Economics is the subject that considers the means for describing, analysing and understanding the production and distribution of wealth (in the form of goods, services and valuable legal documents) within the community. This includes the decision-making by which the economics activity is set in motion. Money is normally used in trading for the purposes of these exchanges. Another way of looking at economics is that it involves the satisfaction of unending human desire after making the least effort, so in one sense it expresses the fact that we are both greedy but lazy!
Macroeconomics is the study of the economical structure and behavior of the entire state, region or nation. This could even be extended to the global economy. Macroeconomic issues can only be dealt with on a macro-scale, so unlike microeconomics, and to help us envisage these macro-matters, it is usual to view the situation from afar without too much micro-detail and to build a macroeconomics model which applies to what in effect is the whole socal system being taken.
Important concepts of macroeconomics include the circulation of money, GDP, unemployment, and inflation.
National income is a way of comparing how well off some countries are compared to others. There are three methods of measuring national income: Output, Expenditures, and Income. The Output model of measuring national income is the sum of all the final market prices of all the goods and services produced in each industry of the nation's economy. The Expenditure model takes the sum of Consumption, Government Spending, Investment, and Net Exports subtracted by Imports. The formula for GDP (Gross Domestic Product; the total market value of all final goods and services produced within the borders of a given country in a given year) is GDP= C + G + I + (X-M), with 'X' representing exports and 'M' representing imports. The Income model is the sum of all incomes of the country. All these models are slightly adjusted depending on which kind of predictor you are using. For instance, GDP(Gross Domestic Product) and GNP(Gross National Product) are different numbers. See the section on Different Measures of National Income.
National Income= National expenditure= national output
Income method= payments to factors of production
Output method: the value of final output produced by various industrial sectors
Expenditure method= GDP= C+I+G+(X-M)
Net= Gross-depreciation (capital consumption)
National= Domestic + Net property income from abroad
Factor cost= Market prices-Indirect taxes + subsidies
Real National Income= Nominal National Income- Inflation
National Income per capita= National income/population
Main article: Macroeconomic Models
Main article: Demand-side Policies
Demand side policies can be the cure for involuntary unemployment.
Economic growth can be stimulated and sustained by:
- Fiscal policy (cut taxes, increase government spending)
- Monetary policy (reduce the rate of interest)
Main article: Supply-side Policies
Supply side policies can be the cure for voluntary unemployment.
Aggregrate supply can be increased by:
- increasing incentives to work
- increasing labour mobility
- decreasing disincentives to work
- human capital improvements
Main article: Unemployment
Unemployment is those people who are regristered as willing, able, and available for work at the market clearing wage, but who are unable to find work.
Unemployment is bad for the economy. Underemployment is when workers who want full time jobs are only able to find part time employment.
The costs of unemployment are:
- loss of output
- waste of productive potential
- government finances including loss of tax revenue and increased benefit spending.
- social problems
- loss of consumer spending
The types of unemployment are:
- cyclical (demand deficient)
- real wage (classical)
Main article: Inflation
Inflation is a constant rise in prices over a given period of time.
The costs of inflation are:
- Redistribution of income
- Devaluation of money
- Reduction in investment
- Reduction of international competetiveness
- A potential for a wage- price spiral if inflation runs out of control
- Shoe- leather and menu costs
The causes of inflation are:
- Rising raw materials costs
- Rising labor costs
The cures for inflation are:
- Monetary policy
- Fiscal policy
2. Supply Side:
- Policies to increase the total supply of goods and services to the economy
Demand- Pull Inflation can be caused by:
- Reduced taxation
- Increased government spending
- Reduced intrest rates
- Rapid money supply growth
- Rising consumer confidence stimulated by rising asset prices
- Economic growth in other countries
- Depreciation of a countries exchange rate
Distribution of IncomeEdit
Main article: Distribution of Income
Any analysis of income distribution needs to consider whether taxes have been removed and benefits been added.
Taxes can be:
- Progressive (the average rate of tax rises as income rises)
- Regressive (the average rate of tax falls as income rises)
- Proportionate (the average rate of tax is constant)
Direct taxes- taxes on income and wealth that are paid directly to tax authorities.
Direct taxes tend to be progressive.
Indirect taxes- taxes on spending that are paid by suppliers and therfore not directly by consumers.
Indirect taxes tend to be regressive.