Реферат: The basical macroeconomics indicators

The basical macroeconimicsindicators.

The level of Macroeconomics is concerned either onwith the economy as a whole or with the basic subdivisions of aggregates — such as government, householdand business sec-tors — which meke up the economy. An aggregate is acollection of the specific economics units which are treated as if they were one unit. Macroeconomics overviewsall economy by generally outlining the mainest aggregates which construct theeconomy. That's why such words as total, general are always used in Macroeconomics. That isthe part of eco-nomics concerned with the economy as a whole; with such majoraggregates as house-holds, business and governmental sectors and with totalsfor the ec. So, tha basical Macro-economics indicators are: Gross NationalProduct (GNP), Price level, Interest Reate and Employment.

GNP:

It is generally agreed that the best availableindicator of economy health is its annual output of goods and services, or so-called aggregate output. This is called GNPand is de-fined as the total market value of all final goods & servicesproduced in ec in one year. Thedefinition of the GNP is very explicit and merits comments. First, GNP measuresthe market value of annual output. Second, GNP is a monetary measure. To measureall output accurately we should count all goods and services only once. That iswhy GNP increasereaseludes only final goods and services and ignorestransactions involving intermediate goods and services. By Final meantsuch goods and services that are purchased for final use and not to be sold infuture (resale), or other processing or manufac-turing. Directly opposite goodsand services are called intermediate. Intermediate goods and servicesare excluded from GNP cause it could involve double countintg. Alot of nonproductiontransactions must be carefully excluded fron GNP: financial transaction (public transfer payments — toincreasereaselude them to GNP would be to overstate this year's production; privatetransfer payments — simp-ly transferof funds to one person to another; security transactions — buying or selling stocks in the stockmarket.) secondhand sales (Such sales either reflect no currentproduction or they involve double counting.) Actually GNP can be determinedeither by adding up all that is spent to buy this year's total output or bysumming up all the increasereaseomes derived from the production of this year'soutput. The formula GNP can bedetermined looks like this:

GNP= C + I

g+G + Xn

where C stands for personal consumptionexpenditures (expenditures by houselods on durable consumer goods: automobiles, houses, VCRs, and so on; nondurableconsumer googs: milk, bread, beer,toothpaste, clothes, etc.; consumer expenditures for services of lawers, doctors, barbers), I

g means Gross Private Domestic Investment, G governmental purchases of goods andservices, and Xn stands for Net Exports, is the amount by which foreign spending onAmerican goods and services exceeds American spending on foreign goods andservi-ces. All these categories of expenditures shown above increasereaseludeall possible types of spend-ing. Added together they reflect the year's GNP.

Measuring the price level.

The price level is stated as an index number. A priceindex measures the combened price ofparticular collections of goods & services, called a «markedbasket».

Price index Price of market basket in a givenyear

in a given year = ——————————————————————— X 100%

Price ofthe same basket in the base year

The Federal government computes price indexes osseveral different collections (or market baskets) of goods and services. Thebest knonw of these indexes are Consumer Price Index (CPI) whichmeasures the prices of a fixed market basket of some 300 consumer goods andservices purchased by a typical urban consumer. The GNP price index or GNPdeflator , however, is more usefulthan the CPI for measuring the overall price level. GNP deflator alsoincreasereaseludes the prices of investment goods, goods and services purchasedby government, and g & s wich enter into world trade.

This paragraph summary.

1

. GNP is a basic measure of society's economicperformance, is the market value of all final goods and services produced in ayear. Intermediate goods, nonproductiontransacti-ons and secondhand sales are excluded from calculating GNP.

2

. By the expenditures approach GNP isdetermined by adding consumer purchases of goods and services, gross investmentspending by businesses, goverment purchases of goods and services and netexports.

3

. Gross investment can be divided into: replacementinvestment (required to maintain the nation's stock of capital at itsexisting level), and net investment (the net increasereaserease in the stock ofcapital) Positive net investment is associated with a grown economy, negative — with a decreaselining economy.

4

. By the increasereaseome or allocations approachGNP is calculated as a sum of compensation to employees, rents, interest,proprietors' increasereaseome, corporate increasereaseome taxes, dividends,undistributed corporate profits, and the two nonincreasereaseome charges(capital consumption allowance & inderect business taxes)

5

. Other important national increasereaseomeaccounting measures are derived from the GNP. Net national product (NNP)is GNP less the capital consumption allowance. National increasereaseome(NI) is total increasereaseome earned by resource suppliers; it is found by subtractinginderect busi-ness taxes from NNP. Personal increasereaseome (PI) is the total increasereaseome paid tohouseholds prior to any allowance for personal taxes. Disposableincreasereaseome (DI) is personalincreasereaseome after personal taxes have been paid. DI measures the amount ofincreasereaseome households haveavailable to consume or save.

