31.The term "inflation" literally means "swelling". Indeed, the financing of public expenditure
(for example, during periods of extreme economic development during the wars, revolutions)
with the issue of paper money with the cessation of cash payments to the metal led to a
"swelling" of money and depreciation of paper money.
Anti-inflation policy is carried out by central banks. It uses increases in interest rates to hold
down price inflation. Increased interest is employed to slow down investment and hiring and
lowering wages, which are seen as the culprit in price inflation.
Criticisms. Anti-inflation policy is very controversial. Supporters point out that it prevents the
loss of currency value, holding prices down. Critics point out that the goal of anti-inflation policy
is to increase unemployment, and that as long as wage increases meet inflation, it has a
minimal impact on working people. The critics claim that since the rich have most of the
money, anti-inflation policy is designed to protect the value of their investments at the expense
of working people whose wages stagnate or fall during periods of higher unemployment.
Anti-inflation policy is based on a recursive relationship between interest rates and
growth/stagnation. During the 1970s and the late 2000s, anti-inflation policy ran into a
dilemma with its "interest-rate weapon." Unemployment continues to rise, even as the general
economy stagnates. The interest rates were dropped to nearly zero, with little visible effect on
the stagnation. The model fails in this instance, because there is no place left to go, i.e, interest
rates cannot be lowered below zero.
Modern inflation has a number of distinctive features. Thus, the local nature of the former was
replaced by the ubiquitous, all-encompassing, the frequency of acquired chronic form and act
on it, not only monetary factors, as before, and many others.
The first group of factors are those that cause the excess demand for money on commodity
supply, resulting in a violation of the law of money circulation.
The second group includes factors that are responsible for rising costs and prices of goods,
supported by further pulling the money supply to their increased level. In fact, both groups of
factors are intertwined and interact with each other.
Depending on the predominance of the factors of a group of two types of inflation: inflation,
demand and cost inflation.
Inflation caused by demand factors, the following money:
a) The militarization of the economy and the growth of military spending. Military
Nye technique becomes less and less adapted for use formation in civilian areas, and the
resulting cash equivalence, as opposed to her becoming a factor, excess for treatment;
b) The state budget deficit and the growth of domestic long
hectares. Cover the budget deficit in two ways: placement of government borrowing in the
money market, or additional issue of irredeemable notes of the Central the bank. The first way
is typical for most industrialized developed countries. c) bank credit expansion, which is
expressed in the extended
rhenium credit to the economy, while the production in
the country is in a state of stagnation;
ii) imported inflation - the issue of national currency in excess of requirements for purchase of
currency countries with surplus. Foreign-economic component of the inflation process, or
imported inflation has two main channels of penetration of the national economy.
The first source of external inflationary impulses could be lowering the exchange rate of the
monetary unit, which increases the market prices of imported consumer goods. With regard to
imported raw materials from abroad and semi, their appreciation of the national money
increases the value of goods produced with them in the country, and thus triggers the
mechanism of cost-push inflation.
The second type of inflationary impact from the outside - it is an excessive expansion of money
supply (money supply) as a result of a major and sustainable balance of payments surplus on
current account or a massive inflow of capital. This drives the demand for inflation;
e) excessive investment in heavy industry. In this case the market is constantly extracted the
elements of productive capital, which in return received an additional turnover of cash
Inflation is characterized by the costs of non-cash impact of these factors on the process of
a) The price leadership. It has been observed in industrialized countries oped countries in the
60's and 70's. XX century. When large companies with formation and price changes were
guided by prices, the mouth lished leading companies, ie the largest of ducer in the industry or
within the local and territorial market. The same trend is observed in Russia;
b) reduction of labor productivity growth and the fall of production. This factor was
characteristic of the industrialized developed countries in the 70-80s. XX century. When a
crucial role in slowing down Research productivity growth has played a deterioration in general
conditions of reproduction due to the crisis. c) the acceleration of growth in costs, especially
per unit of output. The economic strength of the working class,
The need to allocate a category called generalizing the economic unity of the reproduction
process. It is impossible to explain the causes of the financial crisis, high tax threshold, or the
budget deficit. The financial crisis is a consequence of the level of production technology, the
stability of national currency, the wage level, the level of the ultimate profits of producers,
refinancing, and many other factors operating simultaneously. The category "money economy
of the country" allows us to understand the dependencies of economic processes in their
The whole set of relationships that makes money economy of the country, can be represented
Each of the separate structural units (units) of the money economy of the country has a specific
role in the economy. Any link in the money economy can claim to be the economic category,
which has its social purpose, which is realized through its specific functions. But each of these
categories are inherent features in common with the category of "money economy of the
country." These functions are the formation and use of funds
32Macroeconomics is the study of the entire economy in terms of the total amount of goods
and services produced, total income earned, the level of employment of productive resources,
and the general behavior of prices. Macroeconomics can be used to analyze how best to
influence policy goals such as economic growth, price stability, full employment and the
attainment of a sustainable balance of payments.
is the branch that studies large-scale economies. Macroeconomics observes and analyzes how
entire countries, full of many industries and consumers, function. It is notsimply the sum of
many "microeconomics"; many of the concepts are entirely different. Where micro will study a
single consumer, a paper-clip manufacturing plant or the airline industry, macro studies the
entire economy within which those three exist. Macroeconomics studies elements of a large
economy, including inflation, government policies, output growth, and unemployment.on the
other hand, takes a much broader view by analyzing the economic activity of an entire country
or the international marketplace
Analysis of ex post and ex ante. There are two types of macroeconomic analysis : analysis of ex
post analysis and ex ante. Macroeconomic analysis ex post or national accounting , ie analysis
of statistical data that allows to evaluate the economic performance , identify problems and
adverse events , develop economic policies to address them and overcome , to conduct a
comparative analysis of the economic potentials of different countries. Macroeconomic analysis
of the ex ante, ie predictive modeling of economic processes and phenomena on the basis of
certain theoretical concepts, allowing you to identify the patterns of development of economic
processes and to identify causal relationships between economic phenomena and variables.
This is macroeconomics as a science .
Methods and principles of macroeconomic analysis
In his analysis of macroeconomics uses the same methods and principles as microeconomics .
Such general principles and methods of economic analysis are: abstraction, ( the use of models
for the study and explanation of economic processes and phenomena ) , a combination of
methods of deduction and induction , a combination of normative and positive analysis , the
use of the principle of " ceteris paribus " assumption of rational behavior economic agents , etc.
Feature of macroeconomic analysis is that it serves an important principle of aggregation . The
study of economic relationships and patterns on the economy as a whole is only possible if we
consider the aggregate or aggregates . Macroeconomic analysis requires aggregation.
Aggregation is the bringing together of separate elements into one, in aggregate, in the
aggregate . Aggregation is always based on an abstraction ,ie abstraction from unimportant
moments and capture the most important , significant , typical features , patterns of economic
processes and phenomena. Aggregation allows you to select : macroeconomic agents
macroeconomic markets , macroeconomic linkages , macroeconomic indicators .
Aggregation based on the identification of the most typical features of the behavior of
economic agents , provides an opportunity to highlight the four macroeconomic agent :
the foreign sector .
To understand the subject of macroeconomics is necessary to distinguish the macroeconomic
analysis ex post, or national accounting and analysis of ex ante - the macroeconomy in the
proper sense of the word.
National accounting (ex post) determines the macroeconomic situation of the economy in the
past period . This information is needed to determine the extent to which the objectives set out
above , economic policy-making , a comparative analysis of the economic potentials of the
various countries. On the basis of ex post adjustment of existing implemented macroeconomic
and development of new concepts .
Analysis (ex ante) - is predictive modeling of economic phenomena and processes on the basis
of certain theoretical concepts. The purpose of this analysis - to determine the regularities of
Macroeconomics gives some recommendations for the development of economic policy on the
basis of the analysis of real economic variables .
Methods of Macroeconomic Analysis
For macroeconomic research , like other sciences, is characterized by the use of complex
Method - a set of techniques , methods , principles, by which identifies ways to achieve the
research objectives . They can be divided into general scientific and specific research methods.
Scientific methods of investigation include the method of abstraction , analysis , synthesis ,
induction , deduction , the unity of the historical and logical , systemic-functional analysis, etc.
The main specific methods of research in macroeconomics are aggregation and modeling.
Aggregation - consolidation of economic indicators by combining them into a single overall
(creation units, total units ) .
Aggregate values characterize the economy as a whole : Gross domestic product (rather than
issue a separate company ) , the general price level (rather than prices for specific products ) ,
the market interest rate ( rather than individual species percent) , inflation , employment ,
Macroeconomic aggregation applies primarily to economic entities , which are grouped into
the household sector ;
the business sector ;
the public sector ;
sector " rest of the world ."
33.Indicators of results of any kind of labor have a place in his characterization as the starting point for determining the
degree of the achievement . Activities are evaluated at any level of production, whether it be an individual , company,
organization or the national economy as a whole. The results of the operation at the national level is called
macroeconomic . They are usually formed as a cumulative result of microeconomic indicators. The fact that each of the
main macroeconomic indicators, generally corresponds to the analogue , which is calculated at the level of the primary
economic unit. Moreover , a significant part of macroeconomic indicators can only be obtained as the sum of the microlevel indicators . Thus, we can talk about the kind of system, that is such a set of indicators , which are interrelated ,
complementary and performance-oriented economic performance .
