Ecn 102 Ch 10 And Ch 11 Only Notes Study Economics Yr1 Prt2

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Table of Contents Table of Contents....................................................................................................................1 All Multipliers and index ratios:and Marginal propensty's to Consume................................1 Chapter 1:.........................................................................................................................1 Chapter 18:.......................................................................................................................1 Chapter 19:.......................................................................................................................1 All Formulas:........................................................................................................................2 Chapter 1:.........................................................................................................................2 Chapter 18:.......................................................................................................................2 Chapter 19:.......................................................................................................................2 IMPORTANT NOTES from LAST SEMESTER..........................................................................5 CHAPTER 10 ...........................................................................................................................7 : UNEMPLOYMENT:..................................................................................................................7 Unemployment:......................................................................................................................8 The Employment Pool:.........................................................................................................8 Measuring Unemployment...................................................................................................8 The Costs of Unemployment:...............................................................................................8 Types of Unemployment:.....................................................................................................9 Policies to Reduce Unemployment......................................................................................9 Unemployment in the Keynesian & AD-AS Models............................................................10 CHAPTER 11 .........................................................................................................................12 : Economic Growth:...............................................................................................................12 Introduction:.........................................................................................................................12 Definition and Measurement of Economic Growth................................................................13 Some problems associated with GDP as measure of economic growth:........................13 Calculating Economic Growth:........................................................................................13 The Business cycle:........................................................................................................14 Sources of Economic Growth:...............................................................................................14 Supply Factors:...............................................................................................................14 Demand Factors:............................................................................................................15 ------------------------------------------------------------------------------------------------------------------------------

All Multipliers and index ratios:and Marginal propensty's to Consume Chapter 1: Chapter 18: 1) #@#=1/1-c Government

: Multiplier for Keynesian macroeconomic model without foreign sector or

Chapter 19:

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1) The old marginal propensity to consume is c with taxes included.The slope of this curve is c(1-t) which is allways smaller than c. 2) The new marginal propensity to consume is c(1-t) with taxes included.The slope of this curve is c(1-t) which is allways smaller than c. 3) The Multiplier without Taxes= #@#= 1/1-c 4) Multiplier with Taxes = #@#=1/1-c(1-t)

All Formulas: Chapter 1: Chapter 18: 1)

Chapter 19: GOVERNMENT SPENDING 1) Equilibrium position of Tot.Income-Production/Tot.Spending-Demand : Y0=Abar :Income equilibrium =Tot. Autonomous Spending 2) Consumption Function: c=C/Y : 3) Equilibrium Income=Y0 4) To calc: EQUILIBRIUM level we start with 5) Equilibrium condition : Y=A(where eqilibrium is) 6) so :Y=C+I+G because (A=C+Ibar+Gbar) 7) and C=Cbar +cY) 8) So: Y=(Cbar+cY)+I+G 9) Thus:to solve above equation: 10) Y-cY=Cbar+Ibar+Gbar 11) so: Y(1-c)=Cbar+Ibar+Gbar 12) THUS: Y0=1/1-c(Cbar+Ibar +Gbar) : (19.4) 13) General formula can still be written: Y0=#@# (Abar) :(19.5) 14) Y=A(the equilibrium 45 deg line)******** 15) so :Y=C+I+G because (A=C+Ibar+Gbar)********* 16) and :C=Cbar +cY (consumption curve equation)******* 17) So: Y=(Cbar+cY)+I+G 18) Where Y0 is equilibrium of A and Y 19) .Where:#@#=multiplier , Abar = total autonomous spending

TAX 1) Tax Rate: T=tY 2) Specific exercise:If the Gov. wishes to close the gap between full employment (=Yf as an example) and lower levels by incresing spending –they must work pout how much with above formula.=^Y=@^G :so:^G=^Y/@. where multiplier will increase %income morethan %spending

Exports&Imports 1) The Formula for Imports/Exports is: A = C+I+G+(X –Z). ECS102-8 economics Part2 Yr1

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2) 1) 2) 3) 4) 5)

term Net Exports usually referred to as =(X-Z) from A = C + I to A = C + I + G.+(X-Z) Y=A (equil. condition) A=C+ Ibar+Gbar +(Xbar-Zbar) (aggregate spending where I,G,X,Z, are autonomous) C=Cbar +c(1-t)Y (consumption function) SUBSTITUTING: a) Y=A b) Y=C+Ibar +Gbar+(Xbar-Zbar) c) Y=(Cbar +cYd)+Ibar+Gbar+(Xbar-Zbar) d) Y=(Cbar +c(1-t)Y))+Ibar+Gbar+(Xbar-Zbar) e) Y-c(1-t)Y=(Cbar +Ibar+Gbar+(Xbar-Zbar)) f) Y=(1-c(1-t)) *(Cbar +Ibar +Gbar+(Xbar-Zbar)) g) Y0=1 /1-c(1-t) *****(Cbar+Ibar+Gbar+(Xbar-Zbar))