6

. Price indexes are computed by comparing the priceof a specific collection or «marketbasket» of output in a given period to the price (cost) of the same marketbasket in a base period and multiplying the outcome (quotient) by 100. The GNPdeflator is the price indexused to adjust normal GNP to to account forinflation or deflation and thereby to obtain real GNP.

7

. Nominal (current dollar) GNP measures each year'soutput valued in terms of the prices prevailing in that year. Real (constantdollar) GNP measures each year's output valued in terms of the pricesprevailing in a selected base year. Because it is adjusted for price level changes, real GNP measures thelevel of production activity.

Nominal GNP

—————————————— = Real GNP

Price index (in hundredths)

8

. The various national increasereaseome accountingmeasures exclude nonmarket and illegal transactions, changes in leisure andproduct quality, the composition and distribution of output, and theenvironmental effects of production. Nevertheless, these measures are resonablyaccurate and very useful indicators of the nation's economic performance.

Aggregate demand &Aggregate supply

Aggregate demand

— is a schedule, graphicallyrepresented by a curve, which shows various amounts of goods and services — theamount of real national output — which consumers, businesses and governmentcollectively will desire to purchase at each possible price level.

Conversely, the higher the price level, the smallerwill be the national output they desire to purchase. That's exactly whatindicates the downsloping AD curve. The rationale for a downsloping AD curverests primarily upon three factors.

1

. Interest-rate effect

As the price level rises so will interest rates andrisng interest rates will cause reduction in certain kinds of consumption andinvestment spending.

AD curve assumes that the suplly of money in the economy. When the pricelevel increasereasereases, consumers will need to have more money on hand tomake purchases and businesses will similarly require more money to meet thepayrolls and purchase other needed inputs. In short, a higher price level willincreasereaserease the demand for money. Given a fixed supply of money, thisincreasereaserease in demand will drive up the price paid for the use of money.that price, of course, is the InterestRate. High IRs will curtail certain interest -sensetive expenditures bybusinesses & households.

Conclusion:

A high price level — by increasereasereasing the demand for money andthe Interset Rate — causes a reduction in the amount of real output demanded.

2

. Wealth effect

A second reason why the AD curve is downslopinginvolves the Wealth or Real Balances Effect. The idea here is that at a higherprice level the real value of purchasing power of the accumulated finansialassets — In particular, assets with fixed money values such as savings,accounts or bonds — held by the public will deminish. Conversely a decreaselinein the price level will increasereaserease the real value or purchasing power ofone's wealth and tend to increasereaserease spending

3

. Foreign Purchases effect

The Foreign Purchases effect of a price-levelincreasereaserease results in a decreaseline in the aggregate amount ofAmerican goods and services demanded. Conversely, a relative dicline a ourprice level will reduce our imports and increasereaserease our exports,Thereby, increasereasereasing the NE component of American AD

Aggregate supply

— is a schedule, graphicallyrepresented by a curve, indicating the level of real natn'l output which willbe available at each possible price level.

High price levels create an increasereaseentive forenterprises to produce additional output and offer it for sale. Lower pricelevels cause reductions in output. As a result the relationship between theprice level & the amount national output businesses offer for sale isdirect or positive.

The AS curve

shows the level of real national output which will be produced atvariuos price levels. It comprises three ranges: a horizontal (or Keynesian)range wherein the price level remains constant as Ntn'l output varies; avertical (or Classical) wherein the Ntn'l output is constant at thefull-employment level and the price level can vary; and intermediaterange wherein both: real output and the price level are variable.

This paragraph summary.

1

. It is useful for purposes of analysys toconsolidate — or aggregate — the outcomes from the enormous number ofindividual product markets into a composite market in which the key variablesare the price level and the level of Real National Output. This is acomplishedthru an AD-AS model of the economy

2

. The AD curve shows the level of Real NationalOutput which the economy will purchase at each possible price level

3

. The rationale for the downsloping AD curve isbased upon the Interest-Rate effect, the Wealth (or the Real Balances effect)and the Foreign purchases effect. The Interest-Rate effect indicates that,given supply of money, a high price level will increaserease the demend formoney, thereby increasereaseing the interest rate and reducing thoseconsumption and investment purchases which are interest rate sevsetive. TheWealth effect indicates that inflation will reduce the real value of purchasingpower of fixed-value financial assets held by households and will thereby causethem to retranch on their consumer spending. The FPE suggest that a change inthe US' price level relative to other countries will change the NE componemt ofthe US AD in the opposite direction.,

4

. The major non-price-level determinants of AD arespending by domestic consumers, businesses, government & foreign buyers.

