EC21A_Lecture_Notes_2_2009 - Intermediate Macroeconomics I...

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Intermediate Macroeconomics I EC21A (Econ 2002) Measurement of Income, Prices, and Unemployment
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Questions you should be able to answer Ø What is natural rate of unemployment? Ø What is usually a government’s short-run goals? Ø What is usually a government’s long-run goals? Ø What influences the speed of adjustment of the economy? Ø What is the major difference between the short run and long run. Ø What is the major difference between Keynesian Macroeconomics and RBC theory.
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Why We Care About Income? Ø The more each person produces (output/income) the more will be available to divide among the citizens. § The greater our labour productivity the higher our income per capita. Ø Income is critical in determining our absolute and relative standard of living.
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Why We Care About Income? Ø “Why focus on output/income rather than the unemployment rate or even the inflation rate?” Ø There are a few critical relationships in Unit I. § When output is above its natural level we expect inflation to rise and vice versa. § Therefore, if we can manipulate the output level we will at least have partial control over one of the central Macroeconomic concepts – inflation.
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Why We Care About Income? Ø There are a few critical relationships in Unit I. § The unemployment rate moves inversely with changes in the output/income level. § If we are able to manipulate the output level we will at least have partial control over another of the central Macroeconomic concepts – the unemployment rate.
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Why We Care About Income? Ø If we know what is happening to income we have a pretty good idea of what is happening to all three (3) central concepts of Macroeconomics.
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The Circular Flow Ø Simple economy without savings, govt. sector, and foreign sector Ø Let us assume an economy that produces a single good, calculators, from a single input, labour. Ø Expenditure on calculators flows from HHs to firms, and income in the form of wages and profits flows from firms to HHs
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The Circular Flow Households Firms Goods Labor Expenditure ($) Income ($)
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Circular Flow of Income Ø Two agents § Households § Businesses Ø Two Types of Flows § Real Flows (factor services, and goods and services) § Money Flow (wages and consumption) Ø Consumption = Income § Each transaction has a buyer and a seller
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Circular Flow Ø Therefore, for the economy as a whole, Income= Expenditure= Output Ø Thus, to calculate GDP we can look at the flow of dollars from firms to HHs or the flow of dollars from HHs to firms Ø Underlying assumption here, is that all income is consumed and all business receipts belong to HHs
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Leakages- fraction of total income that flows to taxes or savings rather than to the purchase of consumer goods. Injections- non-consumption
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EC21A_Lecture_Notes_2_2009 - Intermediate Macroeconomics I...

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