EPTSo much to do;
So much to talk about;
But that will all come later
For now, I have an exam in 2 days, and an amazing revelation has arisen from my experiences over the years: practice exams don't help.
For anyone that studies in general for tests, my advice to you is that repeatedly doing past exam papers is one of the worst ways to learn. Tackling key concepts and understanding them at a fundamental level is more important to both getting a higher grade and allowing new material into your mind.
My idea is that I will just type how much I can remember from my subject- 'Introductory Macroeconomics'- onto this blog, so I can try get my ideas out on paper and see how much I can replicate from memory.
I could do it in my work book right now, but I just randomly thought of TL and have made a commitment in my mind to go back to blogging...but in the meantime I may as well chuck a few words up here in case someone is bored out of their minds
I've never tried this before, but I guess I'll see how it goes. For anyone that comes across this blog, you can read it if you have an interest in Macroeconomics and want to learn a bit about it, or if you want to correct any mistakes i will (most definitely) make then please do; I am not very confident with my learning abilities atm which is why i'm doing this
But the main message of this blog for the majority of people that will skip by is directed to you studyers:
TLDR: please, please don't use past exams to practice with. Only do them to get a feel for how the questions will be asked. Make sure you understand the concepts you are studying as best and as intuitively as you can, and the marks will look after themselves; you are in the business of learning and increasing your human capital, not memorizing answers ( I think... its still only my personal theory
)My music that I'm listening to while typing:
+ Show Spoiler +
EDIT: well the conclusion was that i am a bit lazy and used the book a lot, but for the parts i didnt use the book it made me think and i think it is an effective method , but ill have to develop this idea further...
+ Show Spoiler +
Well, where to start...
GDP is a good place. Gross Domestic Product, more commonly known as GDP, is the current market value of all domestic goods over a certain period of time. The period of time is a key attribute to GDP. You must associate a time period otherwise it is a useless measure. Most countries release quarterly GDP, as well as yearly GDP, measuring their total output over this time.
The way you can find it is multiplying all of the goods made with their current price to find their market value. Another way of looking at GDP and arriving at the same conclusion can be done by finding the total amount spent by the consumers of these products. The only extra concept you have to add when calculating GDP by this method is you have to assume that Firms will purchase their unsold inventories/goods themselves. This ensures unsold goods are accounted for.
There are 4 main components of this method of calculating GDP, as opposed to the output method which just measures goods x prices.
The method/calculation is called Personal Aggregate Expenditure, and consists of these components:
Consumption= This is by far the largest component of GDP and is the measure of how much ordinary households spend on goods/services.
Investment= the investment of firms on capital goods. NOTE: housing purchases are also counted in investment. The cost to build the house is the only factor accounted for in GDP, so that initial investment is listed here. Buying the actual house does NOT attribute to GDP ( i think ...)
Govt. Expenditure: fkn Obama...I mean this is the amount that Government spends, whether it be on military, education or transport
Net exports: Net exports is basically Exports-Imports. This means that if your exports are more than your imports, this number will be +ve and your GDP will have increased, and vice versa
We can summarise this equation as follows:
PAE = C + I + G + NX
Where these letters are in the same order that I talked about them...
Note that these 2 methods of calculating GDP (output (Y) and personal aggregate expenditure (PAE) ) should equal each other for an economy to be in equilibrium.
We can break each of these letters down to more complex components.
Domestic Consumption (C) can be written as C = C` +c(Y-T)
C` is the exogenous/autonomous component. This means that it is unaffected by any of the other factors in the equation, and will not change. The other component is c(Y-T). The c is the marginal propensity to consume and it is a number between 0 and 1. It is multiplied by Y-T, the income of the economy, where Y stands for the output(GDP) and the T stands for taxes. This means that, for every extra dollar that GDP rises, consumption will rise by c amount relative to that dollar.
T can be written as T=T` +tY, giving it an exogenous component (ie paying taxes of a set amount, say $200 road tax (i just made that up), and tY, which is a percentage of income (ie the income tax)
both G and I can be written as G` and I` , identifying them as exogenous componenets (not affected by anything else in the equation.)