5

. The AS curve shows the level of Real NationalOutput which the will be produced at each various possible price levels.

6

. The shape of the AS curve depends upon whathappends to per unit production costs — and threfore to the prices whichbusinesses must receive to cover costs and make a rpofit — as Real NationalOutput expends. The Keynaisian range of the curve is horizontal because, withsubtantial unemployment production can be increasereased without per unit costsor price increasereases. In the intermediate range, per unit costsincreaserease as production bottlenecks appear and less efficient equipment andworkers are employed. Prices must therefore rise as Real National Output isexpended in this range. The Classical range coinsides with full employment;Real National Output is at a maximum and cannot be increasereasereased but theprice level will rise in response to an increaserease in AD.

7

. the major non-price-level determinants of AS areinput prices, productivity and the legal-institution environment. All elsebeing equal a change in one of these factors will change per unit productioncosts at each level of output and threfore alter the location of the AS curve.

8

. The intersection of the AD and AS curvesdetermines equilibrium price level and Real National Output.

9

. Given AS rightward shifts of AD will:

a)Increase Real National Output and employment but not alter the price level inthe Keyneisian range;

b)Increase both Real National Output and the price level in the intermediaterange;

c)Increase the price level but not change Real National Output in the Classicalrange.

10

. The ratchet effect is based upon the nototion thatprices are flexible upward but, relatively inflexible downward. Hence, anincreaserease in AD will raise the price level, but in the short term pricescannot be expected to fall when demand decrease.

11

. The basic aggregate demand and supply model is aspringboard for a more detailed and comprehensive study of Macroeconomicanalysys and issues.

Macroeconomic instability:unemployment & inflation

Unemployment

«Full unemployment is an elusive concept todefine. A person might initially interpret it to mean that evryone who is inthe labor market — 100% of the labor force — is employed. But such isn't thecase some unemployment is regarded as normal or warranted.

Types ofunemployment

Let us approach the task of defining full employmentby distinguishing among several different types of employment.

Frictional unemployment

Given freedom to choose occupations & jobs, atany point in time some workers will be «between jobs». Some workerswill be in the process of volountarily switching jobs. Others will have beenfired and are seeking reemployment. Still others will be temporarily laid offfrom their jobs cause of seasonality or modal changeovers as in aotomobileindustry and there will be some workers particularly young people, searchingfor their first jobs. Economists use the term Frictional unemployment which consists of search unemployment andwait unemployment, for the group of workers whop are either searching for jobsor waiting to take jobs to the near future. The adjactive«frictional» implies that the labor market doesn't operate perfectlyand instan-taneousely — that's without friction in matching workers & jobs.Frictional unemployment is regarded is inevitable and, at least inpart,desirable.

Structural unemployment

Frictional unemployment shades into a secondcategory, called structural Inthis regard, economists use the term «structural» in the sense of«compisitional». Important changes occur overtime in the«structure» of consumer demand and in tecnology which alter thestructure of the total demand for labour. Because of suchchanges someparticular skills will be in less demand or may even become obsolete. Thedemand for other skills will be expending, including new skills whichpreviously did not exist. Unemployment results because the composition of thelabor force doesn't respond weekly or completely to the new structure of job opportunities. As a resultsome workers find that they have no readily marketable talents; Their skillsand experience have been rendered obsolets and unwanted by changes intechnology and consumer demand.

This paragraph summary.

1

. Our economy has been characterized by fluctiationsin national output, employment and the price level. Although characterized bycommon phases — peak, recession, trough, reco-very — business cycles varygreately in duration and intensity.

2

. Although the business cycle has been explained interms of such ultimate causal factors as innovations, political events, andmoney creation, it is generally agreed that the level of totel spending is theimmediate determinant of national output and employment.

3

. All sectors of the economy are affected by thebusiness cycle but in varying ways and degrees. The cycle has greater outputand employment remifications in the capitel goods and durable consumer goodsindustries than is does in nondurable goods industries. Over the cycle, pricefluctuations are greater in competetive than in monomolistic industries.

