Economics
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[TOC]
demand function: a relationship that expresses the quantity demanded of a good or service as function of own-price and possibly other variables.
where $Q_x^d$ = the quantity demanded of some good X $P_x$ = price per unit of good X I = consumers' income $P_y$ = price of another good, Y
Elasticity: the percentage change in one variable for a percentage change in another variable; a general measure of how sensitive one variable is to a change in the value of another variable Own-price elasticity of demand: the percentage change in quantity demanded for a percentage in good's own price, holding all other things constant
inelastic: the magnitude of elasticity is less than one
elastic: the magnitude of elasticity is greater than one
unit elastic: the magnitude is -1.0
perfectly elastic: the quantity demanded of a given good is infinitely sensitive to a change of price
perfectly inelastic: the quantity is completely insensitive to a change in the value of a specified variable (e.g., price)
Income elasticity of demand is defined as follows
the percentage change in quantity demanded for a given percentage change in the price of another good; the responsiveness of the demand for Product A that is associated with change in price of Product B.
substitutes: said of two goods such that if the price of one increases the demand for the other tends to increase, holding all other thins equal (e.q., butter and margarine)
complements: goods that tend to be used together; technically, two goods whose cross-price elasticity of demand is negative
the substitution effect: a decrease in price tends to cause consumers to buy more of this good in place of other goods
the income effect: the increase in real income resulting from the decline in this good's price causes people to buy even more of this goods when its price falls
normal goods: goods that are consumed in greater quantities as income increase
inferior goods: goods whose consumption decreases as income increases
Giffen good is an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. At lower prices, a smaller quantity would be demanded as a result of the dominance of the income effect over the substitution effect.
Veblen good is one for which a higher price makes the good more desirable.
law of diminishing marginal returns: the observation that a variable factor's marginal product must eventually fall as more of it is added to a fixed amount of the other factors
The factors of production:
land
labor
capital
materials
marginal revenue: the change in total revenue divided by the change in quantity sold; simply, the additional revenue from selling one more unit.
average total cost, average variable cost, average fixed cost, and marginal cost
revenue under conditions of perfect and imperfect competition
normal profit: level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs; 是指企业主如果把资源用于其它相同风险的事业所可能得到的收入，它属于机会成本性质
quasi-fixed cost: a cost that stays the same over a range of production but can change to another constant level when production moves outside of that range.
SMC: short-run marginal cost
shutdown and breakeven under perfect competition
if AR >= ATC, the firm should stay int he market in both the short and long run.
if AR >= ATC but AR < AVC, the firm should stay in the market in the short run but will exit the market in the long run.
if AR < AVC, the firm should shut down in the short run and exit the market in the long run.
AR = MR = Price
shutdown and breakeven under perfect competition
TR = TC: break even
TC > TR > TVC: firm should continue to operate in the short run but shut down in the long run.
TR < TVC: firm should shut down in the short run and the long run.
perfect competition: a market structure in which the individual firm has virtually no impact on market price, because it is assumed to be a very small seller among a very large number of firms selling essentially identical products.
monopolistic competition (垄断竞争): highly competition form of imperfect competition; the competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation.
oligopoly
monopoly
the number and relative size of firms supplying the product;
the degree of product differentiation;
the power of the seller over pricing decisions;
the relative strength of the barriers to market entry and exit;
the degree of non-price competition
Structure
Perfect competition
monopolistic competition
oligopoly
monopoly
number of sellers
many
many
few
single
barriers to entry
very low
low
high
very high
nature of substitute products
very good substitute
good but differentiated
very good substitute or differentiated
no good substitute
nature of competition
price only
price, marketing, features
price, marketing, features
advertising
pricing power
None
some
some to significant
significant
perfectly elastic In a perfectly competitive market, MR = MC = ATC = P, and will not earn economic profits for any significant period.
consumer surplus: value minus expenditure
the consumer surplus is the difference between the value that a consumer places on units purchased and the amount of money that was required to pay for them
for Short-run, P is chosen when MR = MC, the profit is (P - ATC)*Q
for Long-run, P = ATC where the demand curve is tangent to the ATC curve, the profit is 0.
game theory: the set of tools decision makers use to incorporate responses by rival decision makers into their strategies.