Net exports is written by X-M (eXports-iMport)
Here is where it gets a bit weird though. Although PAE and Y SHOULD = each other, sometimes we find that planned expenditure can be higher or lower than the output of the economy
We can actually look at the total sum of planned investment, government expenditure and selling exports to be cash flows into the economy, or INJECTIONS, and savings, taxes and buying imports WITHDRAWALS from the economy. if
I+G+X>Savings(S) + T + X, then that means people are planning to spend more money on goods/services that are currently available. Y will then rise up to meet this demand, and equilibrium will be achieved.
the opposite is true; if injections are less than withdrawals, that means people are planning to spend less than is being currently output, and firms will reduce their output.
Here is something I found to be really cool; savings = investments.
I never realized this until I took the course; holding money in excess of $25,000 in your house is illegal. You are required by law to place it in a deposit-holding institution, or a commercial bank, which then lends your savings to people who demand them (ie business that want to make loans)
So in effect, equilibrium GDP is also achieved when national savings is equal to national GDP. the national savings equation (i forgot it so im looking at the book) is S=-C`+(1-c)Y if C=C` +cY, so it is basically the opposite of consumption lol, which makes sense; what you dont spend you save i guess. When savings moves up, consumption moves down, which lowers GDP.
I should have mentioned that this is a short term model called the Keynesian model, so in the short term it is predicted that savings will lower GDP and cause short term pain.
The multiplier is the last thing I have to talk about to complete the basics of the Keynesian model. This multiplier is a very cool figure that multiplies C + I + G + NX. It looks like 1/1-c, where c is the marginal propensity to consume. So if the Marginal propensity to consume was 0.8, the multiplier would be 5. This means that for every $1 change in exogenous expenditure (C`) there is a 5$ increase in total GDP.
How does that work? Well the idea is that if you increased GDP by, lets say 10 dollars, the initial increase gives top bosses $10 extra dollars, which increases Y by 10% also. Because Y is being multiplied by the marginal propensity to consume, it goes up by 8$ instead. This 8$ is then given down lower in the chain, but only 0.8 of it again, which is 6.sonmething. this keeps going until it reaches a certain point, which in this case is 50%, because a marginal propensity to consume of 0.2 will lead to a multiplier of 1/1-0.8=5, so 10x5 = a $50 dollar increase. That means that for every dollar the government stimulates the economy, it could rise by a further $5 ! crazy shit man...
okay that was the first chapter I wanted to get off my chest, and I dont think I missed that much; oh i forgot about planned vs actual investment. This concept messed with my head for the longest time. If a firm doesn't sell what they were expecting, they have an increase in inventories. This is actually in increase in their actual investment, because instead of selling these goods to consumers, they have had to buy it themselves...So a decrease in PAE will lead to an increase in actual investment...which is bad haha>>
Okay im taking a short break and posting this so I don't accidentally lose it all...
WELL well well the concept of savings in the short term reducing GDP and increasing human misery is indeed a concept of the Keynesian model, and Ill try to explain this further:
We will start with aggregate demand. This is a relationship that defines aggregate demand for goods, which should equal total planned expenditure (PAE) will be a function of inflation and output. As inflation increases, aggregate demand decreases, and so it is a negative sloping graph with inflation on the y axis and output on the x axis. inflation can cause a redistribution of wealth from poorer families to richer ones= many poor families cannot bear the full grunt of inflation and so their expenditure lowers dramatically; and since they make up most of the economy it is these people who matter the most in aggregate demand for products/services.
Long run potential output is a vertical line that shows the ...(fuck looking at my book now) potential output of an economy , and the short run equilibrium represents the current levels of inflation. inflation is affected by 3 things:
Past inflation rates
The current state of the economy (whether it is in expansion/contraction)
AND error terms/inflation shocks, such as the rise of oil prices (this frucked the US up so hard back in the days ouch...)
the short term equilibrium is defined as where the aggregate demand curve intercepts the short term aggregate supply curve, and the long run equilibrium is when the actual output equals potential output, and the inflation rate is stable (lol this is all copied from the book, horrible effort by me)
sources of inflation: my try
excessive spending forces the aggregate demand to increase because there is more output, so the short run equilibrium increases because aggregate demand increases. It moves back to long run and then the economy has normal production levels, except now inflation has increased due to inflation intertia (ie increased bidding due to increased money supply causes intertia etc blah)
ah yeah inflation shocks as well fuck...
there is an inverse relationship between the output and inflation; this is because the RBA increases interest rates when it sees high inflation, thus reducing output.
output gaps cause firms to rise prices, so inflation occurs.
phillips curve= this shows that long term unemployment has with it a slow growing real wage rate...
oh yeah growth can be bad, as in the growth of countries requires savings, and that reduces PAE, so they are worse off...