4

. Economsts distinguish between frictional,structural and cyclical unemployment. The full-employment or natural rate ofunemployment is currently believed to be between 5 and 6%. The accuratemeasurement of unemployment is complicated by the existance of parttime anddiscouraged workers.

5

. The economic cost of unemployment as measured bythe GNP gap, consists of the goods & services which society foregoes whenits resources are involountarily idle. Okun's law suggests that every oneperson increase in unemployment above the natural rate gives rise to a 2.5%

GNP gap.

Classical & Keynesiantheories of employment

1

. Classical employment theory envisonet laissezfaire capitalism as being capable of providing virtually continous fullemployment. This analysys was based on Say's Law and the assumption ofprice-wage flexibility.

2

. The classical economists argued that becausesupply creates its own demand, general overproduction was improbable. Thisconclusin was held to be valid even when saving occured, cause the money marketor most specifically, the interest rate, would automatically synchronize the savingprans of households and the investment plans of businesses.

3

. Classical employment theory also held that even iftemporary declines in total spending where to occur, these declines would becompensated for by downdard price wage adjustments in such a way that realoutput, employment, and real income wouldn't decline.

4

. Keyneisian employment theory rejects the notionthat the interest rate would equate saving and investment by pointing outthat savers & investors are substantially different groups who make theirsaving & investment decisions for different reasons — reasons which, forsavers, are largely unralated to the interest rate. Further more, because ofchanges in

a) Thepublics holdings of money balances;

b) Loansmade by banks and other financial institutions, the supply of funds may exceedop fall short of current saving to the end that saving & investment willnot be equal.

5

. Keyneisian economists discredit price-wageflexibility on both practical and theoretical grounds. They argue that

a) Unionand business monopolists, minimum-wage legislation, and a host of relatedfactors have virtually eliminated the possibility of substantial price-wagereductions;

b)Price-wage cuts will lower total income and therefore the demand for labor.

6

. The Classical & Keyneisian views can beillustrated thru the AD-AS model. Classical economists envision

a) Avertical AS curve which establishes the level of output;

b) A stable AD curve which establishes the pricelevel ;

Keyneisians see

a) A horizontal AS curve atless-than-full-employment levels of output;

b)Inherenlty unstable AD curve.

7

. The basic tools of Key employment theory are theConsumtion (C), Saving (S) and Investment (I) schedules, which show the variousamounts that households intend to consume and save and that businesses plan toinvest at the various possible income-output levels given a particular pricelevel.

8

. The locations of the consumption and Savingschedules are determined by such factors as:

a) The amountof wealth owned by households;

b) Theprice level;

c)Expectations of future income, future prices and product availability;

d) Therelative size of consumer indebtedness;

e)Taxation;

The consumption and saving schedules are relativelystable.

9

. The average propensities to consume andsave show the proportion of fraction of any level of total income that is consimed and saved. The marginal propensities to consume and save show theproportion of fraction of any change in total income that is consumed or saved.

10

. The immediate determinants of investment are:

a) Theexpected rate of net profit;

b) Thereal rate of interest

The economy's investment-demand curve can bedetermined by cumulating investment projrcts and arraying them in descendingorder according to their expected net profitability and applying the rule thatinvestment will be profitable up to the point at which the real interest rateequals the expected rate of net profit. The investment-demand curve reveals andinverse relationship between th interest rate and the level of aggregateinvestment.

11

. Shifts in the investment-demand curve can occur asthe result of chandes in

a) Theacquisition, maintenance and operating costs of capital goods;

b)Business taxes;

c)Thechnology;

d) Thestocks of capital goods on hand;

e)Expectations.

12

. We make the simplifying assumtion that the levelof investment determined by the current interest rate and the investment-demandcurve doesn't vary with the level of aggregate income.

13

. The durability of capital goods, the irregularoccurence of major innovations profit vo-latility, and the variability ofexpectations all contribute to the instability of investment spending.

Equilibrium National outputin Keynesian model

1

. For a closed no-government economy the equilibriumlevel of NNP is that at which the aggregate expenditures and national outputare equal or graphically where the C + In lineintersects the 45-degree line. At any NNP greater than the equilibrium NNP,national output will exceed aggregate spending resulting in unintendedinvestment in inventories, depressed profits and eventual declines in outputemployment and income. At any below equilibrium NNP the aggregate expenditureswill exceed the national output, thereby resulting in unintended disinvestmentin inventories, substantial profits and evential increases in NNP.