SNA is the main indicator of GDP. It expresses the result of the economy over a certain period of development,
characterizes the finished products and services produced . Unlike previously used in our statistics, the total social
product ( SOP) , GDP does not include the cost of the means Discontinued and thus eliminates the double counting . On
the other hand, unlike GDP SOP addition results material production includes the cost of services.
GDP and GNP , the composition and methods of calculation. The main macroeconomic indicator ranked countries as well
as international organizations such as the UN, IMF , World Bank , is the GDP. GDP is the gross value of all goods and
services produced within the State within a certain period minus intermediate consumption. That is, GDP is the sum of
value added of all units of the national economy . GDP measures the performance of the entities in the economic territory
of the State , but it is not designed to assess the production outside the country. Thus, GDP characterizes the value
created by both residents and non-residents of this State , but does not consider the cost produced by residents outside
The national statistics of some of the main macroeconomic indicator can be considered as GNP (used in the U.S. and
Japanese systems). In the quantitative ratio of a difference between GDP and GNP low and is usually not more than 2%.
Unlike GDP , GNP characterizes the value of the final product created by residents within the State and beyond , but does
not include the activities of non-residents in the economic territory of the country.
Methods of calculating GDP. GDP can be calculated in three ways : from the production , distribution and end use.
In the volume of gross output also included some categories produced but unsold goods. These include:
products produced by enterprises for vnutriproiz - duction consumption
products used for construction of buildings and the production of other fixed assets
products and services exchanged by barter
products and services used to pay in kind
agricultural and food products produced by households for their own consumption
other products produced by households
imputed income from living in their own home
imputed payment of financial intermediation services
As for the land rent , then it is treated as income from the property and is not included in the gross output .
GDP , calculated production method , in addition to the amount of value added includes net indirect taxes. The system of
national accounts is - taxes on production and imports . This implies that GDP is the total volume of gross output of
products and services in the domestic economy , minus intermediate consumption, plus value-added tax and net taxes on
imports (excluding VAT) .
GDP = gross output - intermediate consumption + VAT + CHNI
In accordance with the method of distribution of GDP has gross revenues of all business units and people from all kinds of
economic activities , as well as depreciation. More precisely, the GDP as an income stream represented by :
First, income owners of factors of production (ie the sum of wages, interest , rent payments and other property income
property before taxes)
secondly, the income of the state in the form of various indirect taxes
Third, the income of the business sector must take into account depreciation, which are for the purchase of investment
In applying the method of final uses of GDP appear as final consumption of goods and services , capital investment ,
increase in inventories and the balance of foreign trade operations. Thus, GDP will include four streams of costs:
First, consumer spending. This household spending on durable consumer goods , as well as the costs of services . To
denote the aggregate of these costs apply the letter C
Second, gross private domestic investment (I). They represent the cost of the private business sector of the State to
increase investment in a given year ( net investment ) , as well as investment goods for compensation consumed
machinery , equipment, fixtures , etc. , ie depreciation
Third, the state represented by their government is a consumer , making purchases of goods and services, such as military
equipment. Government spending on consumption designated - G. It should be noted that public procurement exclude all
government transfer payments , as this category of expenditure does not reflect the increase in current production and is
just a transfer of part of government revenue to certain categories of persons
Fourth, some of the goods and services produced in the state is exported beyond it ( export) and consumed in other
countries , so they should be added . On the other hand , imported goods and services worth subtracted because they are
produced in other systems and do not reflect the national production . Thus, the fourth component is net exports ,ie
difference between exports and imports ( Xn ) . Based on the above , the GDP by the end use of the method is :
GDP = C + I + G+ Xn.
GDP calculations based on various components inevitably leads to a mismatch of its quantitative evaluations. Most often
there is a discrepancy due to the fact that the collected statistical data do not provide absolutely reliable reflection of the
quantitative content of economic operations. In countries with developed statistical service , such deviations are
negligible and at the level of GDP, as a rule, do not exceed 1-2 %. In statistical references mismatch between calculus GDP
values in different ways , as well as some other macroeconomic indicators are reflected in the special column " statistical
discrepancy ."Nominal and real GDP. GDP estimate for a certain period of time gives you the opportunity to judge the
dynamics of the economy. If, for example , the value of GDP increased by 2% , which means that the increased weight of
the goods and services. However, GDP growth is not always indicative of the progress in development. The fact that GDP it cost index and thus , it depends on the level of prices in the economy . Therefore, in economic theory and practice
distinguish nominal and real GDP.
Nominal GDP - a measure of current prices , that is established at the time of calculation.
Real GDP - is GDP at constant prices, ie inflation-adjusted . Adjustment is performed by the formula:
real GDP = nominal GDP / price index .
Other parameters of the SNA are the following .
Net national product - is the gross national product minus the part produced product that is required to replace the
means of production, worn in the output ( depreciation).
Gross national income - the sum of primary incomes received by residents of the State in connection with their direct or
indirect participation in the GDP of the country 's GDP and other countries.
Net national income - is the difference between GNI and consumption of fixed capital, ie depreciation.
National disposable income - net national income plus current transfers from abroad. Thus, LPR measures the amount of
income that residents can use either for consumption or for savings .
Gross national disposable income ( GNDI ) equals GDP at market prices plus (minus ) the net balance between the
domestic economy and other countries on taxes on production and imports , subsidies , wages, income from property
and entrepreneurial income , insurance operations and other transfers.
Net national disposable income equals GNDI minus consumption of fixed capital .Gross national savings - GNDI part that
does not go to final consumption . It is equal to the sum of gross savings of all sectors.
Net national savings - equal to the difference between the VNS and consumption of fixed capital .
34. GDP: Expenditure Approach
Gross domestic product (GDP) represents the value of all final goods produced and services
delivered within the geographical boundaries of a region (city, state, country) in a period (most
commonly a year).
There are two commonly used approaches to calculate GDP: the expenditures approach and
the income approach. The production approach is also another possible alternative.
Adventures of expenditure method:
Shows demand for goods and services
Stimulus to the economy
Use of supply of goods and services
Link to welfare and production capacity
Link with the rest of the world
Estimates based on the supply and use of goods and services
Estimates are at purchasers prices
Estimate is equal to GDP by economic activity at market or purchasers price
Types of expenditures:
Final consumption expenditure
Non profit institutions serving households
Gross domestic capital formation
Gross Fixed Capital Formation
Exports of goods and services
Less Imports of goods and services
Time of recording and valuation of final consumption expenditure
Follows the main principles in the system
Basic prices – income in kind, retained goods or services for own consumption
Time of recording - accrual principle
Expenditure on a good is to be recorded at the time its ownership changes
Expenditure on a service is recorded when the delivery of the service is completed
The GDP under the expenditures approach is calculated by adding up all the expenditures made
on final goods and services produced within the geographical boundaries of a region. These
include consumption expenditure (by households), investment expenditures (by businesses),
government expenditures (on purchase of goods and services) and net expenditures by
foreigners (i.e. net exports which in turn equals total exports minus total imports).
The GDP under the expenditures approach is calculated using the following formula:
GDP = C + I + G + (X − M)
C stands for personal consumption expenditures and it represents the spending by individuals
on goods and services for personal use. Examples of expenditures that fall under this heading
includes: spending on purchase of durable goods (such as cars, computers, etc.), non-durable
goods (such as bread, milk, etc.) and on purchase of services (such health, entertainment,
haircuts, etc.)I stands for gross private investment and it represents the spending by
entrepreneurs to sustain and grow their business. Examples of expenditures falling under gross
private investment includes: fixed investment (purchase of final plant and machinery, business
tools, etc.), construction for assets (residential and others) and changes in inventory levels, etc.
However, it excludes a mere transfer of existing assets from one party to another (such as
purchase of securities on the stock exchange, purchase of a resold asset, etc.)
G stands for government expenditures and gross investment and it represents the spending by
government on consumption and on investment in new infrastructure, etc. Examples of
expenditures falling under this heading include: salaries of government officers, expenditure on
stationery and equipment used by government, expenditure on training of government
officials, expenditure on construction of new high ways, parks, etc.
(X − M) equals net exports. X stands for exports and represents the purchase of goods produced
in a region that are consumed by foreigners. M stands for imports and represents the purchase
of foreign goods and services.
Since GDP sums up all production within geographical boundaries of a region, it must include
the output that is purchased by foreigners and exclude the portion of C, I and G that is
expended on foreign goods and services.
Classification of Individual Consumption by Purpose (COICOP)
Recreation and cultureEducationRestaurant and hotelsMiscellaneous goods and
of the main macroeconomic indicators that measure economic performance are gross
domestic product ( GDP) and gross national product (GNP).
GDP - is the market value of all final goods and services produced in a country during the year ,
regardless of the factors of production are owned by residents of a country or foreign-owned (
non-residents ) .
GDP - the market value of all final goods and services produced in a country during the year.
GDP measures the value of output created factors of production owned by the citizens of this
country ( resident ) , including in other countries - this is called net income factors.
GNP = GDP + net factor income .