Nash equilibrium: When two or more participants in a non-coop-erative game have no incentive to deviate from their respective equilibrium strategies given their opponent's strategies. The firms do not collude in an effort to maximize joint profits
dominant firm model: the price $P_L$ is taken according to the quantity, $Q_L$ of the dominant firm whose cost is relatively low and the quantity meets when its marginal cost $MC_L$ equals marginal revenue $MR_L$
To maximize profit, monopolies will expand output until MR = MC. Therefore, long-run positive economic profits can exists. Monopolies are price searchers and have imperfect information regarding market demand.
price discrimination
first-degree: a monopolist is able to charge each customer the highest price the customer is willing to pay.
second-degree: the monopolist offers a menu of quantity-based pricing options designed to induce customers to self-select based on how highly they value the product.
third-degree: happens when customers are segregated by demographic or other traits.
concentration ratio, which is the sum of the market shares of the largest N firms
Herfindahl-Hirschman Index (HHI) the market share of the top N companies are first squared and then added. $\sum_{i=1}^N \%share_i$. The HHI does not take the possibility of entry into account, nor does it consider the elasticity of demand.
collusion is less likely in a market when companies have similar market shares
over time, the market share of the dominant company in an oligopolistic market will most likely decrease
a government entity that regulates an authorized monopoly will most likely base regulated prices on long run average cost
aggregate output of an economy is the value of all the goods and services produced in a specified period of time.
aggregate income is the value of all the payments earned by the suppliers of factors used in the production of goods and service.
rent is payment for the use of property
interest is payment for lending funds
profit is the return that owners of a company receive for the use of their capital and the assumption of financial risk when making their investments.
Gross domestic product (GDP): is the total market value of the goods and services produced in a country within a certain time period. GDP: is also the aggregate income earned by all households, all companies, and the government within the economy in a given period of time.
Three broad criteria are used for measuring GDP consistently over time and across countries
All goods and services included in the calculation of GDP must be produced during the measurement period. e.g. houses, cars produced in previous periods.
The only goods and services included in the calculation of GDP are those whose value can be determined by being sold in the market. e.g. labor used in activities that are not sold on the market
only the market value of final goods and services is included in GDP. e.g. intermediate goods are excluded.
Nominal $GDP_t = P_t \times Q_t$ where $P_t$ = Prices in year t
Real $GDP_t = P_B \times Q_t$ where $P_B$ = Prices in the base year
The implicit price deflator for GDP, or simply the GDP deflato, is defined as
GDP deflator =Value of current year output at current year prices/ value of current year output at base year prices 100 = Nominal GDP / Real GDP 100
under the income approach, we have the following equation for GDP: GDP = national income + capital consumption allowance (ACC) + statistical discrepancy
A capital consumption allowance (CCA) measures the depreciation of physical capital from the production of goods and services over a period. The statistical discrepancy is an adjustment for the difference between GDP measured under income approach and the expenditure approach because the use different data.
national income is the income received by all factors of production used in the generation of final output. National income = Compensation of employees
corporate and government enterprise profits before taxes
interest income
unincorporated (不具法人资格的) business net income
rent
indirect business taxes less subsidies
personal income = national income
transfer payments
indirect business taxes
corporate income taxes
undistributed corporate profits
personal disposable income (PDI) is equal to personal income less personal taxes
personal disposable income = personal income - personal taxes
consumption is a function of disposable income
marginal propensity to consume (MPC): the proportion of an additional unit of disposable income that is consumed or spent; the change in consumption for a small change in income.
marginal propensity to save (MPS): the proportion of an additional unit of disposable income that is saved (not spent).
investment is a function of expected profitability and the cost of financing.
real interest rate: nominal interest rate minus the expected rate of inflation
government purchases may be viewed as independent of economic activity to a degree, but tax revenue to the government and therefore the fiscal balance, is clearly a function of economic output.
net exports are a function of domestic disposable incomes
The IS curve (income-saving) illustrates the negative relationship between real interest rates and real income for equilibrium in the goods market; the IS curve represents combinations of income and the real interest rate at which planned expenditure equals income.
In this equation, V is velocity of money, M is the nominal money supply, P is the price level and Y is the real income/expenditure
the LM curve illustrates the positive relationship between real interest rates and income consistent with equilibrium in the money market; LM curve represented combination of income and the interest rate at which the demand for real money balance equals the supply
very short-run aggregate supply (VSRAS) curve: adjust output without changing price by adjusting labor hours and intensity of use of plant and equipment in response to changes in demand.
short-run aggregate supply (VSRAS) curve: slope upward
long-run aggregate supply (VSRAS) curve: perfectly inelastic. In the long run, wages and other input prices change proportionally to the price level, so the price level has no long-run effect on aggregate supply.
increase in customers' wealth: C increases
business expectations: optimism make I increases
consumer expectations of future income: C increases
high capacity utilization: I increases
expansionary monetary policy: C and I increases
expansionary fiscal policy: C increases for tax cut and G increase for spending increases
exchange rates: a decrease in the relative value of a country's currency will increase exports and decrease imports. Both of these effects tend to increase domestic aggregate demand (net X increases)
global economic growth: net X increases
make the SRAS curve shift to the right
Increase of labor productivity
Decrease of input prices: the wages often have the greatest impact on SRAS
Increase of expectation of future output prices
Decrease of taxes and increase of government subsidies
Appreciation of exchange rates: appreciation of a country's currency in the foreign exchange market will decrease the cost of imports. To the extent that productive inputs are purchased from foreign countries, the resulting decrease in production costs will causes firms to increase output, increasing SRAS.