Fiscal Policy

1

. Government responsibility for acheiving andmaintaining full employment is set forth in the Employment Act of 1946. TheCouncil Economic Advicers (CEA) was established to advise the President onpolicies appropriate to fulfiling the goals of the act. The Humphrey-HawkinsAct of 1978 contens specific inflation and unemployment rate objectives.

2

. Increases in government spending expand, anddecreases contract, the equilibrium NNP. Converserly, increases in taxesreduce, and decreases expand the equilibrium NNP. Ap-propriate fiscal policytherefore calls for increases in government spending and decreases in taxes — that is, for a budget deficit — to correct for unemployment. Decreases ingovernment spending and increases in taxes — that is, a budget surplus — areappropriate fiscal policy for correcting demand-pull inflation.

3

. The balanced-budget multiplier indicates thatequal increases in government spending and taxation will increase theequilibrium NNP by the amount of the increase in goverment expenditures andtaxes.

4

. Built-in stability refers to the fact that net tax(NT) revenues vary directly with the level of NNP. Therefore, during arescession the public budget automatically tends toward a stabilizing deficit;Converserly, during expension the budget automatically tends toward ananti-inflationary surplus. Built-in stability ameliorates, but doesn't correct,undesired changes in the NNP.

5

. The full-employment budget indicates what theFederal budgetary surplus or dificit would be if the economy operated at fullemployment throughout the year. The full-employment budget is a more meaginfulindicator of the government's fiscal posture than is its actual budgetarysurplus or deficit.

6

. The enactment and application of appropriatefiscal policy and subject to certain pro-blems and question. Some of the mostimportant are these

a) Canthe enactment and application of fiscal policy be better timed so as tomaximize its effictiveness in heading off economic fluctuations?

b) Canthe economy rely upon Congress to enact appropriate fiscal policy?

c) Anexpansionary fiscal policy maybe weakened if it crowds out some privateinvest-ment spendig;

d) Someof the effect of an expansionary fiscal policy maybe dissipated in inflation;

e)Fiscal policy maybe rendered ineffective or inappropriate by unforeseen eventsoccuring within the world economy. Also fiscal policy may precipitate changesin exchange rates which weaken its effects;

f)Suplly-side economists contend that Keynesian fiscal policy fails to considerthe effects of tax changes upon AS.

Monetary Policy

1

. Like fiscal policy, the goal of monetary policy isto assist the economy in acdheiving a full-employment, noninflationary level oftotal output.

2

. For a consideration of monetary policy the mostimportant assets of the Federal Reserve Banks are securities and loans tocommercial banks. The basic liabilities are the reserves of member banks,Treasury deposits & Federal Reserve Notes.

3

. The three major instruments of monetary policy are

a)open-market operations;

b)changing the reserve ratio;

c) changing the discount rate;

4

. Minor selective controls involve the marginrequirement, consumer credit & moral suasion.

5

. Keynesians envision monetary policy as operatingthrough a complex cause-effect chain

a)policy decisions effect commercial bank reserves;

b)changes in reserves effect the supply of money;

c)changes in the supply of money alter the interest rate;

d)Changes in the interest rate affect investment, the equilibrium NNP and theprice level;

6

. The advantages of monetary policy include itsflexibility and political asseptability. Further, monetarists feel that thesupply of money is the single most important determinant of the level ofnational output.

7

. Monetary policy is subject to a number of limitationsand the problems

a) Theyexcess reserves which an easy money policy provides may not be used by banks toexpend the supply of money;

b)Policy-instigated changes in the supply of money maybe pertially offset bychanges in the velocity of money;

c) Theimpact of monetary policy will be lessened if the money-demand curve is flatant the investment-demand is steep. Theinvestment-demand curve may also shift so as to negate monetary policy.

8

. The monetory authorities face a policy dilemma inthat they can stabilize interest rates or the money supply but not both. In thepost-World War II period monetary policy has shifted from stabilizing interestrates to controlling the money supply and more recently to a more progmaticposition.

9

. The impact of an easy money policy upon domesticNNP strangthed by an accompa-nying increase in net exports precipitated by alower domestic interest rate. Likewise, a tight money policy is strengthed by adecline in net exports. In some sircumstances there maybe a trade off betweenthe use of monetary policy to affect the value of the dollar and thus tocurrect at rage imbalance and the use of monetary policy to achieve domesticstability.

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