H2 Economics notes

Note:ThebuildingblocksunderMacroeconomicsrefertostandardphrasingwhichearnyoucontentmarks.Asthechaptersinmacroeconomicsareallinter-related,itisgoodtostructuredifferentcontentpartsinyourbrainasbuildingblocks.AndsoinessaysandhigherorderCSQquestionsyoucanspamtherelevantbuildingblocks:) ThesectionunderMicroeconomicsisjustnotestokeepinmindforexams. MacroEconomics Buildingblocks Briefmultipliereffect(needifendgoalisunemployment)● ChangeinautonomouscomponentofADcausesamorethanproportionatechangeinRNY● Themultipliereffectisbasedonthepropositionthatexpenditure(order!)generatesincomeandincome(RNY)leadstoexpenditure(Cd)(rememberthatEcomesbeforeYinthealphabet).Orreversely,“basedonthepropositionthatfallinexpenditurecausesfallinincome,andfallinincomeleadstofallinexpenditure.”○ ORThechangeinautonomouscomponentofADcausesachangeinRNY, inducingasmallerchangeinCdduetoleakagesintheformofsavings,taxesandimportswhichinturncausesfurtherroundsofchangeinRNYandinducedCd● Thecyclerepeatsandateachsuccessiveround,thedecreaseinincomegetssmallerandsmallerbecauseofleakagesintheformofsavings,taxesandimports.● Eventually,themultiplierprocessendswhenthefallinwithdrawalsequalsthedecreaseininitialinjectionandtheeconomyreturnstoequilibriumatalowernationalincome.–ADanalysis:unplannedfallininventories>firmsincreaseproduction>deriveddemandforlabourincreases>factorpaymentispaidtohouseholds>increaseinrealnationalincomeinducesanotherroundofincreasedADviathemultipliereffectthatisbasedonthepropositionthatexpenditurecreatesincomeandincomecreatesexpenditure>thisprocessrepeatsuntiltotalincreaseinwithdrawalsisequalinitialincreaseininjection>RNYincreasesmorethanproportionately>Y0toY1>illustratingactualeconomicgrowth

Briefermultipliereffect● (ADincreases)● Themultipliereffectisbasedonthepropositionthatexpendituregeneratesincomeandincomegeneratesexpenditure(order!)● CountrywillhaveamorethanproportionateincreaseinRNY MPM→ksize(whySGmultiplierissmall)● SGlacksnaturalresources● Importreliant,importsalotofrawmaterials,semi-finishedgoodsandfinishedgoods→highMPM● Mostoftheexpenditureleaksoutintheformofimports● Lessresourcesarerepumpedbackinthecircularflowtofurtherincreaseexpenditureandincomeineachsuccessiveround● DecreaseinADissmallerascomparedtoifthemultipliersizewaslarge MPC→ksize(whyachievinginclusivegrowthhelps)● Thepoorhavenotmettheirbasicnecessities->theirMPCishigh● WhenthereisanincreaseinautonomouscomponentofAD,incomeincreases,inducingasmallerincreaseinCd● Partoftheincreaseinincomeisleakedoutintheformofsavings,taxesandimports● AsMPCislarge,theincreaseinCdtakesupalargeproportionoftheincreaseinincome● TheincreaseinCdthenincreasesincomeasecondtime,whichtheninducesyetanotherincreaseinCdthatisevensmaller● Thisprocessrepeatsuntilinitialinjectionsisequaltototalincreaseinwithdrawals● AstheleakageisasmallpartoftheincreaseinincomeduetolargeMPC,thisprocessrepeatsformanyrounds● ThemorethanproportionateincreaseinRNYislarger● Sizeofmultiplierislarge ADanalysis(Eli’sstory)● AD=C+I+G+(X-M)● ADincreasesfromAD0toAD