shift to the right
increase in the supply and quality of labor
increase in the supply of natural resources
increase in the stock of physical capital
technology
recessionary gap: AD decreases -> SRAS increases. Because of decrease of AD, unemployment rate rises
inflation gap: AD increases -> SRAS decreases
stagflation: SRAS decreases, high unemployment
Type of change
Real GDP
unemployment
Price level
increase in AD
increase
decrease
increase
decrease in AD
decrease
increase
decrease
increase in AS
increase
decrease
decrease
decrease in AS
decrease
increase
increase
the sustainable rate of growth in an economy is determined by the growth rate of the labor supply plus the growth rate of labor productivity.
growth in potential GDP = growth in technology (TFP) + W_L(growth in labor) + W_C(growth in capital)
where W_L and W_C are the relative shares of capital and labor in national income (GDP).
Labor productivity = Real GDP/ aggregate hours
potential GDP = Aggregate hours worked * labor productivity
potential growth rate = long-term growth rate of labor force + long-term labor productivity growth rate
Diminishing marginal productivity implies that
increasing the supply of some inputs relative to other inputs will lead to diminishing returns and cannot be the basis for sustainable growth. In particular, long-term sustainable growth cannot rely solely on capital deepening, that is, increasing the stock of capital relative to labor.
given the relative scarcity and hence high productivity of capital in developing countries, the growth rate of developing countries should exceed that of developed countries.
labor supply
the labor supply is determined by population growth, the labor force participation rate, and net immigration. The capital stock in a country increase with investment. Correlation between long-run economic growth and the rate of investment is high.
total hours worked = labor force * average hours worked per worker
human capital: essentially the quality of the labor force
physical capital
technology
total factor productivity is a scale factor that reflects the portion of output growth that is not accounted for by changes in the capital and labor inputs. TFP is mainly a reflection of technological change
total factor productivity (TFP) = growth in potential GDP - [ W_L(growth in labor) + W_C(growth in capital) ]
natural resources
renewable resources
non-renewable resources
inventory-sales ratio
durable goods: such as autos, furniture, a weakness in durables spending may be an early indication of general economic weakness, and an increase in such spending may signal a more general cyclical recovery.
non-durable goods: such as food, medicine
services: such as entertainment
mortgage rates: low interest rates tend to increase home buying and construction while high interest rates tend to reduce home buying and construction.
housing costs relative to income: housing activity can decrease even when incomes are rising late in a cycle if home prices are rising faster than incomes, leading to decreases in purchase and construction activity in the housing sector.
speculative activity
demographic factors
imports generally respond to domestic GDP growth rate while export generally respond to the global GDP growth rates
Neoclassical Schools
believes shifts in both AD and AS are primarily driven by changes in technology over time. They also believe that the economy has a strong tendency toward full-employment equilibrium, because of the "invisible hand, or free market"
Say's law: All that is produced will be sold because supply creates its own demand.
Austrian Schools
believes business cycles are caused by government intervention in the economy.
Keynesian School
believes these fluctuations are primarily due to swings in the level of optimism of those who run business. changes in expectation
argues that wages are "downward sticky", reducing the ability of a decrease in money wages to increase SRAS and move the economy from recession back toward full employment.
New Keynesian School: added the assertion that the prices of productive inputs other than labor are also "downward sticky" presenting additional barriers to the restoration of full-employment equilibrium.
Monetarist's school
believes the variations in AD that cause business cycles are due to variations in the rate of growth of the money supply, likely from inappropriate decisions by the monetary authorities.
believes that recession can be caused by external shocks or by inappropriate decrease in the money supply.
New Classical school introduced real business cycle theory (RBC).
RBC emphasizes the effect of real economic variables such as changes in technology and external shocks, as opposed to monetary variables, as the cause of business cycles.
RBC applies utility theory
employed: the number of people with a job labor force: the number of people who either have a job or are actively looking for a job unemployed: people who are actively seeking employment but are currently without a job. activity ratio: the ratio of labor force to total population of working age underemployed: a person who has a job but has the qualifications to work at a significantly higher-paying job. discouraged worker: a person who has stopped looking for a job. Discouraged workers are statistically outside the labor force, which means they are not counted in the official unemployment rate.
unemployment can be divided into three categories: 1. frictional unemployment: results from the time lag necessary to match employees who seek work with employers needing their skills. 2. structural unemployment: is caused by long-run changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified. 3. cyclical unemployment: is caused by changes in the general level of economic activity. Cyclic unemployment is positive when the economy is operating at less than full capacity and can be negative when an expansion leads to employment temporarily over the full employment level
unemployment rate: is the percentage of people in the labor force who are unemployed
xflationinflation is a persistent increase in the price level of almost all good and services over time
hyperinflation is inflation that accelerates out of control.
disinflation (通货紧缩) refers to an inflation rate that is decreasing over time but remains greater than zero.
deflation refers to a persistently decreasing price level. Deflation is commonly associated with deep recessions.