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IMPORTANT NOTES from LAST SEMESTER ( +extra notes from class this semester=) • Bull market-buying bonds • bear market-selling bonds at lesser price with hope of buying them back at an lesser price. • demand deposit =sight deposit • repo rate replaced the financial rand • Passive way of money supply=you deposit +withdrawing • Active way of-bank relends –see multiplier. • 1. -The 4 Factors of Production +sometimes 5th identified =technology and their respective INCOMES 1.1. Natural resources or land=RENT 1.2. Entrepeneurship =Profit 1.3. Capital =Interest 1.4. Labour =wages/salaries 2. Law of demand +Supply=higher price/more supplied/less demanded cet par. 3.

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ECONOMICS part 2 Yr1

ECS102-8 CHAPTER 10 : UNEMPLOYMENT:

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Unemployment: • •

Unemployment & Inflation are referred to as the twin evils of Macro-economics. RSA : 20/30% 94' - 30/40% 2002' -25% 2007 unemployment of Labour force / Economicly active/able Participants.:high & rising unemployment is most serious of RSA social troubles.

The Employment Pool: 1. Stock Concept-Level or Rate of Unemployment is a stock. 2. Flows -People Entering & Leaving the unemployment pool. 3. 4 reasons to enter unemployment pool: a. New entrant still looking for b. leave specially to look for another job-but still searching c. laid off(retrenched till demand picks up) d. firm closes-no hope of re-employment. 4. 3 reasons to exit unemployment pool a. hired b. recalled from a lay-off c. get discouraged and stop looking for work.

Measuring Unemployment. 1. Very difficlt to measure unemployment because of:seasonal/housewives/those not seeking work but able/criminals/hawkers-self-employed etc. ....so different. estimates done can easy differ alot. 2. term Rate of Unemployment=The % of the EAP –Economically Active Population – (those Willing & Able to work or the Workforce/or Labour force)NOT working. 3. Various ways of Obtaining Data on Unemployment. a. Official Census Data : bad side –1-Once per 5 years -2-Lag before publication of data. b. Unemployment Register :bad side :only very few register-ie those collecting UIF. c. Subtract (1) subsistence agriculture (2) informal sector(hawkers) (3) In d. Formally employed FROM: EAP(econ. activ. popul.). e. Statistics S.A. estimate-bad- controversy between strict or expanded definition usage.Went from strict 'pre-94 –to expanded '94 etc.,TODAY publish both of! 4. term Strict Definition of Unemployment : (1)over 15 (2) available 7 days prior interview for Self-employment OR Paid employment. (3) took steps to find /search 4 weeks prior interview for S or P work. 5. term Expanded Definition of Unemployment: OMITS (3) above-ie:only WANT work–not look

The Costs of Unemployment: 1. Two main costs of unemployment are: a. TO Individuals : i. Ill health,hunger,cold death ii. loss of income iii. Confidence& self esteem&shock&frustration,criminality,loss of skills b. TO Costs to Society at large: i. Crime,Unrest,Riots,Demonstrations. ECS102-8 economics Part2 Yr1

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ii. Overthrow Government eg Hitler etc. iii. Opportunity Costs of assisting the unemployed.(loose out public goods & services) iv. Money cost to society of assisting the unemployed. v. Labour Cannot be saved & used later like other FOP. 2. In RSA NOT First world country with Good unemployment benefits-so here very meagre.

Types of Unemployment: 1. Most basic distinction in Types of unemployment: Strictly all is theoretically Involuntary ONLY a. term Voluntary Unemployment..: not want/feel like working b. term Involuntary Unemp....:cannot find work 2. term Economist usually Distinguish between 4 Main types of Unemployment.: a. Frictional Unemployment:Left one job to find another one –but still looking +New Entrants to job market also included here.:not serious-allways will have some b. Seasonal:Eg: Fruit pickers are out of work in off-season for fruit. c. Cyclical(or demand deficiency) Unemp....: Laid off-(retrenched -till demand picks up again,then can get re-employed.) d. Structural: serious because cannot be remedied by simply increasing Aggr. demand-needs retraining or relocation to where skills in demand i. Structural decline in industries: eg:RSA Gold mining less of. ii. Lack of skills/education(even if econ. booming-no find job!) iii. Technologically unemployed.iv. Changing Consumer preferences- no more production/jobs for that stuff. v. Foreign competition:eg textiles china vi. Discrimination :eg for whites/not blacks

