Name Kristian Villadsen

The Level of Overall Economic Activity Objectives Organizer

Define Macroeconomics:

Branch of economics that studies decision making for the economy as a whole, ie examining growth

Objective 1: List and explain the five main macroeconomic goals of an economy.

Economic growth	1. a steady rate of increase of national output
Employment	a low level of unemployment
Price stability	a low and stable rate of inflation
External stability	a favorable balance of payments position.
Income distribution	an equitable distribution of income

*The order here is quite logical, if it helps you remember.

Objective 2: Describe and illustrate the circular flow of income model of the economy for a closed (two-sector) economy and an open (four sector) economy with government and financial markets.

Closed (two-sector) micro circular flow model

Factor resource market

Product market

House holds

firms

expenditure

Goods and services

Rent, wages, interest profit

Land, labour, capital, etr

Open (four-sector) macro circular flow model

households

firms

expenditure

income

Investments

exports

Governments spending

Savings

imports

taxes

Notice/Know and understand the relationships!

Leakage Injection

Savings	Foregoing current consumption to allow future consumption -|banks	Investment	An increase in capital stock by firms to expand output -|borrow from banks
Imports	Spending on imports is a leakage -|the money flows out of circulation to foreign firms	Exports	Foreigners spend money to buy domestic products thereby injecting money into an economy
Taxes	Taxes are paid to the government (taking that money out of circulation)	Subsidies	Government spending injects money into the circular, flow.

Define Transfer Payments-

A payment to an individual from the government that does not expect an increase in output

Important Conclusions:

· The economy is in equilibrium when:

LEAKAGES=INJECTIONS

· If leakages rise without a corresponding increase in injections:

THE NATIONAL OUTOUT WILL FALL, THERE WILL BE LESS INCOME CIRCULATING.

· If injections rise without a corresponding rise in leakages:

THERE WILL BE MORE MONEY IN CIRCULATION

Objective 3: Distinguish between the output approach, the income approach and the expenditure approach for measuring national income. [know the different ways GDP is calculated]

*The most common measure of a country’s national income is gross domestic product (GDP).

There are three methods to calculate GDP:

1	The output method	Measures the actual value of the goods and services produced (# 3 on circular flow) Calculated by summing all the value added by all the firms in an economy (making sure not to double count by subtracting input cost) Data usually grouped according to different production sectors: primary, (agriculture, mining), secondary (manufacturing), tertiary (services)
2	The income method	Measures the value of all the incomes earned economy (wages, rent, interest, profits) (#2 on circular flow)
3	The expenditure method	Measures the value of all spending on goods and services in the economy. –Calculated by summing spending by different sectors in the economy (c+i+g+x-m (number 4 of circular flow) Consumption, investment, governments, net exports

National Output = National Income = National Expenditure

How accurate are these statistics? In theory they are always equal, is this really true? Why? Why not?

Presumably accurate depending how develpoe or underdeveloped the country may be

The data comes from may and varied sources so inevitably there are inaccucies leading to imbalances among the final values

Some inaccuracies are due to timing, some are due to collection

Objective 4: Define and distinguish between Gross Domestic Product (GDP) and Gross National Product (GNP)/ Gross National Income (GNI) as measures of economic activity.

GDP- The total value ofof all final goods+services produced in an economy in a given year measured by c+i+g+(x-m)

GDP- may be defines as the total value og all economic activity in a country regardless of who owns the productive assests

Ie. An Indian MNC operating within canadas borders and earning profit towards canadas GDP, not indias.

GNP/GNI-

Is the total income earned by a country’s factors of proudction regardless of where the assets are located?

Formula for GNP/GNI:

GNP= GDP + net property income from abroad (income earned by assets abroad minus income paid to foreign assets operating domestically)

GNI versus NNI: Net national product

NNI=GNI- depreciation of capital stock (capital consumption)

NNI takes into account the depracitate (loss of value) off capital or capital consumption due to:

Wear and tear as machinery is used

Damage to capital equipment

Absolute technology

Objective 5: Define and distinguish between total GDP & GNP/GNI and per capita GDP & GNP/GNI

Per capita:

Total gdp divided by the population

What does looking at per capita statistics allow for that looking at total statistics does not?

Comparison between countries

Objective 6: Define and distinguish between the nominal value of GDP and GNP/GNI and the real value of GDP and GNP/GNI.