A price index measures the average price for a defined basket of goods and services.
consumer price index (CPI)
CPI= cost of basket at current prices / cost of basket at base period prices * 100
Laspeyres index: a price index created by holding the composition of the consumption basket constant.
Using a fixed basket of goods and services has three serious biases:
substitution bias: as the price of one good or service rises, people may substitute it with other goods or services that have a lower price.
quality bias: as the quality of the same product improves over time, it satisfies people's needs and wants better. One such example is the quality of cars.
new product bias: new products are frequently introduced and a fixed basket of goods and services will not include them.
Paasche index: an index formula using the current composition of a basket
Fisher index: is the geometric mean of Laspeyres index and Paasche index
cost-push inflation
inflation can result from an initial decrease in AS caused by an increase in the real price of an important factor of production, such as wages or energy.
where
ULC = unit labor cost
O = output per hour per worker
W = total labor compensation per hour per worker
demand-pull inflation
demand-pull inflation can result from an increase in the money supply, increased government spending, or any other change that increase AD
headline inflation is a percentage change in a price index for all goods. Core inflation is calculated by excluding food and energy prices from a price index because of their high short-term volatility.
economic indicator is a variable that provides information on the state of the overall economy.
leading indicators: average weekly hours in manufacturing; initial claims for unemployment insurance; manufactures' new orders for consumer goods; manufactures' new orders for non-defense capital goods ex-aircraft; building permit for new houses; S&P 500 equity price index; leading credit index; 10-year Treasury to Fed funds interest rate spread; and consumer expectations
coincident indicators: employees on non-agricultural payrolls (非农); real personal income; index of industrial production; manufacturing and trade sales;
lagging indicators: average duration of unemployment (businesses wait until ...); inventory-sales ratio; change in unit labor costs (businesses are slow to fire/hire workers considering the cost ); average prime lending rate; commercial and industrial loans; ratio of consumer installment debt to income; change in consumer price index.
the characteristic business cycle patterns of trough, expansion, peak, and contraction are recurrent, not periodic.
based on typical labor utilization patterns across the business cycle, productivity (output per hours worked) is most likely to be highest at the bottom of a recession because firms will run "lean production" to generate maximum output with the fewest number of workers
physical capital adjustments to downturns come through aging of equipment plus lack of maintenance
the characteristic of national consumer price indexes which is most typically shared across major economies worldwide is their use in the determination of macroeconomic policy
CPI is used as a benchmark for adjusting labor contract payments while PPI is more closely connected to business contracts.
For productivity, or output per hour, the faster that it can grow, the further that wages can rise without putting pressure on business costs per unit of output.
fiscal policy: refers to the use of taxes and government spending to affect the level of aggregate expenditures
monetary policy: refers to the actions taken by a nation's central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rate.
money is most commonly defined as a generally accepted medium of exchange.
Money has three primary functions:
money serves as a medium of exchange or means of payment because it is accepted as payment for goods and service
money also serves as a unit of account because prices of all goods and services are expressed in unit of money: dollars, yen, yuan and so forth. measures of value.
money provides a store of value because money received for work or goods now can be saved to purchase goods later.
Narrow money is the amount of notes (currency) and coins in circulation in an economy plus balances in checkable bank deposit. Broad money includes narrow money plus any amount available in liquid assets, which can be used to make purchase.
According to the Federal Reserve Bank of New York:
The money supply measures reflect the different degrees of liquidity -- or spendability -- that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposit, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balance in retail money market mutual funds.
Items
M1
M2
M3
currency in circulation
X
X
X
overnight deposits
X
X
X
deposits with an agreed maturity of up to 2 years
X
X
deposits redeemable at notice of up to 3 months
X
X
repurchase agreements
X
money market fund shares/ units
X
debt securities issued with a maturity of up to 2 years
X
In the early stages of money development, promissory notes were developed.
promissory notes: A written promise to pay a certain amount of money on demand (见票即付).