Policies to Reduce Unemployment. 1. Must be tackled from Both Supply & Demand side. 2. In RSA last 2 decades unemployment from both Supply-350000 new entrants/Yr, and Demand-stagnating & declining economy.,&capital goods-labour relative cost(labour up). 3. Causes of unemployment: a. supply sidei. Population growth ii. Immigration iii. Oversupply of unskilled labour /Shortage of skills b. demand side i. as with forms of. 4. Policies to reduce unemployment: a. SUPPLY SIDE: i. Less people : Reduce population growth ii. Less people : Stricter immigration control iii. Reduce oversupply of unskilled labour by teaching them skills. b. DEMAND SIDE: i. raise aggregate demand for goods & services by: 1. Raise G: a. if this is financed by BORROWING :will RAISE interest rates& negate the effect (i up! =wrong) ECS102-8 economics Part2 Yr1

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ii. iii. iv. v. vi. vii. viii.

b. if financed by TAXES: will negate effect =less Iinvestment c. If financed by increasing money supply-can cause inflation 2. Lower : i -INTEREST RATE & TAXES =limited because will cause Inflation & Balance of payment problems. 3. Raise EXPORTSa. by decrease production costs b. maintain realistic exchange rate 4. (also can raise ,I,C or raise 'Net' Exports or raise C bar) LABOUR INTENSIVE ENTERPRISES: make production more: 1. actually promote these types of production. Promote small business & informal sector(claimed more labour intensive than large enterprises) Create gov. employment programs:eg :build dams(very temporary) Subsidies & Tax benefits. Keep relative price of labour low to capital goods(-interest FOP)machines Keep strikes less Labour legislation relax-more employer friendly

Unemployment in the Keynesian & AD-AS Models. 1. Both graphs assume that Level of Production IS positively related to Employment . 2. Law of Diminishing Returns:can cause increase in production to only help to a point in unemployment –because as employment increases so production increases ,but at a diminishing rate,until it goes backwards. 3. Slope of production function is = marginal product of labour =thus declines as employment increases. a. Why production increase (Y!!) (!! ie:called Economic Growth here too !!) alone is a neccessary but insufficient condition for reducing unemplmnt.: Structural and Frictional & Seasonal lags cannot be done away with by increasing prod. i. Frictional unemployment ii. seasonal unemployment iii. new entrants: to market may be too many -be more than the rate of incr. in Prod. iv. Skills- if workers Not have needed skills may still unemploy even in economic growth. v. Struct. – lack of skills TYPE cannot be overcome by just incr. production vi. Capital goods/Technology type increase in production increase emplmnt. For GRAPH BELOW:Yf= production/income at FULL EMPLOYMENT Nf= employment at FULL EMPLOYMENT the curve of the production function shows the law of diminishing returns: the rate . of increasing returns from more people employed will slowly decrease as more are . ... employed.

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If an increase in in the level of output from Y1 to Y2 is accompanied by an increase in capital intensive production methods the following occurs: The production function shifts upwards. At each level of output less labour is required than before. To produce a level of output of Y2, N1 number of workers are required and the level of unemployment is unchanged. In this case jobless growth has occurred.

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ECS102-8

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CHAPTER 11 : Economic Growth:

Introduction: Economic development is a separate subdiscipline in economics apart from economic growth. ,whereas for years it was seen as the same thing by economists.

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Definition and Measurement of Economic Growth. 1. 1. 2. 3. 4.

term : Definition of Economic Growth: Economic Growth:annual rate of increase in aggregate production & income in the economy.,to be qualified in real terms and per capita terms. MUST :Real and not nominal GDP ... . /production/income should be used and PREFERABLY: be expressed on a per capita scale . to distinguish it from population growth ,but latter is not allways done. Real GNI is also used as a measure of economic growth,is better if big swings in terms of trade are occuring at the time ,since it is adjusted for terms of trade by national accountants. GDP best to measure domestic production output itself. ps-tricky question:(4 types could be :Real -1-gdp+ -2-gni and per capita real -3-gdp+4-gni)

Some problems associated with GDP as measure of economic growth: 1. Jokingly called 'grossly deceptive product' or 'grossly distorted picture'-due to: 2. The problems associated with GDP include the following: a. Non-Market Production : i. Eg:farmers consumption of own produce. ii. government output:cannot valued at market prices ,but at cost prices-eg wage empl b. Unrecorded Activity i. informal sector/,shadow economy/,underground sector/, ii. include crimnal-smuggle,drug,prostitution,Also tax evasion.,Also unlicenced Hawkers iii. Rough estimates are however included since 1994 in GDP c. Data revisions i. Frustrating to analysts:figures are often revised as new & better data becomes available-GDP figure can change d. Economic welfare: i. GDP :Not good measures of economic welfare:negative externalities :eg:pollution,noise,congestion., ii. Also R1 Mil spent on military orR1mil spent on health not equatable. iii. Allowance Depletion scarce Natural Resources. iv. Quality of goods not stated. v. Distribution of income per capita could be uneven-even if average higheg:kuwaitoil 1. ( separate point :M.E.W.-measure of economic welfare-gdp is irregulary & periodicly adjusted in some countries to portray the MEW,but not in RSA.)