Nominal: number (not adjusted for inflation)

real: Number adjusted for inflation (done using the gdp deflator)

Why are ‘real’ values of national income statistics more valuable than nominal values?

Objective 6: Explain the meaning and significance of “green GDP”

Green GDP= GDP-enviromental costs of production

Green GDP is a measure of GDP that ctakes into account any environmental costs incurred from the production of the coods and services included in the GDP figures

China calculated green GDP for 2004 + showed a 3% costs for pollution

Stopped calculating the next year due to arguments

India is discussing calculating green GDP accounts in 2015

Objective 7: Evaluate the uses of national income statistics.

Why are they gathered?

	Act as a report growth been achived
	Gov. uses stats to develop policies
	Economist to stats to develop models and make forecasts
	Business use stats to male forecasts about future demand
	To measure performance of the economy over time (real)
	As a starting point for measuring the welfare of a nations people
	AS a base for comparing different countries

What are the limitations of national income statistics?

Inaccuracies	Dara used to calculate the measure comes from a variety of sources such as tax claims, output data and sales data. Figures tend to become more accurate overtime (after a lag) as they are revised Statisticians try to be as accurate as possible, and in more devoped countries The UN SNA works to improve data
Hidden economy	Unrecorded or under recorded economic activity, informal market -National income accounts only record information formally reported and officially recorded They don’t include do it yourself work or work done at home This is quite significan in devoping countries where much output does not get recorded Also the hidden economic (black market)
Externral costs	Negative externalities of production
Life concerns	GDP ,amu grow because people are working longer hours or taking power holidays
Composition of output	Is it possible that a large part of a countries outpit is in goods that do not benefit consumers -military equipment - in this case it would be hard to argue a higher GPD will raise living standards

Objective 8: Explain and illustrate the business cycle and its phases.

Periodic fluctuations in economic activity measured by changes in real GDP Demonstrates patterns seen in developed countries of periods of rising growth, followed by periods of slowing growth and even falling growth.

boom Recovery

recovery recession

trough

expansion contraction expansion

Long term trends and output gaps

Positive output gap-

the economy is producing above its trend- inflation is likely to be a problem.

Negative output gap-

gap- the economy is producing below its trend- unemployment is likely to be a problem

Objective 10: Calculate nominal GDP from national income data using the expenditure approach.

GDP = C + I + G + (X - M)

C = Household and personal consumption expenditures

I = Gross private domestic investment expenditures

G = Government consumption and gross investment expenditures

X = Expenditures on goods and services exported

M = Expenditures on goods and services imported

2.1 the levels of overall macroeconomic activety worksheet

Exercise one

The inner circle of the base diagram illustrates the economic links between households and firms. There is a flow of factors of production from households to firms and in, the opposite direction a flow of goods and services. from firms to households. These are considered real flows where as the other direction there is a money flow twhich refers to the incomes paid by firms to households for use of the factors supplied. the factors of producuction include land, labour, capital and entrepreneurship and their rewards or payemebnts are the sum of rent, wages interest and profits. GDP is a measure of the total output of an economy in a year. More specificaly it is the value of all final goods produced within the boundaries of an economy over a period of time, typicaly a year. nominal GDP meaures output at current prices ie. the price pravailing each year. Real GDP meaures output value at constant prices, ie prices prevailing during the base year, If the deleterious effect of many production production processes pon the enviroment is accounted for then we will arrive at the of green GDP. Using national income stats to make inferences about living is fraught with problem . for ecampls subsistence farming and non marketed output.

Exercise 2

There are many reasons that just because there is a double gdp that the standard of living is double. This is becasue there are several things that are not accounted for in the GDP such as un paid services thhat benifit the welfare. Also bigger countries proudce more then smaller countries bu may have different GDP per capita.

Exercise 3

It is importent becasue it monetizes the loss of biodiversity, and accounts for costs caused by climate change.

exercise 4

233.046/101.2x100

220

exercise 5

1. false

2. false

3. false

4. true

5. true

6. true

worksheet for oligopoly

· Explain the assumptions of oligopoly.

1. _few companies control__-

a. Concentration ratio-

CRx, if like 4 firms control the 80 percent to 50 percent of the markets its an oligoopoly

b. Herfindahl-Herschmann Index-

is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.