The customers deposited gold with early bankers. And the promissory notes themselves then became a medium of exchange. Bankers, recognizing that all the deposits would never be withdrawn at the same time, started lending a portion of deposits to earn interest. This led to what is called fractional reserve banking.
reserve requirement: the requirement for banks to hold reserves in proportion to the size of deposits.
money created = New deposit/Reserve requirement
money multiplier: 1 divided by the reserve requirement
money multiplier = 1/Reserve requirement
there are three reason for holding money: 1. transaction demand: held to finance transaction 2. precautionary demand: held to provide a buffer against unforeseen events that might require money 3. speculative demand: held in anticipation that other assets will decline in value
the supply of money is determined by the central bank and is independent of the interest rate. This accounts for vertical (perfectly inelastic) supply curve. A central bank can affect short-term interest rates by increasing or decreasing the money supply.
Fisher effect: the thesis that the real rate of interest in an economy is stable over time so that changes in nominal interest rates are the results of changes in expected inflation
there are several key roles of central banks:
sole supplier of currency
banker to the government and other banks
regulator and supervisor of payments system
lender of last resort
holder of gold and foreign exchange reserves
conductor of monetary policy
the primary objectives of a central bank is to control inflation and promote price stability. In addition to price stability, some central banks have other stated goals, such as:
stability in exchange rates with foreign currencies
full employment (US Federal Reserve)
sustainable positive economic growth
moderate long-term interest rates
target independent
operational independent
Note: not all central banks has a role of being supervision of banks. When it is a central bank's role, responsibility may be shared with one or more entities.
expected inflation
menu cost: a cost of inflation in which business constantly have to incur the costs of changing the advertised prices of their goods and services
show leather cost: hold less cash
unexpected inflation
In an economy with volatile inflation rates, lenders will require higher interest rates to compensate for the additional risk they face from unexpected changes in inflation. Higher borrowing rates slow business investment and reduce the level of economic activity.
information about supply and demand from changes in prices becomes less reliable.
Low levels of inflation has higher economic costs than moderate levels, all else equal; unanticipated inflation has greater costs than anticipated inflation.
open market operations: buying and selling of securities by the central bank
the central bank's policy rate: the interest rate that a central bank sets at which it is willing to lend money to the commercial banks
repurchase agreement
reserve requirement: increase the reserve requirement will decrease the funds available for lending and the money supply.
short-term interest rates
changes in the values of key asset prices
the exchange rate
the expectations of economic agents
for a central bank to succeed in its inflation-targeting policies, it should have three essential qualities:
independence
credibility
transparency
interest rate targeting: increasing the money supply when specific interest rates rose above the target band and decreasing when below
inflation target: most widely used, the most common inflation rate target is 2%
exchange rate targeting: for developing countries
contractionary: tending to cause the real economy to contract
expansionary: tending to cause the real economy to grow
neutral rate of interest: the rate of interest that neither spurs or nor slows down the underlying economy, which should be consistent with stable long-run inflation.
neutral rate = trend growth + inflation target
the source of the shock to the inflation rate:
demand shock
supply shock
problems in the monetary transmission mechanism
bond market vigilantes: bond market participants who might reduce their demand for long-term bonds, thus pushing up their yields
liquidity trap: a condition in which the demand for money becomes infinitely elastic so that injections of money into the economy will not lower interest rates or affect real activity, often associated with deflation.
interest rate adjustment in a deflationary environment and quantitative easing as a response
quantitative easing (QE): an expansionary monetary policy based on aggressive open market purchase operations.
fiscal policy refers to a government's use of spending and taxation to meet macroeconomic goals.
Keynesians believe that fiscal policy can have powerful effects on AD, output, employment when there is substantial spare capacity in an economy.
Monetarists believe that fiscal changes only have a temporary effect on AD and that monetary policy is a more effective tool for restraining or boosting inflationary pressures.
discretionary fiscal policy: refers to the spending and taxing decisions of a national government that are intended to stabilize the economy.
automatic stabilizers: are built-in fiscal devices triggered by the state of the economy.
objective of fiscal policy may include:
influencing the level of economic activity and aggregate demand
redistributing wealth and income among segments of the population
allocating resources among economic agents and sectors in the economy
transfer payments: transfer payments are not included in GDP
current spending: refers to government purchases of goods and services on an ongoing and routine basis
capital spending: refers to government spending on infrastructure, such as roads, schools, bridges, and hospitals. Capital spending is expected to boost future productivity of the economy.
direct taxes
indirect taxes
pay-as-you-go rule is a neutral policy because any increases in spending or reductions in revenues would be offset. Accordingly, there would be not net impact on the budget deficit/surplus. The belief is that high levels of debt to GDP may lead to higher future tax rates which may lead to disincentives to economic activity.