Net factor income from abroad is equal to the difference between the income derived nationals
abroad and foreign income received in that country .
Dividing GDP by the number of its citizens , providing an estimate , which is called " GDP per
capita " . The higher the GDP per capita , the higher the standard of living in the country.
Final goods and services are those that are acquired during the year for final consumption and
is not used for intermediate consumption (ie, the production of other goods and services).
In the GDP does not include the cost of purchasing goods produced in previous years (for
example , buying a home , built five years ago) , as well as costs for the purchase of
intermediate products ( raw materials, fuel, energy , etc. used to produce final products) .
For example, food cooked at home and in a restaurant can be exactly the same , but only the
last price recorded in GDP. Servant and a housewife can do the same job , but only wage
workers will enter the GDP. Not counted in GDP output in the shadow economy .
The company sells tire manufacturing company that produces cars, 4 tires cost 4000 rubles .
Another company sells automotive company player for 3000 rubles . When all this is a new car ,
car company sells it to customers for 200,000 rubles. What amount will be included in the
calculation of the GDP ?" The composition of GDP will cost of the final product - the finished car
, 200,000 rubles. The cost of the tires and the player enters into the intermediate. If the player
was bought in a store for their own use . Its cost would be included in GDP this year.
2 . When calculating GDP should be based on the following conditions. All that will be produced
in the country, will be sold .Therefore , you can simply calculate how much consumers are
spending - end users of output - to buy it . Thus , one can imagine the GDP as the sum of all
costs required to redeem the entire market output.
You can look at the same problem from the other side. That took consumers to purchase goods
. Income received in the form of those involved in their production.
Revenue from the sale of goods used for the payment of wages , rents the land owner (if the
plant is located on
land owned by another owner ) , interest on loans obtained from the bank profit - income for
the owner of the firm.
In accordance with this approach, identify two ways of counting GDP :
a) expenditure ;
b) income .
When calculating GDP by expenditure summed costs of all economic agents : households, firms
, government and foreigners (the cost of our exports ) . Total expenses consist of :
personal consumption expenditures , including household spending on durable goods and the
current consumption of services , but does not include the costs of buying a home ;
gross investment , including business investment , or investment in fixed assets , investment in
housing , investment in inventories . Gross investment can be represented as the sum of net
investment and depreciation. Net investment increases the stock of capital in the economy ;
government purchases of goods and services , such as the construction and maintenance of
schools , roads, maintenance of the army and the state apparatus. This does not include
transfer payments ( benefits, pensions , social security payments );
net exports of goods and services abroad , which is calculated as the difference between
exports and imports.
GDP by expenditure = P + I + G + ( Exp. - Imp . )
( Gross investment - depreciation = net investment ) .
When calculating GDP income summarizes all income received by residents of the country of
production (wages , rents , interest, profits ) as well as two components that are not income :
depreciation and indirect business taxes .
GDP by income = c / mp + Release + dividends + interest + depreciation + indirect taxes
Profit for calculating GDP includes : income tax and retained earnings and dividends.
Personal income = c / mp + rent + interest + dividends
Personal disposable income = personal income - individual taxes + transfers
Net National Product = GNP - Depreciation
National income = net national product - indirect taxes
36. Theories explaining the economic cycle mainly due to external factors , called externalities
theories , unlike internal'nym theories , considering the economic cycle as a product of internal
, inherent in the economic system itself , factors. These factors may cause both rise and decline
in economic activity at regular intervals .
If one or more branches of a boom , which caused a sharp increase in demand for machinery
and equipment , it is natural to assume that the phenomenon is repeated after 10-15 years,
during which the machinery and equipment will be completely worn out.
Supporters externalities theory is in the external environment phenomena are repeated every
two to three and a half years and is, in their opinion, the objective reasons related economic
Short cycles are called cycles Kitchin , who dedicated his work to this problem in 1923 . Joseph
Kitchin cycle tied , he took equal to three years and four months , with a range of world gold
reserves. Currently, however, such an explanation of the reasons for the short-term cycle can
satisfy very few .
Most modern economists who support the idea of the existence of short-term economic cycles
, tends to regard them only as an integral part of the overall ring system , which is based on
medium-term economic cycles , called cycles Zhuglyara , after the French economist who
studied the economic fluctuations in the second half of the XIX century .
Clement Zhuglyar considered the economic cycle as a natural phenomenon whose causes lie in
the monetary, more precisely, of the loan.
Crisis - the main phase of the cycle - Zhuglyar assessed as sanatory factor leading to an overall
decrease in prices and liquidation of enterprises , designed to meet the demand artificially
overgrown .Zhuglyar believed that repetition of all economic processes caused by banking,
occurs every ten years.
By the middle cycles also include the so-called construction cycles or cycles Kuznets ( American
economist ) . C. Smith believed that oscillatory processes (cycle 15-20 years ) are associated
with periodic updates of certain types of dwellings and industrial buildings .
Tendency to blur the phases of the industrial cycle , the participation of their mismatch in
different countries and regions together with the trend growth of a market economy difficulties
caused by structural crises , forced scientists to look for new reasons for such a complex
Renewed interest in the half-forgotten studies in 20 - 30s years. XX century. Among them is the
concept of large economic cycles (the theory of "long waves " ) .
The essence of great economic cycles was determined ND Kondratyev follows.
Along with short-term and medium-term economic cycles , there are economic cycles lasting
about 48-55 years. Since the end of the XVIII century. , As shown by ND Kondratiev cycles are
the following :
cycle - from the beginning of the 90s . XVIII century. until 1844 - 1851gg .
cycle - from the beginning of 1844-1851 to 1890-1896 years.
cycle - from 1890 - 1896 to 1914 to 1920 .
Large economic cycles can not be explained by accidental causes . ND Kondratiev explained the
existence of large economic cycles so that the duration of the operation from the different
economic benefits varies. Likewise for their creation requires a different time and different
means . As a rule, the longest period of operation are bridges, roads, buildings and other
infrastructure . It also requires the longest time and the accumulated capital to create them.
Hence it is necessary to introduce the concept of different types of equilibrium for different
time periods. Large cycles in this context can be regarded as a breach and restore economic
balance long period. Their main reason lies in the mechanism of accumulation, accumulation
and dispersion of capital sufficient to create new elements of market infrastructure.
Cybernetics , genetic engineering, new chemistry , synthetic fuels , the revolution in aircraft
innovation in agriculture - that's the starting positions for the fifth great cycle .
JM Clark, who has studied the problem of active economic cycles believed that the increase in
demand for commodities creates a chain reaction leading to a manifold increase in the demand
for machinery and equipment . This pattern , is, according to Clark , the key moments of the
process of cyclical development was defined by him as the acceleration principle ( the
accelerator effect ) .
Thus, the accelerator can be represented as the ratio between investment and growth in
consumer demand ( finished products ) or national income.
where v - accelerator
I - investment,
Y - income ( or consumer demand )
t - the year when the investments were made .
In general, the effect of the accelerator is considered as an essential element of economic
fluctuations generated by the instability of the economy and generating this instability
37.Society seeks both to economic growth and full employment to a sustainable level of prices.
Since the time of the emergence of capitalism the national economy is growing in all countries not only increases production volume for a certain period of time , but also increases the
national wealth and productive potential of nations. However, this growth is neither constant
nor smooth. Economy is subject to fluctuations that are often referred to as business cycles or
cycles of economic conditions .
Business cycles have long attracted the attention of economists who seek to not only identify
patterns of cyclical development , but also to predict future economic development .
Economic cycle is called the interval between two identical states of the economic situation .
Economic ( business ) cycle - the ups and downs of economic levels ( business ) activity for
several years . This is the time between two equal states economic conditions.
Cyclical fluctuations may experience various macroeconomic indicators , but the most common
is the analysis of business cycle fluctuations on the example of the GDP (or GNP). Fig .4.1 shows
a diagram of the economic cycle. Trend line (or average value of GDP for several years ) shows
the overall direction of the economy over time , the line of GDP - real fluctuations in the
Economic cycles are characterized by the following important factors :
oscillation amplitude - the maximum difference between the highest and lowest value of the
index during the cycle (distance CD);
cycle time - the time period during which performed one complete oscillation of business
activity (distance AB).
For the duration of the cycles are divided into:
short cycles related to the restoration of economic equilibrium in the consumer market , with
fluctuating wholesale prices and changes in stocks of firms . Their duration is 2-4 years ;
average cycles associated with changes in investment demand companies with long-term
accumulation of factors of production and the improvement of technologies . Their duration is
10-15 years ;long cycles (waves ) associated with discoveries and important technological
innovations and their dissemination. Their duration is 40-60 years.
Cycles differ in duration and intensity, but all the cycles passes the same phases:In the cycle
structure of the isolated 4 stages ( or phases )
Rise . In the recovery phase the national income is growing from year to year , unemployment is
reduced to the natural rate , and the size of investment in real capital grow , but growth is
slowing . Also due to increased consumer and investment demand increases prices and interest
Boom. Phase lifting boom ends , at which time there and ultra-high overload capacity , the price
level , wage rate and the interest rate is very high . Investments in production almost not, due
to the high cost of raising resources.
