Nominal GDP Value of gross domestic product in a particular year measured in that year's prices - unadjusted GDP (nominal)

Transcription

1 WEEK 5 Grss dmestic prduct Single number which culd summaries the utput f the ecnmy Ttal mney value f all final gds and services prduced within a natin's brder during a given perid f time (usually 3 mnths r a year) Mney value: Includes dllar value f all final gds and services prduced by freigners and crpratins lcated in cuntry Excludes mney value f all final gds and services prduced by the cuntry's citizens and crpratins living in anther cuntry Final gds and services: gds and services said fr final usage and nt thse used t make ther prducts Nminal GDP Value f grss dmestic prduct in a particular year measured in that year's prices - unadjusted GDP (nminal) Real GDP Value f all final gds and services prduced in the ecnmy, measured in dllars adjusted fr inflatin Hw t adjust: Price index: a measure f average prices fr a given set f gds and services at a given lcatin and time GDP deflatr: a price index fr any given year Unemplyment An imprtant measure f an ecnmy's perfrmance as it represents The level f underutilizatin f resurces - labur Whether the ecnmy has created jbs r nt The ecnmy is expanding r cntracting Unemplyed: the labur frce is the fractin f the wrking age ppulatin that is nt emplyed r actively seeking emplyment Des nt include thse wh are nt actively seeking a jb Underemplyed Emplyed persn want t wrk mre hurs Nt captured in unemplyment rate Participatin rate The wrking age ppulatin that is emplyed r seeking emplyment

2 Types f unemplyment Seasnal Varies with the seasns r special ccasins, such as that assciated with the decrease in retail salespeple fllwing Christmas, r summer peak due t graduate student enter the labur frce n a temprary basis Industries like cnstructin, agriculture and turism regularly face seasnal unemplyment Frictinal Unemplyment assciated with peple mving frm ne jb t anther r entering int the labur frce It is nt always represented as a wasted resurce, it takes time fr wrkers t search fr the jbs that best suits their tastes and skills Structural Referred t as lng term unemplyment Results frm structural shifts f the ecnmy, such as a mismatch between the skills required by the newly created jbs and the skills pssessed by thse wh have lst their jbs in declining industries Cyclical Increase in unemplyment that ccurs as the ecnmy slws dwn and decreases when the ecnmy grws Inflatin Percentage change in price level frm ne year t next Inflatin effect n: Lenders Value f mney lent ut des nt equal mney received back Interest rates help t adjust fr inflatin Taxpayers Fcus n investrs, all return n investment are taxed After-tax returns are "negative" if inflatin is high Hlders f cash (currency) If prices rise, cash lses its value The lss in value f cash due t the effects f inflatin, is inflatin tax Tw ecnmy wide impacts f inflatin Variability in relative prices: resurces devted t mitigating the impact f inflatin and taking advantage f price discrepancies Risk and uncertainty generated frm inflatin: if indexing were nt perfect, the resulting uncertainty makes it difficult t plan the future The ecnmies that experience high inflatin tend t demnstrate slwer real ecnmic grwth Indexatin The autmated adjustment f a variable t an index, the dllar amunt increase with inflatin as indexatin Welfare payments and tax rates are indexed (value increases with the value f the index t which they are cnnected T certain extent, indexing sftens the effect f inflatin Hyperinflatin Mnthly inflatin rate >50% leads t hyperinflatin Supply f mney went ges ut f cntrl Standard t supply mney are set by gvernment

3 Huge financing need (war perid) Deflatin Variability in relative prices Increase in uncertainty Deflatin hurts the brrwers as they nw pay back mre mney Reduced real GDP may hld back cnsumers and investrs purchasing decisins, in an endless dwnward spiral Inflatin and supply f mney The mre mney is supplied t an ecnmy (help r available t husehlds, firms and gvernments) The faster the mney is supplied t an ecnmy, the faster it grws Which results in a higher inflatin Central banks exist t versee the prcess f mney creatin (gvernment institutins-rba) Mnetary plicy t stir the ecnmy away frm high inflatin Mnetary plicy is actins by a cuntry's central bank (RBA) i.e. cntrl the level f interests Aggregate demand and interest rates Inflatin rate and interest rate Increasing interest rates leads t prductin ging dwn therefre inflatin rate decreasing Real interest rate and capital market Interest rates influence the level f aggregate demand thrugh the cst and availability f credit within a clsed ecnmy Aggregate expenditures influenced by real interest rates Cnsumptin Higher interest rates means lwer aggregate expenditure because Reduced the prfitability f investment, business scale back investment prjects Affects cnsumer lans and mrtgages, wh cut back n large purchases Investment Cst f firms' brrwed funds t finance their investment is the real interest rate Increase in interest rates means fewer prfitable prjects Gvernment purchases Net exprts RBA's plicy rule Mnetary plicy rule: adjustments by the RBA t interest rates in rder t keep the rate f inflatin within 2-3% per annum n average ver the curse f a typical business cycle If inflatin is t lw, the RBA will lwer the real interest rate t bst aggregate expenditures Inflatin & GDP Aggregate demand - inflatin (ADI) curve Shws the negative relatinship between inflatin and spending

