Macro diagrams (1)
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Macro diagrams (1)

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  • C – As consumption increases, the demand for the good or service increases. The price then increases in order to compensate, and the output of the goods/ service increases.I – More investment leads to greater output, resulting in the price level increasingG – As the government spends more on industries, in the forms of subsidies, more goods/services are produced. The price level increases as well as the output. X-M – The more exports a country has, the more currency it has saved. As a result, output increases to reflect the level of exports, and price level increases.
  • C – As consumption decreasesthe demand for the good or service decreases. The price then decreases in order to compensate, and the output of the goods/ service decreasesI – Less investment leads to less output, resulting in the price level decreasing and output of goods/services decreases.G – As the government spends less on industries, in the forms of subsidies, less goods/services are produced. The price level decreases as well as the output. X-M – The less exports a country has, the less currency it has saved. As a result, output decreases to reflect the level of exports, and price level decreases.
  • Japan has a comparative advantage in terms of Automobiles, but China has an advantage with Apparel. Neither country excels in the production of either good, but rather, specifically one.
  • Invisible BalanceMeasure of revenue received from exports of services minus expenditure on imports of services over given time period.
  • Theory suggests in short term, even if marshall-lerner condition is fulfilled, fall in value of currency will lead to worsening of current account deficit, before things improve in long term.
  • Demand for the $ increased from D to D1. This may have been caused by an increase in US interest rates, increased demand for US products, speculation that the $ will increase in value, or a more favorable investment climate in the $. Japanese citizens will spend more $s, increasing the demand for the $ on the foreign exchange market.
  • Supply of $ increased for S to S1, This may have been caused by an increase in foreign interest rates, increased demand for foreign products, speculation that the $ will decrease in value, or a more favorable investment climate in foreign countries, increasing the supply of $s on the foreign exchange market.