Downturn. Production and employment are declining. Due to lower demand falling prices for
goods and services . Investments become negative , because at this stage of the cycle of the
company not only carry out new investments , but an increase in idle capacity . Many firms
suffer losses or go bankrupt .
The bottom of the recession. The rate of decline slowed down and stabilized at this stage .
Decline in production and rising unemployment reach their maximum values . Prices are
minimal. Survived only the strongest firms . Accumulated potential for future growth - at low
interest rates investment increases. The transition to the stage of recovery occurs after a period
of time when the investments are paying off .
There are situations when the background of the decline in production and rising
unemployment also observed a rise in prices . This situation is called stagflation and most often
occurs with sudden changes in the economic situation. Stagflation was observed in the 70 -ies.
in developed countries during the energy crisis caused by rising oil prices. Another example Russia in the 90s .after the start of economic reforms.
Crisis as an essential element of the cycle
Phase of recession is also called phase of the crisis and depression. This step is especially
important for the economy, because after the crisis occurs renewal of businesses survive the
strongest and most efficient firms , new inventions and open new economic opportunities.
However, the crisis is also a great social upheaval - people lose their jobs , their incomes are
reduced , reduced standard of living. Therefore, to prevent or mitigate crises - one of the most
important tasks of the state .
Cyclical development of the economy clearly began to manifest itself , since the XIX century.
First cyclical crisis of overproduction occurred in England in 1825 in the XIX century. cyclical
crises occurred in some countries , they do not coincide in time and were due to internal causes
of development of countries or international non-economic events (eg wars ) .
The first crisis , called the world , which began in the United States and spread to other
capitalist countries in 1929 - 1933 gg. , Was called the Great Depression. He covered
allindustries (especially the steel industry , mechanical engineering , mining, marine transport ,
etc.) and agriculture.
38. Unemployment (or joblessness) occurs when people are without work and actively seeking
work. The unemployment rate is a measure of the prevalence of unemployment and it is
calculated as a percentage by dividing the number of unemployed individuals by all individuals
currently in the labor force. During periods of recession, an economy usually experiences a
relatively high unemployment rate. According toInternationalLabour Organization report, more
than 197 million people globally are out of work or 6% of the world's workforce were without a
job in 2012
To a certain extent, these were covered in the topic called 'Macroeconomic objectives'. They
are reproduced here in a little more detail.
Economic cost to the economy as a whole. There is the cost to the whole economy in terms of
wasted, unused resources. The existence of any idle resources means that the economy will be
at a point within its production possibility frontier (PPF).
frictional unemployment is voluntary unemployment for workers who are looking for a better
job. This all sounds very trivial, but the numbers involved are quite significant. When you hear
the monthly unemployment figures announced on the news (a fall by 20,000; a rise by 10,000;
etc.) what you may not realise is that the monthly change is dwarfed by the actual inflows of
workers into jobs and outflows of workers into unemployment. Some months these figures can
be as high as 300,000!
Thereplacement ratio would be too high (the size of the unemployment benefit as a percentage
of in work disposable income). But if benefits are too low, newly unemployed workers might
take the first job that comes along, which might not be the best use of his skills. The economy's
resources would not be allocated efficiently.
Structural unemployment . The huge shift away from manufacturing to the service sector over
the last twenty to thirty years (often referred to as deindustrialisation) has caused structural
unemployment to be the largest component of the total unemployment figures.
One can probably think of examples where 'technology' has put people out of work. A good
recent example is the banking sector, where the introduction of phone and Internet banking has
caused the big banks to close many of their traditional high street branches. Of course, it is not
quite as simple as that.
In economics, Okun's law (Arthur Melvin Okun 1962) is an empiricallyobserved
relationship relating unemployment to losses in a country's production. The "gap version"
states that for every 1% increase in the unemployment rate, a country's GDP will be
roughly an additional 2% lower than its potential GDP. The "difference version" describes
the relationship between quarterly changes in unemployment and quarterly changes
inreal GDP. The stability and usefulness of the law has been disputed. Imperfect
Okun's law is more accurately called "Okun's rule of thumb" because it is primarily an
empirical observation rather than a result derived from theory. Okun's law is approximate
because factors other than employment (such as productivity) affect output. In
Okun'soriginal statement of his law, 2% increase in output corresponds to a 1% decline
in the rate of cyclical unemployment; a .5% increase in labor force participation; a .5%
increase in hours worked per employee; and a 1% increase in output per hours worked
Okun's law states that a one point increase in the cyclical unemployment rate is
associated with two percent age points of negative growth in real GDP. The relationship
varies depending on the country and time period under consideration.
The relationship has been tested by regressing GDP or GNP growth on change in the
unemployment rate. Martin Prachowny estimated about a 3% decrease in output for
every 1% increase in the unemployment rate. However, he argued that the majority of
this change in output is actually due to changes in factors other than unemployment,
such as capacity utilization and hours worked. Holding these other factors constant
reduces the association between unemployment and GDP to around 0.7% for every 1%
change in the unemployment rate (Prachowny 1993). The magnitude of the decrease
seems to be declining over time in the United States. According to Andrew Abel and Ben
Bernanke, estimates based on data from more recent years give about a 2% decrease in
output for every 1% increase in unemployment (Abel and Bernanke, 2005).
There are several reasons why GDP may increase or decrease more rapidly than
unemployment decreases or increases:
As unemployment increases,
a reduction in the multiplier effect created by the circulation of money from employees
unemployed persons may drop out of the labor force (stop seeking work), after which
they are no longer counted in unemployment statistics
employed workers may work shorter hours
labor productivity may decrease, perhaps because employers retain more workers than
One implication of Okun's law is that an increase in labor productivity or an increase in
the size of the labor force can mean that real net output grows without net unemployment
rates falling (the phenomenon of "jobless growth")
The gap version of Okun's law may be written (Abel & Bernanke 2005) as:
is potential GDP
is actual output
is the natural rate of unemployment
is actual unemployment rate
is the factor relating changes in unemployment to changes in output
39. Okun's Law describes a clear relationship between unemployment and national output, in
which lowered unemployment results in higher national output. Such a relationship makes
intuitive sense: as more people in a nation work it seems only right that the output of the nation
should increase. Building on Okun's law, another economist, A. W. Phillips, discovered a
relationship between unemployment and inflation. The chain of basic ideas behind this belief
follows: as more people work the national output increases, causing wages to increase, causing
consumers to have more money and to spend more, resulting in consumers demanding more
goods and services, finally causing the prices of goods and services to increase. In other words,
Phillips showed that unemployment and inflation shared an inverse relationship: inflation rose as
unemployment fell, and inflation fell as unemployment rose. Since two major goals for economic
policy makers are to keep both inflation and unemployment low, Phillip's discovery was an
important conceptual breakthrough, but also posed a troublesome challenge: how to keep both
unemployment and inflation low, when lowering one results in raising the other?
The Phillips curve represents the relationship between the rate of inflation and
the unemployment rate. Although he had precursors, A. W. H. Phillips’s study of wage inflation
and unemployment in the United Kingdom from 1861 to 1957 is a milestone in the development
of macroeconomics. Phillips found a consistent inverse relationship: when unemployment was
high, wages increased slowly; when unemployment was low, wages rose rapidly.
Phillips conjectured that the lower the unemployment rate, the tighter the labor market and,
therefore, the faster firms must raise wages to attract scarce labor. At higher rates of
unemployment, the pressure abated. Phillips’s “curve” represented the average relationship
between unemployment and wage behavior over the business cycle. It showed the rate of wage
inflation that would result if a particular level of unemployment persisted for some time.
Economists soon estimated Phillips curves for most developed economies. Most related general
price inflation, rather than wage inflation, to unemployment. Of course, the prices a company
charges are closely connected to the wages it pays. .
If government uses expansionarymonetary or fiscal policy in an attempt to lower unemployment
below its natural rate, The resulting increase in demand encourages firms to raise their prices
faster than workers had anticipated. With higher revenues, firms are willing to employ more
workers at the old wage rates and even to raise those rates somewhat. For a short time, workers
suffer from what economists call money illusion: they see that their money wages have risen and
willingly supply more labor. Thus, the unemployment rate falls. They do not realize right away
that their purchasing power has fallen because prices have risen more rapidly than they
expected. But, over time, as workers come to anticipate higher rates of price inflation, they
supply less labor and insist on increases in wages that keep up with inflation. The real wage is
restored to its old level, and the unemployment rate returns to the natural rate. But the price
inflation and wage inflation brought on by expansionary policies continue at the new, higher
The expectations-augmented Phillips curve is a fundamental element of almost every
macroeconomic forecasting model now used by government and business. It is accepted by most
otherwise diverse schools of macroeconomic thought.
Early new classical theories assumed that prices adjusted freely and that expectations were
formed rationally—that is, without systematic error. These assumptions imply that the Phillips
curve in Figure 2 should be very steep and that deviations from NAIRU should be short-lived
(see new classical macroeconomics and rational expectations). While sticking to the rationalexpectations hypothesis, even new classical economists now concede that wages and prices are
somewhat sticky. Wage and price inertia, resulting in real wages and other relative prices away
from their market-clearing levels, explain the large fluctuations in unemployment around NAIRU
and slow speed of convergence back to NAIRU.
