Introduction to Economic Growth and Instability Chapter 7.
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Transcript of Introduction to Economic Growth and Instability Chapter 7.
Introduction to Economic Growth and Instability
Chapter 7
RevisionEconomic growthRule of 70Sources of growthBusiness CycleUnemploymentTypes of unemploymentEconomic costsOkun’s Law
InflationRise in the general level of pricesEach dollar buys fewer goods and
servicesReduces the purchasing power of
money
Measuring inflation
Price indicesConsumer price index
Each month or each yearMarket basket of some 300
consumer goods and services
CPIPrice of the Most Recent Market
Basket in the Particular Year
Price of the Same MarketBasket in 1982-1984
= x 100
Quanti
ty in
Basket
2006 2007 2008
(kg or
litre)Price
Cost of
basketPrice
Cost of
basketPrice
Cost of
basket
Flour 6 Rs. 200 1200 Rs. 300 Rs. 150
Oil 1.5 Rs. 80 120 Rs. 150 Rs. 50
Milk 1 Rs. 40 40 Rs. 55 Rs. 30
Rice 3 Rs. 300 900 Rs. 250 Rs. 250
Total
cost2260
Price
index100
Consumer Price Index
Types of InflationDemand-pull
Excess of total spending beyond the economy’s capacity to produce
Excess demand for goods, can push up prices“too much spending chasing too few goods”
Cost-pushSupply or cost side of economyRising per-unit production costsReduces profits and thus reduces output Prices riseAlso known as supply shocks
Redistributive Effects
Inflation hurt some people , leaves others unaffected, and actually helps still others
AnticipationsAnticipated Inflation, avoid or lesson effects
of inflationUnanticipated Inflation( not expected)
Nominal vs. Real income Nominal income is the number of dollars received
as wages, rent, interest, profitsReal income = Nominal income / price
index
Real income is measures the amount of goods & services nominal income can buy. It is the purchasing power of nominal income
% change in real income = % change in nominal income - % change in price level
Redistribution Effects of Inflation
InflationWho is Hurt by Inflation?
Fixed-Income ReceiversSaversCreditors
Who is Unaffected or Hurt by Inflation?Flexible-Income Receivers
Cost-of-Living Adjustments (COLAs)BusinessDebtors
Inflation Deflation: the effects of unanticipated
declines in the price level. People with fixed nominal incomes will benefit. Creditors and Savers will benefit.
Hyperinflation is extraordinarily rapid inflation. Money loses its value and status as medium of exchange
Public and Private Sectors- M&B Ch. 5
Households, Businesses, the Public Sector/Government
The US Economy: Private and Public sectors
Households113 million householdsOne or more person occupying a housing
unitSupplier of economic resourcesMajor spenders in economy
Income received can be categorized asHow its earnedHow it distributed by households
Functional distribution of IncomeIndicates how nations income is
apportioned among wages, rents , profits etc
According to the function performed by the income receivers
Personal Distribution of IncomeIndicates how money is divided among
individual householdsDivided into groups , height of bar shows
how much of total income is received by each group
Household as SpendersPersonal TaxesPersonal Savings
SecuritySpeculationDis-save
Personal consumption Relation of income with S and C ??
The business populationA plant is a physical establishment, that
performs one or more function in fabricating a good or serivce
A firm is a business organization that owns and operates plant
An industry is a grp of firms that produce the same, or similar products
Multiplant
Sole-proprietorship: is a business owned and operated by one person
Partnership: two or more individuals agree to own and operate a business together
Corporation: is a legal creation that can acquire resources, own assts, produce and sell products, incur debts, extend credit etc...perform the functions of any other type of enterprise.
Legal Forms of Businesses
Principals (stockholders)- want maximum company profit and stock price.
Agents (managers) –may want the power, prestige and pay that often accompany control over a large enterprise, independent of profitability and stock price. For example, executives may build expensive office buildings, enjoy the use of corporate jets, pay too much to acquire other corporations.
Differences in objectives (profits vs. salary) –so a conflict of interest may exist between the principal and the agent
The Principal-Agent Problem
Government’s roleProviding legal structure: government establishes
rules of the game that control relationships among businesses, resource suppliers and consumers. Optimum amount of regulation is established so that the MB and MC are equal
Maintaining competition: in most markets, efficient production can be best attained with a high degree of competition.
Redistributing income Transfer payments (to the poor)Market intervention (minimum prices, wages)Taxation (Higher taxes applied on rich and lower taxes on
the poor to narrow income gaps)
Public Sector