4 If the inflatin is large enugh t push the inflatin rate utside the target range will prduce a mnetary plicy respnse ADI curve determinants Hw the central bank respnds and adjusts interest rates as inflatin changes The impact f the real interest rate n the decisins by husehlds and firms abut hw much t spend n cnsumptin and investment The negative relatinship between inflatin and shrt-run equilibrium GDP represented by the ADI curve is like: 1. Increases in inflatin 2. Increases in real interest rate 3. Decrease in aggregate demand 4. Lwer equilibrium utput (GDP) The reserve bank and interest rate Plicy and interest rate The dwnward slpe f the aggregate demand-inflatin curve (ADI) reflected the RBA's plicy reactin as inflatin varies: The structure: generally lenders request a higher interest rate t cmpensate fr lnger term f maturity and fr less liquidity Interest rates tend t mve tgether with rates n ne year bank depsits, ninety day bills, cash rate The influence f RBA n cash rate RBA's pwer Cntrl ne interest rate means cntrl the whle structure f interest rates in the ecnmy Cash rate and cash market Banks brrw and lend funds t each ther in a shrt term manner (vernight) The arrangements fr the purchase and sale f such funds (r balances) is cash market The depsits f banks held with the RBA and tradeable thrugh the cash market is exchange settlement (ES) funds, r ES balances The price charged is cash rate which is the utcme f supply and demand The RBA can cntrl the cash rate by cntrlling the supply f ES funds via the pen market peratins 'central banks' purchase and sell gvernment bnds in the pen market ES funds

5 Banks hld funds in their ES accunts because they are required by law t make tw types f payments using ES funds: Payments t gvernment department r agency Payments by banks required t be made using ES funds between each ther Demand f ES funds The need t make payments using ES funds generates a demand f ES funds Each bank must maintain a psitive ES balance at all times, if it is negative: Brrw frm ther banks - put upward pressure n the cash rate Brrw frm the RBA - pay extra 0.25% interest rate than the cash rate Increase in the cash rate by the RBA deliberately restrict the supply f cash - a tightening f mnetary plicy The RBA reduces the cash rate by lsening mnetary plicy and injects mre cash int the system than the banks need t hld The cash rate is the pprtunity cst f hlding ES balance by lending the funds vernight n the cash market, t earn very lw interest Higher ecnmic activity leads t mre inflws and utflws f ES funds therefre higher ES balance required The shift in curve is influenced by: The level f ecnmic activity The willingness f banks t lend Supply f ES funds The RBA creates a demand fr ES funds, and als cntrl its supply via the pen market peratin Open market peratin reduced ttal stck f ES funds and thus increase cash rate

6 Open market sell decrease the ttal supply f reserves, shifting supply curve t left Equilibrium The cash rate is utcme f supply and demand in the market fr ES funds at the equilibrium price Cash rate summary The cash is determined by supply and demand in the cash market The RBA is able t keep the cash rate equal t its target by using pen market peratins t cntrl the supply f ES funds Summary GDP is the mst cmmn measure f the value f natinal utput. The real GDP is the nminal GDP adjusted fr the price level Unemplyment impses csts bth n individuals and n the whle sciety, which lses what the unemplyed wrkers culd have cntributed and must supply what is needed t supprt them in ther ways Inflatin and the impact f inflatin The capital market - fr saving and investment - determines the level f real interest rate in the ecnmy The RBA's mnetary plicy rules t impact upn ADI curve The structures and functins f interest rate, cash rate in Australia