Macro diagrams (1) Macro diagrams (1) Presentation Transcript

  • Macroeconomic Diagrams
  • Definition
    Aggregate Demand
    The total expenditure on the national output at different values of the price level over a given period of time.
    C onsumption or spending by households
    I nvestements = spending by firms on goods
    G overnment Spending
    X-M = Export minus Imports => net amount spent on economy’s output by rest of world
    Aggregate Supply
    Total output of goods and services, which all firms in the economy are willing and able to supply at different price levels over a period of time.
  • Reason for Shifts
    Aggregate Demand
    Reduction in income tax
    Consumption increase
    Reduction in interest rates
    Consumer spending and corporate investment increase
    Increase in government spending
    Boosting demand certain products, increasing earnings in sector
    Improved competitiveness performance
    Boosting export sales
  • Aggregate Demand Increase
    Price Level
    S
    P1
    P
    D1
    D
    0
    Output
    Q1
    Q
  • Reasons for Shift
    Aggregate Supply
    Increase in short-run AS
    Reduction in Indirect Tax
    Reduction in Wage costs
    Reduction in raw material & import costs
    Favorable weather conditions
    Decrease in short-run AS
    Reverse of everything said.
  • Aggregate Demand Decrease
    Price Level
    S
    P1
    P
    D1
    D
    0
    Output
    Q1
    Q
  • International Economics
    Reasons for Trade
  • Factor endowments
    Factors of production that a country has available to produce goods and services
    Australia has minerals
  • Specialization
    Exists where country specializes in production of goods and services where they have a comparative advantage in production. Trade to get goods and services in which they do not specialize.
  • Absolute Advantage
    Good exists where a country is able to produce more output than other countries using same inputs of factors of production.
  • Comparative Advantage
    A good exists where a country is able to produce a good at a lower opportunity cost of resources than another country.
  • Comparative Advantage between Japan and China
    Automobiles
    100 Units
    5
    Japan
    1
    China
    0
    Apparel
    5
    20
    Thousand units
  • Free Trade & Protectionism
  • Free Trade
    International trade takes place without any barriers, such as tariffs, quotas, and subsidies.
    Free trade in an economy
    Price
    SDomestic
    PEq
    Pworld
    Sworld
    D
    Qe
    0
    Q1
    Quantity
    Q2
  • Tariff
    Duty that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for government
    Tariff diagram
    Price
    SDomestic
    Deadweight Loss
    PEq
    STariff
    PTariff
    Pworld
    Sworld
    D
    Qe
    0
    Q3
    Q1
    Q4
    Q2
    Quantity
  • Quota
    Import barrier set upper limits on quantity or value of imports that may be imported into a country.
    Price
    SDomestic
    Loss
    Windfall gain by foreign producers
    PEq
    STariff
    PTariff
    Pworld
    Sworld
    D
    Qe
    0
    Q3
    Q1
    Q4
    Q2
    Quantity
  • Subsidy
    An amount of money paid by the government to a firm, per unit of output, to encourage output and to give firm an advantage over foreign competitors.
  • Voluntary Export Restraint
    Voluntary agreement between an exporting country and an importing country that limits volume of trade in particular product.
  • Infant Industry Argument
    Propose new industries should be protected from foreign competition until they are large enough to compete in international markets.
  • Dumping
    Selling of a good in another country at a price below its unit cost of production.
  • Anti-Dumping
    Legislation to protect an economy against import of a good at a price below its unit cost of production.
  • Economic Integration & WTO
  • Free Trade Area
    Exists when agreement is made between countries agree to trade freely among members of the group, but are able to trade with countries outside free trade area in whatever ways they wish.
  • Customs Union
    Agreement made between countries, where countries agree trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union.
  • Common Market
    Customs union with common policies on product regulation, and free movement of goods, services, capital, and labor.
  • Trade creation
    A benefit of greater economic integration
    Entry of country into a customs union leads to the transfer of production from a high cost producer to a low cost producer
  • Trade Creation
    Before
    Trading Bloc
    A
    B
    Low Cost Producer
    C
    High cost Producer
    Tariffs
    B
  • Trade Creation
    After
    C
    High cost Producer
    A
    B
    Low cost Producer
    B
  • Trade Diversion
    A disadvantage of greater economic integration
    Entry of country into a customs union leads to the transfer of production from a low cost producer to a high cost producer
  • Trade Diversion
    Before
    D
    Low cost producer
    A
    C
    High cost Producer
    B
  • Trade Diversion
    After
    Trade Barriers
    D
    Low cost producer
    C
    High cost Producer
    A
    B
  • WTO
    World Trade Organization
    International body that sets rules for global trading and resolves disputes between its member countries. Also hosts negotiations concerning reduction of trade barriers between member nations.
  • Balance of Payments
  • Balance of Payments
    Record of value of all transactions between residents of a country with residents of all other countries over given time period.
  • Balance of Trade
    Measure of revenue received from exports of tangible goods minus expenditure on imports of tangible goods over a given time period.
  • Current Account
    Measure of flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants, and remittances)
  • Capital Account
    Measure of buying & selling assets between countries. Assets are often separated to show assets that represent ownership and assets that represent lending.
  • Current Account Surplus
    Where revenue from exports of goods and services and income flows is greater than expenditure on import of goods and services and income flows over given time period.
  • Current Account Deficit
    Where revenue from export of goods & services & income flows is less than expenditure on import of goods & services & income flows over given time period.
  • Marshall-Lerner Condition
    Depreciation, or devaluation, of a currency will only lead to improvement in current account balance if elasticity of demand for exports plus elasticity of demand for imports is <1.
  • J-Curve
  • Exchange Rates and Terms of Trade
  • Exchange Rate
    Value of one currency expressed in terms of another.
  • Appreciation/Depreciation
  • Revaluation/Devaluation
  • Purchasing Power Parity Theory
    States that under floating exchange rate, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore BoP equilibrium.
  • Terms of Trade
    Index that shows value of country’s average export prices relative to their average import prices.
  • Terms of Trade
  • Elasticity of Demand of Exports
    Measure of responsiveness of quantity demanded of exports when there is a change in relative price of exports.
    Increase in Demand for $
    Price of $ in Yen
    S
    $20
    $10
    D1
    D
    0
    Quantity of $
  • Elasticity of Demand for Imports
    Measure of responsiveness of quantity demanded of imports when change in relative price of imports.
    S
    Price of $ in Yen
    S1
    $20
    $10
    D
    0
    Quantity of $