Calculating Economic Growth: 1. ANNUAL BASIS. 2. Calculation : eg 1,8% ,3% 3. EG:for 2003- is shown as a percentage increase from the 2002 price eg :5% a. 2003 –:ie,% by how much % 2003 is more than %2002. i. FirstBoth years data convert to 2002 prices ie:REAL GDP/GNI ii. Second- (2003-2002 ) / 2002 * 100/1 = %change from 2002 prices=Economic Growth Measure 4. ECS102-8 economics Part2 Yr1

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The Business cycle: • • •

The long term trend in economic activity ,(albeit growth or level) is broken up by short term swings up & down called: upswings(expansion)(booms) and downswings(contraction)(recession) . A business cycle has 4 'elements': trough,upswing,peak,downswing, A business cycle always starts on a trough And nds on a trough.

Sources of Economic Growth: 1. Note:supply factors= FOP ,while demand factors=components of aggregate spending: 2. Supply-increase prod.capacity /Demand-increase demand for goods&services -aggregate spending capacity.

Supply Factors: a. NATURAL RESOURCES:Can :-1-Explore for gold or 2- if Depletion use other FOPmanufacture(entrepeneur+labour etc.)/ or render services(labour) b. LABOUR: Influenced by: i. Human capital-quality ie: Training/Skills +Health+Hygine +Nutrition +Attitude. ii. Size-net migration rate AND births / OR -could increase working hours-. c. CAPITAL: i. Economic Growth :Depends on Quantity &Quality of countries capital – eg:machinary,buildings,roads,dams.(also -1-finance & -2-in RSA foreign exchange) ii. Quantity :Increase in the capital stock may take form of either: 1. CAPITAL WIDENING:

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a. Average capital /worker stays same- more capital because more workers. 2. CAPITAL DEEPENING: a. Average capital/worker increases –increase in 'capital intensive' (intensity of ) production- more capital used for every worker. iii. Quality : must have technology to compete imports-also need skilled labour:INTERDEPENDANCE of: labour,capital,technology.(technology=5th FOP). d. ENTREPENEURSHIP : i. Gov. can act as one in beginning stages if shortage of them. ii. Also unneccesary rules & regulations to stifle growth remove.

Demand Factors: 1. Increase in Supply NOT sufficient for growth-ther must also be an increase in DEMAND. 2. HOWEVER : ANY increase in domestic AGGREGATE DEMAND SHOULD also BE ACCOMPANIED by an increase in AGGREGATE SUPPLY or it could cause inflation (just higher prices from demand –no big supply increase) AND Balance of Payments problems (from INCREASED IMPORTS) 3. INWARD INDUSTRIALISATION : this is a strategy for economic growth which focuses on domestic demand eg:demand for electricityr & houses :In RSA this type growth policy was used where urbanisation by rural poor is seen as catalyst to -1- increasing demand by redistributing income to them (then spend more),-2-in turn demanding more gov. services & demand for goods-but must also add the supply side to this policy or causes above-inflation& balance payment problems. 4. Economic Growth( in DOMESTIC ECONOMY) is Caused by :individual parts of aggregate demand. a. C:Consumption. i. :is primarily a function of INCOME b. G:Government : i. determined by Gov. Policy. c. I:investment : i. is primarily a function of expected profitability of investment projects and therefore also interest rates.(remember multiplier) to supply all this investment demand. d. E: increase exports i. –-1-favourable slightly undervalued exchange rate -2-keep production costs down -3- stimulate exports by subsidies -4- gov assist with marketing&finance&other for exporters. e. Less of Z: Import substitution. i. Decrease imports by producing them locally: ii. METHODS :BY import tariffs/quotas protect local producers in the initial stages iii. DRAWBACKS: 1. Over –Protection,not withdrawn timely enough, can cause inefficient /uncompetative local producers. 2. Firms can Overfocus on local market & do not develop exports & become internationaly competative. 3. Level of imports could stay same and composition could just change-from dependant on consumer goods to dependant on capital goods.-eg:RSA. ECS102-8 economics Part2 Yr1

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PRINT FROM PAGE 88- 97 Must re-print all multipliers/indexes etc after 'contents/index section' And diagrams file in study week. Do a search in study guide & also own notes for above words:multiplier & index .

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