Modern macroeconomic models often employ another version of the Phillips curve in which the
output gap replaces the unemployment rate as the measure of aggregate demand relative to
aggregate supply. The output gap is the difference between the actual level of GDP and the
potential (or sustainable) level of aggregate output expressed as a percentage of potential. This
formulation explains why, at the end of the 1990s boom when unemployment rates were well
below estimates of NAIRU, prices did not accelerate.
The reasoning is as follows. Potential output depends not only on labor inputs, but also on plant
and equipment and other capital inputs. At the end of the boom, after nearly a decade of
rapid investment, firms found themselves with too much capital.
The excess capacity raised potential output, widening the output gap and reducing the pressure
on prices.One can believe in the Phillips curve and still understand that increased growth, all
other things equal, will reduce inflation. The misplaced criticism of the Phillips curve is ironic
since Milton Friedman, one of the coinventors of its expectations-augmented version, is also the
foremost defender of the view that “inflation is always, and everywhere, a monetary
The Phillips curve was hailed in the 1960s as providing an account of the inflation process
hitherto missing from the conventional macroeconomic model. After four decades, the Phillips
curve, as transformed by the natural-rate hypothesis into its expectations-augmented version,
remains the key to relating unemployment (of capital as well as labor) to inflation in mainstream
40. Unemployment types and causes
There are several types of unemployment, each one defined in terms of cause and severity.
Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in
aggregate demand (AD).If the decline in aggregate demand is persistent, and the unemployment
long-term, it is called either demand deficient, general, or Keynesian unemployment. For
example, unemployment levels of 3 million were reached in the UK in the last two recessions,
between 1980 and 1982, and between 1990 and 1992. In the most recent recession of 20082010, unemployment levels rose to 2.4m in the last quarter of 2009, and are likely to peak at
over 2.5m during 2010. (Source: ONS).
Demand deficienct unemployment
This is caused by a lack of aggregate demand, with insufficient demand to generate full
Structural unemployment occurs when certain industries decline because of long term changes
in market conditions. For example, over the last 20 years UK motor vehicle production has
declined while car production in the Far East has increased, creating structurally unemployed car
workers. Globalisation is an increasingly significant cause of structural unemployment in many
When structural unemployment affects local areas of an economy, it is called ‘regional’
unemployment. For example, unemployed coal miners in South Wales and ship workers in the
North East add to regional unemployment in these areas.
Classical unemployment is caused when wages are ‘too’ high. This explanation of unemployment
dominated economic theory before the 1930s, when workers themselves were blamed for not
accepting lower wages, or for asking for too high wages. Classical unemployment is also
called real wage unemployment.
Seasonal unemployment exists because certain industries only produce or distribute their
products at certain times of the year. Industries where seasonal unemployment is common
include farming, tourism, and construction.
Frictional unemployment, also called search unemployment, occurs when workers lose their
current job and are in the process of finding another one. There may be little that can be done to
reduce this type of unemployment, other than provide better information to reduce the search
time. This suggests that full employment is impossible at any one time because some workers
will always be in the process of changing jobs.
Voluntary unemployment is defined as a situation when workers choose not to work at the
current equilibrium wage rate. For one reason or another, workers may elect not to participate
in the labour market. There are several reasons for the existence of voluntary unemployment
including excessively generous welfare benefits and high rates of income tax. Voluntary
unemployment is likely to occur when the equilibrium wage rate is below the wage necessary to
encourage individuals to supply their labour.
The natural rate of unemployment
This is a term associated with new Classical and monetarist economists. It is defined as the rate
of unemployment that still exists when the labour market it in equilibrium, and includes
seasonal, frictional and voluntary unemployment. The US economist Milton Friedman first used
the concept to help explain the connection between unemployment and inflation. Friedman
argued that if unemployment fell below the natural rate there would be an increase in the rate
The different types of unemployment can be illustrated through the AJ-LF model.
See also: the Phillips Curve.
Over the last 30 years, employment in the service sector has increased to over 70% of total
employment, while employment in manufacturing has decreased to under 20%. Since the 1940s
employment in the primary sector, including agriculture, has been less that 3% of the workforce.
Recent changes have created two speed economy, with a relatively bouyant service sector and a
declining manufacturing one.
The main reasons are:
Globalisation and the rise of new ‘low cost’ overseas competitor countries.
Increased competition within the domestic product market.
The increasing comparative advantage of the UK as an international supplier of financial
41. Wage labour (or wage labor in American English) is the socioeconomicrelationship
between a worker and an employer, where the worker sells their labourunder a formal or
informal employment contract. These transactions usually occur in a labour
market where wages are market determined. In exchange for the wages paid, the work
product generally becomes the undifferentiated property of the employer, except for special
cases such as the vesting of intellectual propertypatents in the United States where patent
rights are usually vested in the original personal inventor. A wage labourer is a person whose
primary means of income is from the selling of his or her labour in this way.
In modern mixed economies such as those of the OECD countries, it is currently the dominant
form of work arrangement. Although most work occurs following this structure, the wage work
arrangements of CEOs, professional employees, and professional contract workers are
sometimes conflated with class assignments, so that "wage labour" is considered to apply only
to unskilled, semi-skilled or manual labour.
The most common form of wage labour currently is ordinary direct, or "full-time", employment
in which a free worker sells his or her labour for an indeterminate time (from a few years to the
entire career of the worker), in return for a money-wage or salary and a continuing relationship
with the employer which it does not in general offer contractors or other irregular staff.
However, wage labour takes many other forms, and explicit as opposed to implicit (i.e.
conditioned by local labour and tax law) contracts are not uncommon. Economic history shows a
great variety of ways in which labouris traded and exchanged. The differences show up in the
employment status: a worker could be employed full-time, part-time, or on a casual basis. He or
she could be employed for example temporarily for a specific project only, or on a permanent
basis. Part-time wage labour could combine with part-time self-employment. The worker could
be employed also as an apprentice.
civil (legal) status: the worker could for example be a free citizen, an indentured labourer, the
subject of forced labour(including some prison or army labour); a worker could be assigned by
the political authorities to a task, they could be asemi-slave or a serf bound to the land who is
hired out part of the time. So the labour might be performed on a more or less voluntary basis,
or on a more or less involuntary basis, in which there are many gradations.
method of payment (remuneration or compensation). The work done could be paid "in cash" (a
money-wage) or "in kind" (through receiving goods and/or services), or in the form of "piece
rates" where the wage is directly dependent on how much the worker produces. In some cases,
the worker might be paid in the form of credit used to buy goods and services, or in the form
of stock options or shares in an enterprise.
method of hiring: the worker might engage in a labour-contract on his or her own initiative, or he
or she might hire out their labour as part of a group. But he or she may also hire out their labour
via an intermediary (such as an employment agency) to a third party. In this case, he or she is
paid by the intermediary, but works for a third party which pays the intermediary. In some cases,
labouris subcontracted several times, with several intermediaries. Another possibility is that the
worker is assigned or posted to a job by a political authority, or that an agency hires out a worker
to an enterprise together with means of production.
Socialists see wage labour as a major, if not defining, aspect of hierarchical industrial systems.
Most opponents of the institution support worker self-management and economic
democracy as alternatives to both wage-labour and to capitalism. While most opponents of
wage labour blame the capitalist owners of the means of production for its existence,
mostanarchists and other libertarian socialists also hold the state as equally responsible as it
exists as a tool utilised by capitalists to subsidise themselves and protect the institution
of private ownership of the means of production—which guarantees the concentration of
capital among a wealthy elite leaving the majority of the population without access. As some
opponents of wage labour take influence from Marxist propositions, many are opposed
to private property, but maintain respect for personal property.
A point of criticism is that after people have been compelled by economic necessity to no
feasible alternative than that of wage labour, exploitation occurs; thus the claim that wage
labour is "voluntary" on the part of the labourer is considered ared herring as the relationship is
only entered into due to systemic coercion brought about by the inequality of bargaining
power between labour and capital as classes.
Wage labourhas long been compared by socialists to slavery, and has thus acquired the
epithet wage slavery. Similarly, advocates of slavery looked upon the "comparative
evils of Slave Society and of Free Society, of slavery to human Masters and slavery to
Capital," and proceeded to argue persuasively that wage slavery was
actually worse than chattel slavery.Slavery apologists like George Fitzhugh contended
that workers only accepted wage labour with the passage of time, as they became
"familiarized and inattentive to the infected social atmosphere they continually
The slave, together with his labour-power, was sold to his owner once for all. . . . The
[wage] labourer, on the other hand, sells his very self, and that by fractions. . . . He
[belongs] to the capitalist class; and it is for him . . . to find a buyer in this capitalist
For Marxists, labour-as-commodity, which is how they regard wage labour, provides an
absolutely fundamental point of attack against capitalism. "It can be persuasively
argued," noted one concerned philosopher, "that the conception of the worker's labour as
a commodity confirms Marx's stigmatization of the wage system of private capitalism as
'wage-slavery;' that is, as an instrument of the capitalist's for reducing the worker's
condition to that of a slave, if not below it." That this objection is fundamental follows
immediately from Marx's conclusion that wage labour is the very foundation of capitalism:
"Without a class dependent on wages, the moment individuals confront each other as
free persons, there can be no production of surplus value; without the production of
surplus-value there can be no capitalist production, and hence no capital and no
42. The label 'capital market' is a blanket term for all procedures and institutions providing for
transactions of long-term financial products. These products include loans, lease equity, and
bonds. Two basic types of capital markets are over-the-counter markets and organized security
exchanges. Other types of capital markets, such as primary, secondary, public, and private
markets, function within these two basic categories.
