Macroeconomics and Business
GNI/GNP = GDP + Factor payments from abroad – to abroad
Current account = (Exports – Imports) + Investment income + Net
transfers
Capital account = Capital account + financial account + errors and
omission
Balance of payments (BP) = records of a country’s economic
transactions with the rest of the world
BP has to balance, Current account + capital account = 0
An analogy of BP to personal finance
Personal “X”: income from labour service (job, business, profession)
Personal “M”: goods, services, bought for consumption
Personal “investment income”: interest, dividend from investment
Personal “net transfer”: gifts received from, given to others
Capital in1ows/out1ows: funds borrowed/repaid from banks
If consumption < income: current account surplus, build savings on
reserves
If consumption > income: current account deficit, borrow or sell
assets to create capital account surplus or draw down reserves
Economic Growth: Supply Side
Output = TFP × Capital stocka × Labour hours(1-a)
Labour productivity =
Economic Growth: Demand Side
Optimal investment = invest in new capital until its marginal revenue =
marginal cost
MPK × P = Marginal cost of capital
At a steady state: Investment = dK; MPK = d
Firms should not add new capital but only replace depreciated
capital.
Investment = depreciation → investment = d × K
New capital = Investment – depreciation = investment – d × K
The higher the investment rate of a country, the greater the capital stock
when it arrives at the steady state, and the greater its output level.
Golden rule: Invest at the rate that creates the highest consumption
Aggregate supply curve: upward sloping, more elastic in short run, less
elastic in long run
Fiscal policy: government actions related to taxes and government
spending that can be used to stimulate or restrain the economy.
Keynesian multiplier eHect:
Tax multiplier = < Keynesian multiplier ()
Financing G: taxation, borrowing (to finance deficit), & printing money
G = Taxes + deficit
Fiscal spending with borrowing → Net taxes = present value (lifetime tax
payments – lifetime receipts of benefit from government spending)
Primary balance = government tax revenue – government spending
(exclude interest payments on government debt)
or,
When the country’s g > r → it can aHord primary deficit.
T(1) – G(1) = D(0) × (1 + r) → . Current debt stock equals PV of future
primary surpluses.
Money, inflation, and Monetary Policy
In many countries, the money supply consists oH:
(1.) Currency (bank notes and coins)
(2.) Demand deposits (the balance held in checking and saving
accounts)
1. + 2. = M1; 1. + 2. + 3. = M2
(3.) Quasi-money (deposit instruments that can convert into cash
quite easily, such as fixed deposits, certi$cate of deposit, money
market funds.
Reserve requirement = RR → Money multiplier = 1/RR
Measuring inflation: (1) Consumer Price Index (CPI); (2) Producers’ Price
Index (PPI); (3) GDP De1ator; (3a) Ratio of nominal GDP to real GDP;
(4)Mis-measurement issues
Cause of inflation: Quantity theory of money & seignorage
MV = PY (M = money supply, V = velocity, P = price level, Y = real GDP)
→ gM +gV = gP + gY
Velocity of money (V): total money supply is $100 trillion, and there are
$300 trillion worth of transactions in a year, then the V is 3.0.
Seignorage = growth in the supply of currency = the net revenue raised
by government by printing money.
2 ways to create seignorage: (1) Direct – print money to spend; (2)
Indirect – print money, then use the money to buy and hold government
debt (that the government issues)