2. ___either hard or easy barriers to entry____-

because of economies of scale and brand loyalty

3. ____either homogenous or different products______-

alot of branding like coke or same product like opec

4. ____interdependence____-

companies have to take notice other peoples actions like price.

5. ____price rigidity_____-

prices dont change much.

· Distinguish between collusive and non-collusive oligopoly.

· Distinguish between formal collusion and tacit collusion.

· Define a cartel.

1. Define collusive oligopoly –

a collusive oligopoly is when firms collude to charge the same prices for their product, working as a monopoly

2. Define collusion-

working together

3. Illustrate and explain the collusive oligopolist’s graph (whether formally or tacitly colluding).

its a monopoly curve as they function as a monopoly

4. Distinguish between formal and tacit collusion.

a. Formal collusion-

companies formaly and openly agree that they will charge the same price, illigal in most cases

b. Tacit collusion-

when firms charge the same price without formal collusion, just looking a other firms pricing

5. What is a cartel? Are they typically legal or illegal? Give a specific example of a legal cartel.

a cartel is when firms are working together at a set price. ususally illigal but can be legal like OPEC, org. of oil exporting countries.

6. What types of laws guard against anti-competitive behavior like collusion between firms?

antitrust laws which penalize with fines and jail

· Explain the role of game theory in oligopoly.

· Explain and illustrate the kinked demand curve.

7. Define and distinguish the characteristics of a non-collusive oligopoly.

when firms do not work togehter and must be aware of all the other companies decisions.

8. Illustrate and explain the graph faced by the non-collusive oligopolist.

a kinked demand curve

The firm only knows one point on its demand curve

if the firm raises their price alot of demand would be lost

if the firm lowered their price then the other firm would lower theirs too

show price rigifity in a non collusive olygopoly

firms are afraid to raise prices

firms are afraid to lower markets

the shape of the mr curve means that if marginal cost were to rise then it is possible that mc equals mr and so not chang ethier prices or outputs

9. What is game theory? Explain its role in oligopoly.

game theory is the optimal strategy a firm can make in order to gain the best outcome.

10. What is a duopoly?

a. What is a maximin strategy?

maximizing is minimum profit option

b. What is a maximax strategy?

trying to get its highest profit

11. Explain the prisoner’s dilemma. What does the

principle tell us about oligopoly

If Dave pleaded non guilty and henry did so to they would both go to jail but only for 2 years, however dave can be a dick and plead guilty and henry being a nice guy pleads guilty, thinking Dave will so too gets 5 while Dave gets one.

this is relative to economy because instead of guilty it could be advertizing so all the effects remain.

· Explain and give examples of non-price competition.

12. Explain what non-price competition is and why it is important in an oligopoly market structure.

It is factors that make us want to choose the firm over other firms like advertizing. it is important because it is how firms gain customers without price.

13. Describe at least one case study example of firms competing through non-price competition. Give details.

Coca cola compete through heavy ads and sports sponerships agains pepsis advertizing and racing sponsorships.

oligopoly

Assumptions Perfect comp. Monopolistic comp. 0% Low concentration 50%

Few dominate the industry Many or not does not matter, domination Concentration ratio- CRx X is the number of large firms Example- Cr4 is 90 on beer companies Meaning 4 companies make 90 % of booze Oligopoly monopoly Medium concentration 80% High concentration Some make almsot the same goods, some are very differnent Most hard barriers to entry like high scale of production and branding Interdependance Small number of firms controling the industry Collude- act togehter as a monoply Also compete vigourously for market share Prics change far less, even when production costs change firms leave their prices unchanged Firms

Collusive and non collusive

Firms act togehter as a monoply and share profits Formal- firms offically agree on a price A cartel Illigal in most countries as is against the interest of the people Fines and punishments Opec, world oil prices Tacit collususion, when firms change their prices simply by looking at other firms prices, no comuniation need to take place. Monopoly graph Try to keep prices stable in order to keep the situation going Non collusive firms, compete and are aware of eachothers actions Game theory is the optimum strategy that a firm could undertake in tge light of other firms decisions for example: Dont advertize Advertize Dont advertize Both make 4 million Firm a gets 8 million Firm b gets 2 million Advertize Firm a gets 2 million Firm b gets 8 million Both get 3 million firm a firm b kinked demand curve The firm only knows one point on its demand curve if the firm raises their price alot of demand would be lost if the firm lowered their price then the other firm would lower theirs too show price rigifity in a non collusive olygopoly firms are afraid to raise prices firms are afraid to lower markets the shape of the mr curve means that if marginal cost were to rise then it is possible that mc equals mr and so not chang ethier prices or outputs non price comp. brand names, packaging, special features and ads etc. huge expeditures on ads misuse of resources but also greater choice unilever amd procter and gamble own many things, many industries