Maybe now ill talk about the solo swan model as best i can
The solow swan model is a model that measures the capital;labour ratio and observes a declining marginal benefit of increasing capital . It goes off the Cobb-Douglas function, a very famous function said no one ever..
Okay I lied>>>
Cobb and Douglas loved this shit
Anyway it goes something like this
Y = A(k^a)(l^a-1)
This, in simple terms, shows that output of a country is a function of capital and labour. This is an improvement on the most basic of output functions; Y=f(k,l). This can show decreasing marginal productivity if you differentiate with respect to either labor or capital
For example, if you differentiate with respect to capital, you get df/dm= aA(k^a-1)(l^a-1)
this gives a(A(k^a)(l^a-1)/k), and so it is aY/k
And the change of labour is (1-a)Y/l
These both show diminishing returns...yay
there are constant returns to scale also; this means that if the function were to incease by a factor of S in both capital and labour, the overall function will increase
(A(Sk^1)(Sl^1-a)=A(S(k,l))
yep i fucked that up
its actually A((Sk)^a)((Sl)^(1-a)) = A(S^a+1-a K^a L^1-a = AS k ^a L ^ 1-a
ahh kk
Growth accounting: how much each factor (TFP, labour and capital affects growth )
Book definition : dividing country's growth experience between primary and secondary factors.....
primary factors are k,l
secondary are TFP, or At.
solo swan model divides the output model by a factor of l, labour, which gives y/l = Af(k/l)
This is represented as a curved line, and savings is a function of Y
S=thetaY
the more complex identity for savings is actually replacement invest + change in net investment, and so when change in net investment = 0, the savings = replacement investment rate, and the economy has effectively stopped growing.
The covergence theory is that countries with lower capital/labour ratios can catch up very quickly, because each increase in capital increases the ratio by a substantially greater amount
I guess FX rates are the last thing ill summarise
Foreign exchange rates aha
well nominal rates are how much of one currency can purchase another, such as $1 AUD = 200 yen
that is an indirect quote i think...
direct may be 200 yen = 1AUD but im not sure...
But i think the ratio we are using is 200:1, so if the exchange rate (e) increases , say to 300:1, that means the AUS is appreciating relative to other currencies.
What does an appreciating currency do? well it just makes exports more expensive for foreigners, so the demand for your currency falls, and your demand for other currencies rise, so your supply of dollars on the market increases while less people want to buy it...this casuse a price drop i think...
the current account and capital account of a country also come into play
The current account is the total transfer of money in/out of the country relating to good/services, and income
The financial account relates to the total flow of financial assets out of the country
A fundamental rule is that CAB + KAB = 0, because if money leaves the country, it must be bought somewhere else, which offsets the transactions and makes it a net 0 sum
GDP is a good place. Gross Domestic Product, more commonly known as GDP, is the current market value of all domestic goods over a certain period of time. The period of time is a key attribute to GDP. You must associate a time period otherwise it is a useless measure. Most countries release quarterly GDP, as well as yearly GDP, measuring their total output over this time.
The way you can find it is multiplying all of the goods made with their current price to find their market value. Another way of looking at GDP and arriving at the same conclusion can be done by finding the total amount spent by the consumers of these products. The only extra concept you have to add when calculating GDP by this method is you have to assume that Firms will purchase their unsold inventories/goods themselves. This ensures unsold goods are accounted for.
There are 4 main components of this method of calculating GDP, as opposed to the output method which just measures goods x prices.
The method/calculation is called Personal Aggregate Expenditure, and consists of these components:
Consumption= This is by far the largest component of GDP and is the measure of how much ordinary households spend on goods/services.
Investment= the investment of firms on capital goods. NOTE: housing purchases are also counted in investment. The cost to build the house is the only factor accounted for in GDP, so that initial investment is listed here. Buying the actual house does NOT attribute to GDP ( i think ...)
Govt. Expenditure: fkn Obama...I mean this is the amount that Government spends, whether it be on military, education or transport
Net exports: Net exports is basically Exports-Imports. This means that if your exports are more than your imports, this number will be +ve and your GDP will have increased, and vice versa
We can summarise this equation as follows:
PAE = C + I + G + NX
Where these letters are in the same order that I talked about them...