Organized security exchanges are tangible markets that occupy a physical space, such as an
office or a building, and equity and debt are traded on the premises. All other types of capital
markets are over-the-counter. The United States has seven major organized security exchanges,
including the New York Stock Exchange and the American Stock exchange, which are the two
national markets. The other five markets, such as the Boston or Philadelphia stock exchanges,
are regional. Companies that want to sell securities, but don’t meet the organized exchanges’
listing requirements, often use over-the-counter markets. Business may also uses these types of
capital market to avoid fees. A network of stockbrokers, dealers, and brokerage firms completes
most over-the-counter transactions.
When a corporation decides to sell equity in the form stocks in a capital market, the financial
managers have a choice to sell privately or publicly. In a public stock market offering, both
individuals and investing conglomerates can purchase the company’s securities. Stock sold in
public markets is referred to as common stock. Private stock is sold to a limited number of
investors in a private placement market. Private placement capital markets come in two forms,
private debt markets and equity markets that sell stocks and other forms of equities. Often,
investment firms transfer venture capital to new projects using private equity markets. Stock
offered privately is often more expensive than common stock and it pays in higher dividends.
Other types of capital markets include primary and secondary markets. A primary market is
created when a company offers its securities for the first time. If the stock is common and the
company has never offered stock before, it is called the company’s initial public offering, or IPO.
After a company’s IPO, it may continue to offer issue new stock in the primary market.
Secondary markets are those in which previously offered securities are sold and traded. The first
buyer of a stock buys in the primary market, but if she decides to sell or trade that stock, she
does so in the secondary market. Only initial purchases in primary markets have a direct effect
on the stock-issuing company. The two main types of capital market securities are
stocks and bonds. Traded in separate markets, companies, corporations and
governments use them to raise funds for various purposes. These funds are
raised for long terms and are the regulatory to supervise the capital market
securities and their respective market in every country.
Bond is the medium for handling the debt securities. As the bond market is a
part of the capital market, it provides the opportunity to deal in the debt
securities. Bond enjoys a vast international market estimated to be around
$45 trillion. A huge slice of this bond market transaction generally takes place
in the over-the-counter market, where as the corporate bonds are listed on
There exist different types of bonds in the market like- the corporate bond,
municipal bond, government bond and many more. The government bond is
the most secured one amongst all these, besides being the biggest and most
liquid. Another type of capital market security is known as stocks. These are
favored by the investors as they can get huge returns from this capital
market instrument. The estimated size of the global stock market is
evaluated to be around $45 trillion. Used for trading of company stocks,
companies and governments use it to raise funds for different purposes.
There exists every kind of investor in the capital market, both the individual
investors and the institutional investors. Today, the market trend has
completely changed and is mainly dominated by the institutions, which are
increasing the volume of the market. Hence it’s very important for the
investor to take proper care while selecting capital market securities, as the
risk factor related to these securities are different.A proper research should
be done before any investment.
Capital market instruments are fixed-income obligations that trade in the secondary
market, which means anyone can buy and sell them to other individuals or
institutions. Marketable securities are exchanged through the organized markets for
example, stock exchanges and its Representative dealers and brokers who sell and buy
marketable securities on behalf of their customer in exchange of commission.
Capital market instruments fall into four categories: (1) Treasury securities, (2)
government agency securities, (3) municipal bonds, and (4) corporate bonds.
Treasury Securities: All government securities issued by the Treasury department
of Govt. are fixed income instruments. They may be bills, notes, or bonds depending on
their times to maturity. Specifically, bills mature in one year or less, notes in over one to
10 years, and bonds in more than 10 years from time of issue government obligations
are essentially free of credit risk because there is little chance of default and they are
Government Agency Securities Agency securities are sold by various agencies
of the government to support specific programs, but they are not direct obligations of the
treasury department. Mortgage bonds that sell bonds and uses the proceeds to purchase
mortgages from insurance companies or savings and loans; and the home loan which
sells bonds and loans the money to its banks, which in turn provide credit to savings and
Municipal Bonds Municipal bonds are issued by local government entities as
either general obligation or revenue bonds. General obligation bonds are backed by the
full taxing power of the municipality, whereas revenue bonds pay the interest from
revenue generated by specific projects. Municipal bondsdiffer from other fixed-income
securities because they are tax-exempt. The interest earned from them is exempt from
taxation by the government and by the state that issued the bond, provided the investor
is a resident of that state. For this reason, municipal bonds are popular with investors in
high tax brackets.
Corporate Bonds Corporate bonds are fixed-income securities issued by industrial
corporations, public utility corporations, or railroads to raise funds to invest in plant,
equipment, or working capital. They can be broken down by issuer, in terms of credit
quality in terms of maturity i.e. short term, intermediate term, or long term, or based
on some component of the indenture.
43. Macroeconomic equilibrium for an economy in the short run is established
when aggregate demandintersects with short-run aggregate supply. This is shown in
the diagram below
At the price level Pe, the aggregate demand for goods and services is equal to the
aggregate supply of output. The output and the general price level in the economy
will tend to adjust towards this equilibrium position.
If the price level is too high, there will be an excess supply of output. If the price level
is below equilibrium, there will be excess demand in the short run. In both situations
there should be a process taking the economy towards the equilibrium level of output.
Consider for example a situation where aggregate supply is greater than current
demand. This will lead to a build up in stocks (inventories) and this sends a signal to
producers either to cut prices (to stimulate an increase in demand) or to reduce output
so as to reduce the build up of excess stocks. Either way - there is a tendency for
output to move closer to the current level of demand.
There may be occasions when in the short run, the economy cannot meet an increase
in demand. This is more likely to occur when an economy reaches full-employment of
factor resources. In this situation, the aggregate supply curve in the short run becomes
The diagram below tracks the effect of this. We see aggregate demand rising but the
economy finds it difficult to raise (expand) production. There is a small increase in real
national output, but the main effect is to put upward pressure on the general price
level. Shortages of resources will lead to a general rise in costs and prices
Impact of a change in aggregate supply
Suppose that increased efficiency and productivity together with lower input costs
(e.g. of essential raw materials) causes the short run aggregate supply curve to shift
outwards. (I.e. an increase in supply - assume no shift in aggregate demand). The
diagram below shows what is likely to happen. AS shifts outwards and a new
macroeconomic equilibrium will be established. The price level has fallen and real
national output (in equilibrium) has increased to Y2. Aggregate supply would shift
inwards if there is a rise in the unit costs of production in the economy. For example
there might be a rise in unit wage costs perhaps caused by higher wages not
compensated for by higher labour productivity. External economic shocks might also
cause the aggregate supply curve to shift inwards. For example a sharp rise in global
commodity prices. If AS shifts to the left, assuming no change in the aggregate demand
curve, we expect to see a higher price level (this is known as cost-push inflation) and a
lower level of real national output.
National Income Equilibrium when Aggregate Supply is Perfectly Elastic
When short run aggregate supply is perfectly elastic, any change in aggregate demand
will feed straight through to a change in the equilibrium level of real national output.
For example, when AD shifts out from AD1 to AD2 (shown in the diagram below) the
economy is able to meet this increased demand by expanding output. The new
equilibrium level of national income is Y2. Conversely when there is a fall in total
demand for goods and services (AD1 shifts inwards to AD3) we see a fall in real output.
Long Run Economic GrowthWe have considered short-term changes in both aggregate
demand and aggregate supply. For an economy to experience sustained economic
growth over the longer run it must shift out the long run aggregate supply curve by
either increasing the supply of factors of production available (e.g. an increase in the
labour supply, more land and more capital inputs); increasing the productivity of those
factors or the economy might increase LRAS by achieving an improvement in the state
An outward shift in the LRAS is similar to an outward shift in the production possibility
frontier.The effects are shown in the diagram below. If LRAS shifts out the economy
can operate at a higher level of aggregate demand and can achieve an increase in real
national output without running into problems with inflation.
One of the main long-term economic objectives of the current Labour government is to
raise the economy's productive potential and therefore provide a platform for faster
economic growth in future years. For this to happen the economy needs to achieve a
higher level of investment in new capital and new technology. And the quantity and
productivity of the labourforce also needs to increase over time.
Equilibrium is the situation where there is no tendency for change. The economy can be
in equilibrium at any level of economic activity that is a high level (boom) or a low level
(recession). Due to the size of many modern economies, equilibrium is a very temporary
state, as changing variables shift affect the economy.Macroeconomic Equilibrium can be
shown through the C.F.M. using:
Savings + taxation + imports = investment + government spending + exports
This can be understood as savings approximately equal to investment, government
spending to taxation, and similarly imports to exports, at least over the long run. It means
that, at equilibrium, injections into the income stream equal the leakages from the income
stream.∑E = ∑O = ∑Y
Total expenditure = total output = total income
It is easier to remember if you just think that they are really different ways of measuring
the same thing, which is the flow of factors through the economy, which can be
demonstrated with the CFM.
