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Inflation
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The increase in overall level of prices. Prices have risen approximately 4% each year
The overall level of prices in a economy adjusts to bring money supply and money demand into balance.
When the central bank prints money, it causes the price level to rise.
A government can pay for some of its spending simply by printing money. Relying heavily on inflation tax causes hyperinflation
The overall level of prices in a economy adjusts to bring money supply and money demand into balance.
When the central bank prints money, it causes the price level to rise.
A government can pay for some of its spending simply by printing money. Relying heavily on inflation tax causes hyperinflation
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Nominal vs Real Prices
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Real Interest Rate = Nominal Interest Rate - Inflation
Nominal Interest Rate = Real Interest Rate + Inflation
Nominal Interest Rate = Real Interest Rate + Inflation
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Methods of Calculation of Inflation
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CPI & GDP
CPI: A measure of the overall cost of the foods and services bought by a typical consumer
GDP: A measure of the price level calculated as the ratio of
(Nominal GDP/Real GDP) x 100. The market value of all officially recognized final goods and services produced within a country in a given period of time
CPI: A measure of the overall cost of the foods and services bought by a typical consumer
GDP: A measure of the price level calculated as the ratio of
(Nominal GDP/Real GDP) x 100. The market value of all officially recognized final goods and services produced within a country in a given period of time
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GDP equation
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Y = C+I+G+NX
Y= economy's GDP
C= consumption
I= investment
G = government purchases
NX = net exports
Y= economy's GDP
C= consumption
I= investment
G = government purchases
NX = net exports
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Money Equation
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Salary in $'s x (Price level in previous year/Price level in current year)
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Phillips Curve
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The tradeoff between inflation and unemployment described by the Phillips curve holds only in the short run and for temporary demand shocks.
After an adverse supply shock, policymakers just have to accept a higher rate of inflation for any given rate of unemployment or a higher rate of unemployment for any given rate of inflation.
In the long run, expected inflation adjusts to changes in actual inflation, and the short-run Phillips curve shifts.
As a result, the long-run Phillips curve is vertical at the natural rate of unemployment.
After an adverse supply shock, policymakers just have to accept a higher rate of inflation for any given rate of unemployment or a higher rate of unemployment for any given rate of inflation.
In the long run, expected inflation adjusts to changes in actual inflation, and the short-run Phillips curve shifts.
As a result, the long-run Phillips curve is vertical at the natural rate of unemployment.
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Economic Bubbles
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A bubble exists when an asset price is above its fundamentals, and this difference does not disappear even if investors know the price is above its fundamental value.
Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears.
Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears.
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Kondratieff Cycles
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Describes that economy goes through cycles in the long term. Four cycles or "K" waves over approx. 60 years
Spring: a new factor of production, good economic times, rising inflation
Summer: hubristic 'peak' war followed by societal doubts and double digit inflation
Autumn: the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression.
Key Factors: Inflation, Confidence, Interest Rate, Credit Availability, & Forms of Interest
Spring: a new factor of production, good economic times, rising inflation
Summer: hubristic 'peak' war followed by societal doubts and double digit inflation
Autumn: the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression.
Key Factors: Inflation, Confidence, Interest Rate, Credit Availability, & Forms of Interest
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Strong vs Weak Dollar Policy
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Keeping a weak dollar is better for economies like China where exporting is huge.
The strong dollar policy is an economic policy based on the assumption that a strong exchange rate of the dollar is in the interests of the country and the whole world. The policy keeps inflation low, encourages foreign investment, and maintains the currency's role in the global financial system.
The strong dollar policy is an economic policy based on the assumption that a strong exchange rate of the dollar is in the interests of the country and the whole world. The policy keeps inflation low, encourages foreign investment, and maintains the currency's role in the global financial system.
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Globalisation
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The (old) process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture.
Just 10.9 million people, or 0.15%, control $42.7 trillion dollars or two thirds of world GDP. An even tinier group of people, 0.001%, control a third of that amount.