Note that these 2 methods of calculating GDP (output (Y) and personal aggregate expenditure (PAE) ) should equal each other for an economy to be in equilibrium.
We can break each of these letters down to more complex components.
Domestic Consumption (C) can be written as C = C` +c(Y-T)
C` is the exogenous/autonomous component. This means that it is unaffected by any of the other factors in the equation, and will not change. The other component is c(Y-T). The c is the marginal propensity to consume and it is a number between 0 and 1. It is multiplied by Y-T, the income of the economy, where Y stands for the output(GDP) and the T stands for taxes. This means that, for every extra dollar that GDP rises, consumption will rise by c amount relative to that dollar.
T can be written as T=T` +tY, giving it an exogenous component (ie paying taxes of a set amount, say $200 road tax (i just made that up), and tY, which is a percentage of income (ie the income tax)
both G and I can be written as G` and I` , identifying them as exogenous componenets (not affected by anything else in the equation.)
Net exports is written by X-M (eXports-iMport)
Here is where it gets a bit weird though. Although PAE and Y SHOULD = each other, sometimes we find that planned expenditure can be higher or lower than the output of the economy
We can actually look at the total sum of planned investment, government expenditure and selling exports to be cash flows into the economy, or INJECTIONS, and savings, taxes and buying imports WITHDRAWALS from the economy. if
I+G+X>Savings(S) + T + X, then that means people are planning to spend more money on goods/services that are currently available. Y will then rise up to meet this demand, and equilibrium will be achieved.
the opposite is true; if injections are less than withdrawals, that means people are planning to spend less than is being currently output, and firms will reduce their output.
Here is something I found to be really cool; savings = investments.
I never realized this until I took the course; holding money in excess of $25,000 in your house is illegal. You are required by law to place it in a deposit-holding institution, or a commercial bank, which then lends your savings to people who demand them (ie business that want to make loans)
So in effect, equilibrium GDP is also achieved when national savings is equal to national GDP. the national savings equation (i forgot it so im looking at the book) is S=-C`+(1-c)Y if C=C` +cY, so it is basically the opposite of consumption lol, which makes sense; what you dont spend you save i guess. When savings moves up, consumption moves down, which lowers GDP.
I should have mentioned that this is a short term model called the Keynesian model, so in the short term it is predicted that savings will lower GDP and cause short term pain.
The multiplier is the last thing I have to talk about to complete the basics of the Keynesian model. This multiplier is a very cool figure that multiplies C + I + G + NX. It looks like 1/1-c, where c is the marginal propensity to consume. So if the Marginal propensity to consume was 0.8, the multiplier would be 5. This means that for every $1 change in exogenous expenditure (C`) there is a 5$ increase in total GDP.
How does that work? Well the idea is that if you increased GDP by, lets say 10 dollars, the initial increase gives top bosses $10 extra dollars, which increases Y by 10% also. Because Y is being multiplied by the marginal propensity to consume, it goes up by 8$ instead. This 8$ is then given down lower in the chain, but only 0.8 of it again, which is 6.sonmething. this keeps going until it reaches a certain point, which in this case is 50%, because a marginal propensity to consume of 0.2 will lead to a multiplier of 1/1-0.8=5, so 10x5 = a $50 dollar increase. That means that for every dollar the government stimulates the economy, it could rise by a further $5 ! crazy shit man...
okay that was the first chapter I wanted to get off my chest, and I dont think I missed that much; oh i forgot about planned vs actual investment. This concept messed with my head for the longest time. If a firm doesn't sell what they were expecting, they have an increase in inventories. This is actually in increase in their actual investment, because instead of selling these goods to consumers, they have had to buy it themselves...So a decrease in PAE will lead to an increase in actual investment...which is bad haha>>
Okay im taking a short break and posting this so I don't accidentally lose it all...
WELL well well the concept of savings in the short term reducing GDP and increasing human misery is indeed a concept of the Keynesian model, and Ill try to explain this further:
We will start with aggregate demand. This is a relationship that defines aggregate demand for goods, which should equal total planned expenditure (PAE) will be a function of inflation and output. As inflation increases, aggregate demand decreases, and so it is a negative sloping graph with inflation on the y axis and output on the x axis. inflation can cause a redistribution of wealth from poorer families to richer ones= many poor families cannot bear the full grunt of inflation and so their expenditure lowers dramatically; and since they make up most of the economy it is these people who matter the most in aggregate demand for products/services.