Desirable attributes of tax policy:
simplicity to use and enforce
efficiency
fairness
horizontal equality: people in similar situations
vertical equality: richer people should pay more in taxes
sufficiency: taxes should generate sufficient revenues to meet the spending needs of the government
advantage:
social policies, such as discouraging tobacco use, can be implemented very quickly via indirect taxes
quick implementation of indirect taxes also means that government revenues can be increase without significant additional costs
disadvantage：
direct taxes and transfer payments take time to implement, delaying the impact of fiscal policy
capital spending also takes a long time to implement. The economy may have recovered by the time its impact is felt.
marginal propensity to consume (MPC): the proportion of an additional unit of disposable income that is consumed or spent; the change in consumption for a small change in income.
fiscal multiplier = 1/(1 - MPC(1-t))
Ricardian equivalence: an economic theory that implies that it makes no difference whether a government finances a deficit by increasing taxes or issuing debt.
recognition lag
action lag
impact lag
additional macroeconomic issues may hinder usefulness of fiscal policy:
misreading economic statistics
crowding-out effect: expansionary fiscal policy may crowd out private investment, reducing the impact on AD.
supply shortages: if economic activity is slow due to resource constraints and not due to low demand, expansionary fiscal policy will fail to achieve its objectives.
limits to deficits: if the deficit is already too high as a proportion of GDP, funding the deficit will be problematic.
multiple targets: if the economy has high unemployment coupled with high inflation, fiscal policy cannot address both problems simultaneously.
easy fiscal policy/ tight monetary policy
AD will likely be higher (due to fiscal policy), while interest rates will be higher (due to increased government borrowing and tight monetary policy). Government spending as a proportion of GDP will increase.
tight fiscal policy/ easy monetary policy
interest rate will fall from decreased government borrowing and from the expansion of the money supply, increasing both private consumption and output. Government spending as a proportion of GDP will decrease due to contractionary fiscal policy. The private sector would grow as a result of lower interest rates.
easy monetary policy/ easy fiscal policy
the impact will be highly expansionary taken together. Interest rates will usually be lower, and the private and public sectors will both expand.
tight monetary policy/ tight fiscal policy
AD and GDP would be lower, and interest rates would be higher due to tight monetary policy. Both the private and public sectors would contract.
precautionary balances tend to rise with the volume and value of transaction in the economy, and therefore rise with GDP.
excess supply = money supply - money demand > 0 at a certain rate
imports: goods and services that firms, individuals, and governments purchase from producers in other countries.
exports: goods and services that firms, individuals, and governments from other countries purchase from domestic producers.
Autarky or closed economy: a country that does not trade with other countries
free trade: a government places no restrictions or charges on import and export activity
trade protection: a government places restrictions, limits, or charges on export or imports
world price: the price of a good or service in world markets for those to whom trade is not restricted
domestic price: the price of a good or service in the domestic country, which may be equal to the world price if free trade is permitted or different from the world price when the domestic country restricts trade.
net exports: the value of a country's export minus the value of its imports over some period.
trade surplus: net exports are positive; the value of the goods and services a country exports greater than the value of the goods and services it imports
trade deficit: net exports are negative; the value of the goods and services a country exports is less than the value of the goods and services it imports.
terms of trade: the ratio of an index of the prices of a country's exports to an index of the prices of its imports expressed relative to a base value of 1000. If a country's terms of trade are currently 102, the prices of the goods it exports have risen relative to the prices of the goods it imports since the base period.
foreign direct investment (FDI): ownership of productive resources (land, factories, natural resources) in a foreign country.
multinational corporation (MNC): a firm that has made foreign direct investment in one or more foreign countries, operating production facilities and subsidiary companies in foreign countries.
foreign portfolio investment (FPI): short term investment in such foreign financial instruments as foreign stocks and foreign government bonds.
Gross national product: total value of goods and services produced by the labor and capital of a country's citizens.
Gross domestic product: total value of goods and services produced within a country's borders over a period, typically a year.
benefits: import lower cost goods/ increasing employment, wages and profit from export
cost: compete with domestic industries
absolute advantage: a country's ability to produce a good or service at a lower absolute cost than its trading partner.
comparative advantage: a country's ability to produce a good or service at a lower relative cost, or opportunity cost, than its trading partner.
Ricardian model of trade: has only one factor -- labor. The source of differences in production costs in Ricardo's model is different in labor productivity due to difference in technology.