44. Aggregate demand
In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in
the economy at a given time and price level. It specifies the amounts of goods and services
that will be purchased at all possible price levels.This is the demand for the gross domestic
product of a country. It is often called effective demand, though at other times this term is
It is often cited that the aggregate demand curve is downward sloping because at lower price
levels a greater quantity is demanded. While this is correct at the microeconomic, single good
level, at the aggregate level this is incorrect. The aggregate demand curve is in fact downward
sloping as a result of three distinct effects: Pigou's wealth effect, the Keynes' interest rate
effect and the Mundell-Fleming exchange-rate effect. Additionally, the higher the price level is to
be, the less demanded and thus it is downward sloping.
The aggregate demand curve illustrates the relationship between two factors - the quantity of
output that is demanded and the aggregated price level. The value of the money supply is fixed.
There are many factors that can shift the AD curve. If the Bank were to reduce the amount of
money in circulation (reducing money supply), the AD curve shifts. Nominal output is lower than
before and decreases by the same amount as the decrease in the money supply. The price level
decreases and thus the AD curve shifts rightward. Since the price level decreased, the real
balances level (M/P) will decrease - demand decreases. If the money supply was increased and
thus aggregate demand increased, there would be a movement up along the Long run aggregate
supply curve. The cost of this is a permanently higher level of prices. As a result of increase in
aggregate demand, the economy will gravitate toward the natural level more quickly
AGGREGATE DEMAND DETERMINANTS:
An assortment of ceteris paribus factors other than the price level that affect aggregate demand,
but which are assumed constant when the aggregate demand curve is constructed. Changes in
any of the aggregate demand determinants cause the aggregate demand curve to shift. The
specific ceteris paribus factors are commonly grouped by the four, broad expenditure categories-consumption expenditures, investment expenditures, government purchases, and net
exports.Aggregate demand determinants are held constant when the aggregate demand curve is
constructed. A change in any of these determinants causes a shift of the aggregate demand
curve. The determinants work through the four aggregate expenditure categories--consumption
expenditures, investment expenditures,government purchases, and net exports. Should any
specific aggregate demand determinant change, it must affect the aggregate demand curve
through one of the four aggregate expenditures.
A few of the more notable determinants that tend to stand out in the study
of macroeconomics and the analysis of the aggregate market are:Interest Rates: Interest rates
affect the cost of borrowing and thus both consumption and investment expenditures. Interest
rates are a component of investment-driven business cycles and play a key role in monetary
Federal Deficit: The federal deficit is comprised of government purchases, which is one of the
four basic expenditures, and taxes, which affects the amount of disposable income available for
consumption. Changes in the federal deficit commonly result from the use of fiscal policy.
Expectations: Household and business expectations of future business-cycle conditions,
especially inflation and unemployment, affect consumption and investment expenditures.
Money Supply: The quantity of money circulating in the economy directly affects the buying
capabilities of all four sectors and thus affects all four expenditure categories--consumption,
investment, government purchases, and net exports. Control of the money supply is the key to
Consumer Confidence: The degree of household sector optimism or pessimism affects current
A host of other specific aggregate demand determinants also surface from time to time,
including exchange rates between domestic currency and foreign currency, the accumulation
of physical wealth especially business capital and household durable goods, and the
accumulation of financial wealth especially changes in the value of the stock market.
The exhibit to the right presents a standard aggregate
demand curve. It is negatively-sloped, capturing the specific
one-to-one relationship between the price level and
aggregate expenditures. The ceteris paribus factors, that is,
the aggregate demand determinants, are assumed to remain
constant with the construction of the curve.
Analogous to other determinants, aggregate demand
determinants shift the aggregate demand curve. A change in
any of the determinants can either increase or decrease the
aggregate demand curve. An increase in aggregate demand is
illustrated by a rightward shift in the aggregate demand
curve. A decrease in aggregate demand is illustrated by a
leftward shift. Click the [Increase in AD] and [Decrease in AD] Начало формы
buttons for a demonstration.
What does it mean to have an increase in demand? It means that for every price level, the four
sectors have an increase in aggregate expenditures on real production. A decrease in demand is
the exact opposite. For every price level, the four sectors have a decrease in aggregate
expenditures on real production.
45. Aggregate supply - is the total amount of goods and services produced in the economy ( in
terms of value ) . This concept is often used as a synonym for gross domestic product.
Aggregate supply curve AS ( from the English aggregate supply) shows how much of aggregate
output can be offered to the market by manufacturers for different values of the general price
level in the economy.
Non-price factors, the aggregate supply are changes in technology , prices of resources , taxation
, etc. Companies that graphically reflected a shift of the curve AS. For example , a sharp rise in
prices for oil and oil products leads to higher costs and lower volume of supply at any given price
level in the economy, which is interpreted graphically shift the AS curve to the left. High yield ,
caused by unexpectedly favorable weather conditions will increase aggregate supply and affect
the schedule shift the AS curve to the right.
Form AS curve is interpreted differently in classical and Keynesian schools. Change of the
aggregate supply under the influence of the same factor , say, aggregate demand may be
different . It depends on whether we take into account the changes in supply have occurred in a
short period of time or we are interested in long-term effects of fluctuations in aggregate
The difference between short-term (usually 2-3 years) and long-term periods in macroeconomics
associated mainly with the behavior of real and nominal variables. In the short term nominal
values (prices, nominal s / n , the nominal interest rate ) under the impact of market fluctuations
change slowly , usually talk about their relative "rigidity" . Actual quantities (volume of output,
employment, real interest rate ) - more mobile , "flexible" . In the long term , on the contrary ,
the nominal values as a result of change is strong enough - they are considered "flexible" , but
real change very slowly , so that for the convenience of analysis, they are considered as
Classical model describes the behavior of the economy in the long run . Analysis of aggregate
supply in the classical theory is built on the basis of the following conditions :
Markets are competitive;
Issue volume depends only on the number of factors of production ( labor and capital) and
technology and does not depend on the price level;
Changes in factors of production and technology is slow ;
Economy is operating at full employment of factors of production , therefore, is a potential
production volume ;
Prices and nominal wages - flexible, they support the balance changes in the markets.
AS curve is vertical in these circumstances at issue at full employment factors.
Explanation of the form of the AS curve in the classical model is associated with the analysis of
the labor market , since labor is the main factor that changes which may affect the level of
output in the short run .
Growth of the general price level reduces real wages, hence the demand for labor exceeds the
supply of labor ( workers and employers react to changes in the real and not the nominal s / n ) .
This will cause an increase in nominal wages. As a result, the real increase to the original level
that will restore equilibrium in the labor market , the previous level of employment and,
consequently , the volume of virtually unchanged (subject to only minor short-term fluctuations )
. Adjusting nominal wages are fast , so any change in the price level aggregate supply (
production volume ) remains unchanged at the level of potential (Y *).
AS shifts are possible only to the extent that the factors of production or technology. If there are
no such changes , the curve in the long run AS (LRAS - a portmanteau . Long run aggregate supply
curve) is fixed at the level of potential output , and any fluctuations in aggregate demand is
recorded only at the level of prices (Figure number 3).
Keynesian model considers economic performance over relatively short periods of time . Analysis
of aggregate supply is based on the following assumptions :
Economy operates in a part-time factors of production ;
Prices , nominal wages and other nominal values - relatively rigid , slow to respond to market
Actual quantities (volume of output, employment, real wages , etc.) are more flexible , more
responsive to market fluctuations .
AS curve in the Keynesian model is horizontal ( in extreme cases - under severe price and the
nominal s / n ) or has a positive slope (with rigid nominal s / n and relatively mobile prices) .
The reasons for the relative stiffness values in the short term are : duration of employment
contracts , government regulation of nominal s / n , stepwise changes in prices and wages ( when
firms change their prices and s / n, gradually , "chunks ", with an eye on the competition ) , the
validity of contracts for the supply of raw materials and finished products, trade union activities ,
the effect of the "menu" , etc.
For example, if the cost of reprinting catalogs with prices for manufactured products are large
enough and the process takes time to reissue (the " menu "), then an increase in the firm's
demand for some time will seek to hire additional workers, increase production and meet the
demand of buyers in the same price level. In this extreme case, the price is hard vacation AS
curve is horizontal .If nominal wages are rigid enough and the prices are relatively flexible , their
growth due to increased aggregate demand will lead to a drop in real wages , labor becomes
cheaper, which will boost the demand for labor by firms . Using a larger amount of labor will
increase release. Thus at a time when nominal wages does not change , there is a positive
correlation between the level of prices and production volume . AS curve under these conditions
has a positive slope (Figure number 4). Reasonable assumptions about the relative rigidity for
short time intervals confirmed typical behavior business. Under normal conditions, the majority
of firms have excess capacity , stocks of finished goods in warehouses , as well as the ability to
use overtime or hire additional workers (especially in under-employed ) . Therefore, in the short
term, increased demand can always be met by an increase in sales volume without any
significant price changes.
46. The essence of money , their function and role.
The essence of money is that it is a specific product with a natural form which merges the social
function of a universal equivalent .