Just 10.9 million people, or 0.15%, control $42.7 trillion dollars or two thirds of world GDP. An even tinier group of people, 0.001%, control a third of that amount.
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Bitcoins
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A currency that's free from government intervention and can be used to conduct transactions without hefty exchange or processing fees. Created by hackers.
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Money
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A medium of exchange to make transactions, a store of value a way to transfer purchasing power. Refers to assets that people regularly use to buy goods and services
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Velocity of Money
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V = (PxY)/M
P= Price level
Y= Quantity of Goods Produced
M= Money Supplied in the Economy
P= Price level
Y= Quantity of Goods Produced
M= Money Supplied in the Economy
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The Quantity Equation
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MxV=PxY
V= Velocity
P= Price Level
Y= Quantity of Goods Produced
M= Money Supplied in the Economy
V= Velocity
P= Price Level
Y= Quantity of Goods Produced
M= Money Supplied in the Economy
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Fisher Effect
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When inflation rises, the nominal interest rate rises by the same amount so that the real interest rate remains the same. Works only on the long run regarding the expected inflation.
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Inflation Rate
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The inflation rate is the percentage change in some measure of the price level from one period to the next. Using the GDP deflator, the inflator rate between two consecutive years is:
GDP deflator in year 2 - GDP inflator in year 1/GDP deflator in year 1
CPI in year 2 - CPI in year 1/CPI in year 1
GDP deflator in year 2 - GDP inflator in year 1/GDP deflator in year 1
CPI in year 2 - CPI in year 1/CPI in year 1
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If a CD in 1992 was $20, what is it's value in 2012?
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CPI 1992=140.3
CPI 2012=229.6
20 x (229.6/140.3) = $32.73
CPI 2012=229.6
20 x (229.6/140.3) = $32.73
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Exports
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Goods and services that are produced domestically and sold abroad.
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Imports
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Goods and services that are produced abroad and sold domestically net exports the value of a nation's exports minus the value of its imports.
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Trade Balance
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The value of a nation's exports minus the value of its imports; also called net exports.
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Trade Surplus
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An excess of exports over imports.
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Net Exports
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The value of domestic goods and services sold abroad (exports) minus the value of foreign goods and services sold domestically (imports).
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Net Capital Outflow
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The acquisition of foreign assets by domestic residents (capital outflow) minus the acquisition of domestic assets by foreigners (capital inflow).
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Adam Smith
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Said that participants in the economy are motivated by self-interest and that the 'invisible hand' of the marketplace guides this self-interest into promoting general economic well-being.
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Theodore Levitt vs Pankaj Ghemawa
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Theodore: "technology is creating a new commercial reality - the emergence of global markets on a previously unimagined scale of magnitude... global companies that ignored regional and national differences can exploit economies of scale by selling the same things in the way everywhere"
Ghemawa: "World 1.0 was defined primarily in terms of nation-states where national borders were protecting people and industries... World 2.0 sees globalization as market forces over governments with deregulated industries and free trade... World 3.0 implies deep understanding of local cultures."
Ghemawa: "World 1.0 was defined primarily in terms of nation-states where national borders were protecting people and industries... World 2.0 sees globalization as market forces over governments with deregulated industries and free trade... World 3.0 implies deep understanding of local cultures."
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Economic Fluctuations
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Short-term Economic Fluctuations Are Irregular
and Unpredictable
Most Macroeconomic Quantities Fluctuate Together
As Output Falls, Unemployment Rises
Recession: GDP < 0 for 2 consecutive quarters. Declining real incomes and increasing unemployment
Depression: Severe recession
Recovery: A period of growing real income
Growth: period of growing incomes and declining unemployment
and Unpredictable
Most Macroeconomic Quantities Fluctuate Together
As Output Falls, Unemployment Rises
Recession: GDP < 0 for 2 consecutive quarters. Declining real incomes and increasing unemployment
Depression: Severe recession
Recovery: A period of growing real income
Growth: period of growing incomes and declining unemployment
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Aggregate Demand & Supply
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Designed to understand short-run economic fluctuations focuses on the behavior of two variables:
The first variable is the economy's output of goods and services, as measured by real GDP.