Heckscher-Ohlin model: there are two factor -- capital and labor. The source of comparative advantage (different in opportunity costs) in this model is differences in the relative amounts of each factor the countries possess (factor endowments).This model assumes that technology in each industry is the same among countries, but it varies between industries
A country captures more of the gains from trade the more the final terms of trade differ from its autarkic prices. 国际市场开放以后价格与自产自销价相差越多则盈利越多。
Some of the reason for trade restrictions that have support from economics are:
infant industry
national security
Other arguments for trade restrictions that have little support in theory are:
protecting domestic jobs: while some jobs are certainly lost, and some groups and regions are negatively affected by free trade, other jobs (in export industries or growing domestic goods and services industries) will be created, and prices for domestic consumers will be less without import restriction.
protecting domestic industries: industry firms often use political influence to get protection from foreign competition, usually to the detriment of consumers, who pay higher prices.
types of trade restrictions include:
tariffs (关税): taxes on imported good collected by the government
quotas (配额): limits on the amount of imports allowed over some period
export subsidies: government payments to firms that export goods
minimum domestic content: requirement that some percentage of product content must be from domestic country
voluntary export restraint: a country voluntarily restricts the amount of a good that can be exported, often in the hope of avoiding tariffs or quotas imposed by their trading partners.
The welfare effects of the tariffs or quotas can be summarized as follows:
consumers suffer a loss of consumer surplus because of the increase in price. This effect is represented by areas A+B+C+D.
local producers gain producer surplus from a higher price for their output, represented by A.
the government gains tariff revenue on imports $Q^2Q^3$, represented by C.
the deadweight loss to the country's welfare is B+D
voluntary export restraint (VER): VERs are another way of protecting the domestic producers in the importing country. They result in a welfare loss to the importing country equal to that of an equivalent quota with no government charge for the import licenses; that is, no capture of the quota rents.
export subsidies: are payments by a government to its country's exporters.
Most of the effects of all four of these protectionist policies are the same. With respect to the domestic (importing) country. import quotas, tariffs, and VERs all:
reducing imports
increase price
decrease consumer surplus
increase domestic quantity supplied
increase producer surplus
with one exception, all will decrease national welfare. Quotas and tariffs in a large country could increase national welfare under a specific set of assumptions, primarily because for a country that imports a large amount of good, setting a quota or tariff could reduce the world price for the good.
capital restrictions on the flow of financial capital across borders include outright prohibition of investment in the domestic country by foreigners, prohibition of or taxes on the income earned on foreign investments by domestic citizens, prohibition of foreign investment in certain domestic industries, and restrictions on repatriation of earnings of foreign entities operating in a country. Overall, capital restrictions are thought to decrease economic welfare. However, over the short term, they have helped developing countries avoid the impact ...
Free Trade Areas: all barriers to the flow of goods and services among members are eliminated, but each country maintains its own policies against non-members
Customs Union: extends FTA by not only allowing free movement of goods and services among members but also creating a common trade policy against non-members
Common Market: incorporates all aspects of a customs union and extends it by allowing free movement of factors of production among members
Economic Union: incorporates all aspects of a common market and requires common economic institutions and coordination of economic policies among members
Monetary Union: members of a monetary union adopt a common currency.
reducing the volatility of domestic asset prices
maintain fixed exchange rates
keep domestic interest rates low
protect strategic industries
balance of payments (BOP): A double-entry bookkeeping system that summarizes a country's economic transactions with the rest of the world for a particular period of time, typically a calendar quarter or year.
merchandise trade
service: such as patent fee, legal services
income receipt
unilateral transfers
a current deficit usually result from low private savings, high private investment and low government saving. Of these, only investment can increase productive resources and improve future ability to repay the creditors.
capital account
sales and purchase of non-produced, non-financial assets: such as mineral rights
government-owned assets abroad
foreign-owned assets in the country
国际收支结构一般有四种情况:
经常项目和资本与金融项目都出现顺差，这时不仅国际收支量上出现顺差，而且结构也较好，因而一般认为是最好的一种情况。
经常项目与资本与金融项目都出现逆差，这是最坏的一种情况。
经常项目出现顺差，资本与金融项目出现逆差，此时不管最后国际收支是顺差还是逆差，都不失为一种好的国际收支状况，因为它结构较好：经常项目出现顺差表明该国商品、劳务的国际竞争能力很强，出口多于进口，国家外汇储备增加；资本项目出现逆差，反映一国资本的国际竞争力能力很强，对外投资大于资本流入。
经常项目出现逆差，资本与金融项目出现顺差，此时即使最后国际收支能够达到平衡或顺差，都不是一种好的状态，因为这种国际收支结构不好。
The primary influences referred to here are on the current account deficit or surplus. Considering the equation S = I + (G - T) + (X - M) namely X - M = private savings + government savings - investment
Lower levels of private savings, large government deficits, and high rates of domestic investment all tend to result in or increase a current account deficit. The intuition here is that low private or government savings in relation to private investment in domestic capital requires foreign investment in domestic capital.
International Monetary Fund (IMF): to ensure the stability of the international monetary system, the system of exchange rates and international payments that enables countries to buy goods and services from each other. The IMF helps to keep country-specific market risk and global systemic risk under control.