Value - is the social labor expended on the production of goods. Different products have
different prices , that is, each of them had invested various labor. Different prices of
commodities creates a need for it somehow measure, to evaluate .And here comes the concept
of exchange value. Exchange value - the ability of some of the goods exchanged for others in
certain proportions . On the other hand , stands the concept of use-value of the goods, ie the
ability to meet people's needs . In an exchange of goods should have an exchange value for the
seller and use value for the buyer.
Barter has evolved over time , and with it, and changed the form of value . The first form of value
- simple. Randomly appeared on the market looking for their products antipodes for exchange.
For example, if the blacksmith made it wanted to change the ax on a bag of grain, it was
necessary to look farmer who wants to change their grain to the ax . Already there has been
some the comparison values (1 ax = 1 bag of grain ), but it is intermittent . The second form of
value - detailed . With the development of commodities on the market there are other products
that meet each other and relate to specific proportions (1 ax = 1 bag of grain = 3 = 1 clay pot pig ,
etc.) . The third form - general . Sale of goods becomes the target of the manufacturer, but for
the product of his labor , it requires some universal equivalent value. Initially, this was the
equivalent of such commodities as cattle , furs, honey , and other slaves . Equivalents changed
rapidly , as they simply do not meet the equivalent properties - they do not always and not
everywhere can be easily exchanged for other goods. Finally , there is a fourth form of value money . In the development of commodity humanity has to ensure that the most convenient
equivalent value of the goods is a metal .
To become a commodity money is necessary to satisfy a number of conditions . First, this
product should be recognized and the buyer and seller. Secondly, this product should be
compact , and its physical properties should allow him to communicate repeatedly without loss
of value . Third, this product should fulfill the role for a long time equivalents . In this respect,
metals , namely gold and silver were the best money - equivalents .
Money still retain the properties of the goods they may have a use value (eg , in the form of gold
jewelry satisfies aesthetic needs ) and exchange value ( for the manufacture of goods , money
expended labor) . But this is a special commodity , as it increases the use value (money can
satisfy any need .) On the other hand , the money becomes the spokesman of use values of other
goods through its cost . Thus, the money - it spontaneously arose goods acting as universal
equivalent and resolve contradictions between use value and exchange value .
The essence of money is manifested in the unity of the three properties : • universal direct
exchangeability ; • crystallization of exchange value ; • materialization of universal labor-time .
Therefore, the money arising from the resolution of contradictions Item ( use value and value )
are not technical means of circulation and reflect deep social relations .
In its evolution, money appears in the form of metal ( copper , silver and gold ) , paper , a new
kind of credit and credit money - electronic money.
Money performs five functions: a measure of value , medium of exchange , a means of hoarding ,
savings and savings , payment , world money.
^ Function of money as a measure of value. Money as a universal equivalent measured value of
all goods . But do not make money comparable products and the amount spent on their
production of socially necessary labor . With metal handle this function was performed by real
money ( gold and silver) , which themselves have value , and the value of goods was expressed
perfectly , ie as represented mentally money.
^ Function of money as a medium of exchange. Commodity circulation includes two
metamorphosis ,ie two changes to the forms of value : the sale of one product and buy another .
Singularity of the function of money as a medium of exchange is that this function is performed ,
first, real, or cash , money , and secondly, the cost of the signs - paper and credit money .
^ Function of money as means of payment. This feature is the result of the development of
credit relations in the capitalist economy . In this case, the money is used when : • the sale of
goods on credit, the necessity of which is associated with different conditions of production and
sale of goods, different duration of their production and circulation , the seasonal nature of
production ; • payment of wages to workers and employees .
^ Function of money as a means of hoarding , savings and savings. Accumulation function
previously performed full of treasures and real money - gold and silver. Since money is the
universal embodiment of wealth , there is a tendency to their accumulation . While money falls
out of circulation and turn into a "golden doll ", ie in treasure.
Pursuit of maximum profit prompts businesses not to store money as a dead treasure , and keep
them out of circulation.
Today, gold along with the credit money is used to create a centralized state reserves of the
country , concentrated in the central banks.
^ Function of world money . This f. manifested in the relationship m / s from countries or m / y
jur. andnat - E persons in different countries in the form of foreign trade relations , international
loans , services external partner . Money functions as: 1) the universal means of purchase , and
2) the universal means of payment , and 3) general materialization of social wealth.
1. The social role of money , their function in the economic system is that they act as a link
between producers .Money is like a general condition of social production, "tool" in the
commodity economy .
2 . Money plays a qualitatively new role : they become capital , or self-expanding value. Money
turns into money-capital in the reproduction of individual capital because their function is
included in the circuit of industrial capital and they are the starting point and the result of the
last circuit .
47.In economics, the money supply or money stock, is the total amount of monetary
assets available in an economy at a specific time. There are several ways to define "money," but
standard measures usually include currency in circulation and demand deposits (depositors' easily
accessed assets on the books of financial institutions).
Money supply data are recorded and published, usually by the government or thecentral bank of
the country. Public and private sector analysts have long monitored changes in money supply
because of its effects on the price level, inflation, theexchange rate and the business cycle.
That relation between money and prices is historically associated with the quantity theory of
money. There is strong empirical evidence of a direct relation between money-supply growth and
long-term price inflation, at least for rapid increases in the amount of money in the economy. That
is, a country such as Zimbabwe which saw rapid increases in its money supply also saw rapid
increases in prices (hyperinflation). This is one reason for the reliance on monetary policy as a
means of controlling inflation.
The nature of this causal chain is the subject of contention. Some heterodox economists argue that
the money supply is endogenous (determined by the workings of the economy, not by the central
bank) and that the sources of inflation must be found in the distributional structure of the
In addition, those economists seeing the central bank's control over the money supply as feeble
say that there are two weak links between the growth of the money supply and the inflation rate.
First, in the aftermath of a recession, when many resources are underutilized, an increase in the
money supply can cause a sustained increase in real production instead of inflation. Second, if
the velocity of money, i.e., the ratio between nominal GDP and money supply, changes, an
increase in the money supply could have either no effect, an exaggerated effect, or an
unpredictable effect on the growth of nominal GDP.
Definition of 'Monetary Aggregates'
Broad categories measuring the total value of the money supply within an economy. In the United
States, the standardized monetary aggregates and their measured contents are known as:
M0 – Physical cash and coin
M1 – All of M0 plus demand deposits, traveler's checks
M2 – All of M1 plus savings deposits, money market shares
There is also an M3 aggregate that includes larger (greater than $100,000) time deposits and
institutional funds. The M3 measure is no longer tracked by the Federal Reserve as of 2006,
although analysts still calculate the figure broadly. The Federal Reserve uses monetary aggregates
to measure the effects of open-market operations, like changing the discount rate or trading in
Monetary aggregates are watched closely by economists and investors, as they give a clear picture
of the true size of the "working" money supply. Frequent reporting of the M1 and M2 measures
(data is published weekly) allows investors to measure the rate of change in the monetary
aggregates and overall monetary velocity.
If the monetary aggregates are growing too quickly, it could trigger inflationary fears (more
money chasing after the same amount of goods and services leads to rising prices) and cause
central-banking groups to raise interest rates or otherwise halt money-supply growth.
While the monetary aggregates were once key in determining overall central-banking policy, the
past few decades have shown a lower correlation between changes in the money supply and key
metrics like inflation, GDP and unemployment.
Narrow money (M1) includes currency, i.e. banknotes and coins, as well as balances which can
immediately be converted into currency or used for cashless payments, i.e. overnight deposits.
"Intermediate" money (M2) comprises narrow money (M1) and, in addition, deposits with a
maturity of up to two years and deposits redeemable at a period of notice of up to three months.
Depending on their degree of moneyness, such deposits can be converted into components of
narrow money, but in some cases there may be restrictions involved, such as the need for advance
notification, delays, penalties or fees. The definition of M2 reflects the particular interest in
analysing and monitoring a monetary aggregate that, in addition to currency, consists of deposits
which are liquid.
Broad money (M3) comprises M2 and marketable instruments issued by the MFI sector. Certain
money market instruments, in particular money market fund (MMF) shares/units and repurchase
agreements are included in this aggregate. A high degree of liquidity and price certainty make
these instruments close substitutes for deposits. As a result of their inclusion, M3 is less affected
by substitution between various liquid asset categories than narrower definitions of money, and is
therefore more stable.
Pool of money available to the population , economic entities , states , local governments are
Revolving funds are a combination of cash invested in working capital funds and treatment. Some
of their functions in the sphere of production , the other - in the sphere of circulation. Current
assets - is to advance the construction organization in the current funds and treatment ( less
depreciation ) pool of money , which mediates their movement in the process of circulation and
ensures the continuity of production and circulation of construction products (Fig. 12.1) , as a
source of funding for current and (partial) capital costs of a construction company , and consists of
circulating material and financial assets.
Capital expenditures - a collection of materials, labor and cash macro - and micro allocated for
simple and expanded reproduction of capital is the cost , which is compensated by increases and
Financial capital , money - a set of funds intended for the purchase of elements of fixed capital
and working capital , as well as the monetary expression of the value of securities .
Governing income - is the totality of funds transferred from higher to lower-level budgets to
control ( balance ) their costs and revenues.
Governing income territorial budgets - a set of funds transferred from higher to lower-level
budgets to control their income and expenses.