The second is the average level of prices, as measured by the CPI or the GDP deflator.
The aggregate-demand curve tells us the quantity of all goods and services demanded in the economy at any given price level.
The aggregate-supply curve tells us the total quantity of goods and services that firms produce and sell at any given price level.
The first variable is the economy's output of goods and services, as measured by real GDP.
The second is the average level of prices, as measured by the CPI or the GDP deflator.
The aggregate-demand curve tells us the quantity of all goods and services demanded in the economy at any given price level.
The aggregate-supply curve tells us the total quantity of goods and services that firms produce and sell at any given price level.
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The Wealth Effect
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A decrease in the price level raises the real value of money and makes consumers wealthier, which in turn encourages them to spend more. The increase in consumer spending means a larger quantity of goods and services demanded.
Conversely, an increase in the price level reduces the real value of money and makes consumers poorer, which in turn reduces consumer spending and the quantity of goods and services demanded.
Conversely, an increase in the price level reduces the real value of money and makes consumers poorer, which in turn reduces consumer spending and the quantity of goods and services demanded.
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The Interest-Rate Effect
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A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded.
Conversely, a higher price level raises the interest rate, discourages investment spending, and decreases the quantity of goods and services demanded.
Conversely, a higher price level raises the interest rate, discourages investment spending, and decreases the quantity of goods and services demanded.
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The Exchange-Rate Effect
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When a fall in the U.S. price level causes U.S. interest rates to fall, the real value of the dollar declines in foreign exchange markets. This depreciation stimulates U.S. net exports and thereby increases the quantity of goods and services demanded.
Conversely, when the U.S. price level rises and causes U.S. interest rates to rise, the real value of the dollar increases, and this appreciation reduces U.S. net exports and the quantity of goods and services demanded.
Conversely, when the U.S. price level rises and causes U.S. interest rates to rise, the real value of the dollar increases, and this appreciation reduces U.S. net exports and the quantity of goods and services demanded.
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Sticky Wage Theory
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The short-run aggregate-supply curve is upward sloping because nominal wages are based on expected prices and do not respond immediately when the actual price level turns out to be different from what was expected.
This stickiness of wages gives firms an incentive to produce less (because it is a FIXED COST) output when the price level turns out lower than expected and to produce more when the price level turns out higher than expected.
This stickiness of wages gives firms an incentive to produce less (because it is a FIXED COST) output when the price level turns out lower than expected and to produce more when the price level turns out higher than expected.
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Sticky Price Theory
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Emphasizes that the prices of some goods and services also adjust sluggishly in response to changing economic conditions.
This slow adjustment of prices occurs in part because there are costs to adjusting prices, called menu costs .
These menu costs include the cost of printing and distributing catalogs and the time required to change price tags. As a result of these costs, prices as well as wages may be sticky. in the short run.
This slow adjustment of prices occurs in part because there are costs to adjusting prices, called menu costs .
These menu costs include the cost of printing and distributing catalogs and the time required to change price tags. As a result of these costs, prices as well as wages may be sticky. in the short run.
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Misperceptions Theory
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Changes in the overall price level can temporarily mislead suppliers about what is happening in the individual markets in which they sell their output.
As a result of these short-run misperceptions, suppliers respond to changes in the level of prices, and this response leads to an upward-sloping aggregate-supply curve.
They would conclude that it is a good time to produce.
As a result of these short-run misperceptions, suppliers respond to changes in the level of prices, and this response leads to an upward-sloping aggregate-supply curve.
They would conclude that it is a good time to produce.
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Pareto Optimum
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80% profits = 20% of customers. Blockbuster economy
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