World Bank: helps to create the basic economic infrastructure essential for creation and maintenance of domestic financial markets and a well-functioning financial industry in developing
World Trade Organization (WTO): to foster free trade by providing a major institutional and regulatory framework of global trade rules without which today's global multinational corporations would be hard to conceive.
price/base currency: e.g., 1.25USD/EUR, the USD is the price currency and the EUR is the base currency exchange rate is simply the price or cost of units of one currency in terms of another nominal exchange rate: at a point in time, $1.46/euro suggests that in order to purchase one euro's worth of goods and services in Euroland, the cost in US dollar will be $1.46.
spot exchange rate: is the currency exchange rate for immediate delivery, which for most currencies means the exchange of currencies takes place two days after the trade (T+2).
forward exchange rate: is a currency exchange rate for an exchange to be done in the future.
where $F{f/d}$ is the forward exchange rate and $S{f/d}$ is the spot rate, $i_f$ is the interest rate of foreign currency and $i_d$ is the domestic currency's interest rate
For an interest rate of the fractional period ($\tau$):
Forward rates are typically quoted in terms of forward (or swap) points. The swap points are added to the spot exchange rate in order to calculate the forward rate. Occasionally, forward rates are presented in terms of percentages relative to the spot rate.
a country can use the currency of another country (formal dollarization). The country cannot have its own monetary policy, as it does not create money/currency.
a country can be a member of a monetary union in which several countries use a common currency, e.g., European Union.
a currency board arrangement(货币局制度): 承诺本币与某一确定的外国货币之间可以以固定比率进行无限制兑换，并要求货币当局确保这一兑换义务的实现的汇率制度
conventional fixed peg arrangement: a country pegs its currency within margins of $\pm 1\%$ versus another currency of a basket that includes the currencies of its major trading of financial partners.
pegged exchange rates within horizontal bands or a target zone, the permitted fluctuations in currency value relative to another currency or basket of currencies are wider (e.g., $\pm 2\%$)
crawling peg (爬行钉住汇率制): 视通货膨胀情况，允许货币逐渐升值或贬值的一种汇率制度
management of exchange rates within crawling bands: the width of the bands that identify permissible exchange rates is increased over time
manged floating exchange rate
independently floating (独立浮动汇率制度): the exchange rate is market-determined
goods for which there are good substitute
goods that trade in competitive markets
luxury goods, rather than necessities
goods that represent a large portion of consumer expenditure or a large portion of input costs for final producers
Even when the Marshall-Lerner condition is satisfied, it is still possible that devaluation or depreciation of the currency will initially make the trade balance worse before making it better. This effect, called the J-curve effect.
marginal cost: the cost of producing an additional unit of a good.
The relationship between MR and price elasticity can be expressed as
kinked demand curve
using the expenditure approach, the major components of real GDP are consumption, investment, government spending and net exports. where: C = consumer spending on final goods and services I = gross privet domestic investment, which includes business investment in capital goods and changes in inventory G = government spending on final goods and services X = exports M = imports
where Y is GDP; F is transfer payment (经常性转移收入，政府转移和其他部门转移，如政府补助); $S_B$ is business saving, namely retained earnings and depreciation; R is indirect taxes; C is consumption of goods and services; $S_H$ is household saving
we get this equation rearranged where $T = R - F$ denotes net taxes and $S = (S_B + S_H)$ denote total private sector saving
So we have
This equation shows that domestic private saving is used or absorbed in one or three ways: investment (I), financing government deficits (G - T) and building up financial claims against overseas economies (X - M),net export could include lending to foreigners and purchases of assets from foreigners
make it shift to the right
The quantity equation of exchange is known as where M is the quantity of money, V is the velocity of circulation of money, P is the average price level, and Y is real output. The belief that real variables (real GDP and velocity) are not affected by monetary variables (money supply and prices) is referred to as money neutrality.
where $R{nom}$ is the nominal interest rate, $R{real}$ is the required real rate and $\pi^e$ is the expected rate of inflation. Investors can never be sure about future values of such economic variables as inflation and real growth. To compensate them for this uncertainty, they require a risk premium.
the central bank's policy rate works through the economy via any one, and often all, of the following interconnected channels:
where, B is the payment of transfer benefit
Thus, a trade deficit (surplus) must be exactly matched by an offsetting capital account surplus (deficit). This implies that any factor that affects the trade balance must have an equal and opposite impact on the capital account, and vice versa.
Under the absorption approach, national income must increase relative to national expenditure in order to decrease a trade deficit. This can also be viewed as requirement that national saving must increase relative to domestic investment in order to decrease a trade deficit. In conjunction with the Marshall-Lerner condition, our review of the factors that determine price elasticities suggests that exchange rate changes will be a more-effective mechanism for trade balance adjustment if country imports and exports the following:
