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.