Long run potential output is a vertical line that shows the ...(fuck looking at my book now) potential output of an economy , and the short run equilibrium represents the current levels of inflation. inflation is affected by 3 things:
Past inflation rates
The current state of the economy (whether it is in expansion/contraction)
AND error terms/inflation shocks, such as the rise of oil prices (this frucked the US up so hard back in the days ouch...)
the short term equilibrium is defined as where the aggregate demand curve intercepts the short term aggregate supply curve, and the long run equilibrium is when the actual output equals potential output, and the inflation rate is stable (lol this is all copied from the book, horrible effort by me)
sources of inflation: my try
excessive spending forces the aggregate demand to increase because there is more output, so the short run equilibrium increases because aggregate demand increases. It moves back to long run and then the economy has normal production levels, except now inflation has increased due to inflation intertia (ie increased bidding due to increased money supply causes intertia etc blah)
ah yeah inflation shocks as well fuck...
there is an inverse relationship between the output and inflation; this is because the RBA increases interest rates when it sees high inflation, thus reducing output.
output gaps cause firms to rise prices, so inflation occurs.
phillips curve= this shows that long term unemployment has with it a slow growing real wage rate...
oh yeah growth can be bad, as in the growth of countries requires savings, and that reduces PAE, so they are worse off...
Maybe now ill talk about the solo swan model as best i can
The solow swan model is a model that measures the capital;labour ratio and observes a declining marginal benefit of increasing capital . It goes off the Cobb-Douglas function, a very famous function said no one ever..
Okay I lied>>>
Cobb and Douglas loved this shit
Anyway it goes something like this
Y = A(k^a)(l^a-1)
This, in simple terms, shows that output of a country is a function of capital and labour. This is an improvement on the most basic of output functions; Y=f(k,l). This can show decreasing marginal productivity if you differentiate with respect to either labor or capital
For example, if you differentiate with respect to capital, you get df/dm= aA(k^a-1)(l^a-1)
this gives a(A(k^a)(l^a-1)/k), and so it is aY/k
And the change of labour is (1-a)Y/l
These both show diminishing returns...yay
there are constant returns to scale also; this means that if the function were to incease by a factor of S in both capital and labour, the overall function will increase
(A(Sk^1)(Sl^1-a)=A(S(k,l))
yep i fucked that up
its actually A((Sk)^a)((Sl)^(1-a)) = A(S^a+1-a K^a L^1-a = AS k ^a L ^ 1-a
ahh kk
Growth accounting: how much each factor (TFP, labour and capital affects growth )
Book definition : dividing country's growth experience between primary and secondary factors.....
primary factors are k,l
secondary are TFP, or At.
solo swan model divides the output model by a factor of l, labour, which gives y/l = Af(k/l)
This is represented as a curved line, and savings is a function of Y
S=thetaY
the more complex identity for savings is actually replacement invest + change in net investment, and so when change in net investment = 0, the savings = replacement investment rate, and the economy has effectively stopped growing.
The covergence theory is that countries with lower capital/labour ratios can catch up very quickly, because each increase in capital increases the ratio by a substantially greater amount
I guess FX rates are the last thing ill summarise
Foreign exchange rates aha
well nominal rates are how much of one currency can purchase another, such as $1 AUD = 200 yen
that is an indirect quote i think...
direct may be 200 yen = 1AUD but im not sure...
But i think the ratio we are using is 200:1, so if the exchange rate (e) increases , say to 300:1, that means the AUS is appreciating relative to other currencies.
What does an appreciating currency do? well it just makes exports more expensive for foreigners, so the demand for your currency falls, and your demand for other currencies rise, so your supply of dollars on the market increases while less people want to buy it...this casuse a price drop i think...
the current account and capital account of a country also come into play
The current account is the total transfer of money in/out of the country relating to good/services, and income
The financial account relates to the total flow of financial assets out of the country
A fundamental rule is that CAB + KAB = 0, because if money leaves the country, it must be bought somewhere else, which offsets the transactions and makes it a net 0 sum