monopolistic competition

My version has pictures

monopolistic competition

The assumptions of monopolistic competition	Fairly large number of firms The firms are small relative to the industry All produce slightly different products No barriers to entry
Possible short run profit and loss	abnormal profit mc ac D=AR mr
The long equilibrium	All firms will go back to a long run equilibrium and all make normal profits If firms are making short run abnormal profit other firms will get attracted to join and the curve will shift back to normal. if there is short run losses companies will leave and the firms remaining will go to equilibrium product differentiation in order to attract more customers maximizing profits when MC=MR all firms making normal profits
Productive and allocative effeciency	Productive effiveincy- Mc=ac Allocative= mc=ar
Monopolistic competition vs. perfect competition	not productive or allocative effecient this is due to the consumers desire for different products they pay higher for the choices

Mastering Monopolistic Competition

1. Explain the assumptions of monopolistic competition.

Assumption Explanation

Number of firms	There are a large number
Size	The firms are small in comparison to the industry
Products	All products are slightly different
Barriers to entry	Very little

2. Define and give examples of product differentiation.

Differentiation exists when a good or service is perceived to be different from other goods/services in some way.

color of the packaging.

3. Explain and illustrate the demand curve for firms in monopolistic competition.

4. Explain and illustrate the short run profit/loss situation for firms in monopolistic competition.

5. Explain and illustrate the long-run equilibrium in monopolistic competition.

All firms will go back to a long run equilibrium and all make normal profits

If firms are making short run abnormal profit other firms will get attracted to join and the curve will shift back to normal. if there is short run losses companies will leave and the firms remaining will go to equilibrium

product differentiation in order to attract more customers

6. Explain the movement from short run to long run in monopolistic competition.

• Because of ease of exit and entry (no barriers to entry) SR losses or profits will turn into LR normal profits as firms enter and exit the industry freely.

• If firms are making SR abnormal profits, then other firms will be attracted to the industry.

• As they enter, they will take some business away from existing firms, whose demand curves will shift left.

• If firms are making SR losses, some firms will exit the industry. The firms that remain will find their demand curve begin to shift right as they pick up trade from exiting firms.

7. Explain and illustrate productive and allocative efficiency in the short and long run in monopolistic competition.

8. Compare and contrast perfect and monopolistic competition.

not productive or allocative effecient

this is due to the consumers desire for different products

they pay higher for the choices

Monopoly

Monopoly

Assumptions of the model	There is only one firm producing the products Barriers to entry exist so that new firms cant enter the market and they maintain the industry As a concequence of the barriers to entry the monopolist may be able to make abnormal profit in the long run
Sources of monopoly power/barriers to entry	The firm may be able to keep its monopoly in several ways 1. Economies of scale- If a firm is a monopoly they will be feelong economies of scale, the firms that are trying to enter will be too small and not enough expertise, therdore they will be forced to make losses as they simply cant compete. 2. Natural monopoly 3. Legal barriers Patents allow legal monopolies to encourage creativity and inventions Governments create a nationalized industry 4. Brand loyalty A company may gain huge brand loyalty, consumers think of the product as a brand Kleenex 5. Anti competitive behavior Firms may try to adopt restrictive practices, -price war, the firm iss able to lower their prices so much kicking other firms out of the industry
The demand curve and the profit maximizing level of out put	The firms demand curve is the industries demand curve,
Possible profit situations in monopoly	The monopoly is able to make abnormal profits in the long run. However they can also make losses and if they closed down the industry would also close
Revenue maximization	The firm may want to maximize revenue rather than profit.
Efficiency in monopoly	There is neither productive efficienct nor allocative
Advantages and disadvantages
The disadvantages

Excersises 17-20

http://imgur.com/kIOPI