run farmers x counted
- Adds market transactions regardless of quality of output (ex. Hospitals or jails?)
→ Green GDP: country’s aggregate output that accounts for environmental destruction
- Adds monetary value to soil erosion, water pollution, loss of biodiversity
*controversial because it is hard to measure
Calculation
- Real GDP = nominal GDP/GDP deflator ✕ 100; in other words,
- GDP deflator: broad measure of price levels in the economy = nominal GDP/real GDP ✕ 100
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, - *base year is ALWAYS base year
- ONLY includes domestic goods (GNI includes everything consumed by citizen in a nation)
Growth: increase in real GDP from one year to the next → rate of change:
- Final value - initial value / initial value ✕ 100
GNI: value of the income produced by citizens of a country; counts for Korea’s GNI, but Vietnam’s GDP
Value vs. income
Gross national product (GNP) = GNI measures flow of income based on actual ownership of factors of production
- Net property income from abroad: GDP - any foreign factors of production
- + sum of income from domestically owned assets abroad, - income from foreign owned assets within country
GNP = GDP + net property income from abroad
- GNI per capita <955: low-income
- GNI per capita 995<x<3945: lower-middle-income
- GNI per capita 3946<x<12 195: upper-middle income economies
- GNI per capita x>12 196: high-income economies
- - : more foreigners in the country
- + : more people outside of the country
Net national product (NNP): GNP - depreciation (wearing down of capital goods); to further account for value of goods and services
GDP + GNP: both reflect national output and income of an economy
Business cycle: fluctuations in GDP
Recession: 2 consecutive quarters of declining national output (more than 6 months)
→ different from rate of growth (4 → 2.5% is still growing)
- Recessionary trough: lowest point
- Recovery: increase in GDP from recessionary level to match level of output produced before the recession
- Expansion: economy grows beyond its previous level of output; happens in short bursts
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