pantos 177 Semester Notes

pantos 177 Semester Notes - Lecture on closed economies 1...

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1/29/09 Lecture on closed economies 1. Closed economy is one that does no business with other nations (North Korea); has no interaction and is isolated with the rest of the world o Cannot trade (import or export), there is a productivity problem because they have no idea how other economies operate o They like to keep their economy, military, and even culture shrouded in secrecy o There is no answering what, how, and for whom they'll produce; people have no rights and must like what the government provides and produces, consumer goods are not part of those goods produced o Consumer choice is greatly restricted 2. y = GNP = C + I P + G; the Expenditure Side of GNP o GNP, or Gross National Product, is the sum of all goods and services produced by US citizens in one fiscal year o The higher the GNP, the lower the unemployment o Three components to GNP: C = Consumption, I P = Private Investment, G = Government expenditure 3. GDP is the GNP plus imports and exports 4. y d = Disposable Income = y - T o y = Gross Income, T = Tax 5. Consumption is a function of disposable income (y d ), as shown in graph on right o Even with 0 disposable income, through Autonomous Consumption (C 0 ) people can still consume via government coupons; people consume whatever they're told to consume o If y d goes down, C goes down; If T goes up, C will go down and GNP will drop 6. Regulation is always after the fact, and that's the problem; by then it is too late 2/3/09 Lecture on closed v open economies 1. The Expenditure Side of GNP is y = GNP = C + I P + G (Equation 1) o Where C = Consumption, I P = Private Investment, and G = Government expenditure 2. The Income Approach to the GNP is y = GNP = C + S p + T (Equation 2) o Where C = Government Consumption, S P = Private Savings, and T = Taxes 3. The two approaches together equal equation 3 o C + I P + G = C + S P + T; (Equation 3) or o (S P - I P ) = (G - T) (Equation 4) The equilibrium condition in the closed economy indicates that the budget account should be equal to the capital account If G > T, the government is in deficit; If G < T, the government is in surplus (G - T) is the Public Budget Constraint (S P - I P ) is The Capital Account 4. Raising taxes is not necessarily the answer o Raising T will lower y d (Disposable Income) o Since C (consumption) is a function of y d , C will drop o If C drops, so too will GNP 5. We need Fiscal Conservatism, lowering G 6. S p * = I p + (G - T) (Equation 5) o The optimal Private Savings is equal to the Private Investment plus the Public Budget Constraint o If I p is negative, and so too is (G - T); then S p is negative 7. I p * = S p * - (G - T) (Equation 6)
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o The optimal Private Investment is equal to the optimal Private Savings minus the Public Budget Constraint 8. In an open economy, you deal with imports and exports o Certain imports we have a demand for characteristics rather than price 2/5/09 Lecture on open economy (closed economy review) 1. Equation 1) y = GNP = C + I
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This note was uploaded on 09/08/2010 for the course BUS 177 at San Jose State.

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pantos 177 Semester Notes - Lecture on closed economies 1...

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