ECO 099 - @MATT_FATHIR

TYPES OF ECONOMY Strengths

1. No serious macroeconomic
A) Capitalists Economic System problems
Characteristics 2. Equitable income distribution
1. Absence of government 3. Minimal social repercussion
intervention 4. Price control - affordable
2. Consumer sovereignty
3. Private ownership Weakness
4. Open competition 1. inefficient resource use - no
5. Profit motivated price mechanism
6. Price mechanism 2. Slow economic growth - no
competition and motivation
B) Free Market Economic 3. Bureaucratic - no economic
System freedom
Characteristics
1. Free to set prices D) Mixed Economy
2. Free to compete Characteristics
3. Free to earn profits 1. Public and private owns
4. Free to be an entrepreneur property
5. Free to be an investor 2. Price mechanism and
government intervention -
Strengths decision making
1. Economic problems solved by free
forces Strengths
2. Higher efficiency - profit motivation 1. All strength of free market
3. Optimum resource utilization - and planned economy
competitiveness 2. Cooperation - private and
4. Utility maximized - consumer government
sovereignty and wider choice
Weakness
Weakness 1. Weakness of free market and
1. Income inequality planned economy - depends
2. Human welfare declines - profit on who plays main role
motivation
3. Monopoly power - private ownership

C) Planned Economy
Characteristics
1. Government control
2. No consumer sovereignty
3. State owns property
4. Absence of competition
5. Work for state glory
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GROSS DOMESTIC PRODUCT
(GDP)
Definition of GDP
value of all final goods and
services produced in a country
within a given period
Method to calculate GDP:
1) Product method
Definition
total value of all goods and
services in a given period AFTER
deducting the price of the goods
and services used to produce
them
GDP = Primary + Secondary +
Tertiary
2) Income method
Definition:
income generated from goods
and services
GDI = Interest + Profit +
Wages + Rent
3) Expenditure method
Definition:
summation of all final demands
(C) = Consumer expenditure
(I) = Investment expenditure
(G) = Government expenditure
(X) = Exports of goods and
services
(M) = Import of goods and services
GDE = C + I + G + X - M +
Inventory
GROSS NATIONAL PRODUCT
(GNP)
Definition of GNP:
total of income generated from
abroad and GDP
GNP = GDP + Net income from
abroad
National Income:
Some countrys capital
equipment wears out annually
National Income = Net national
income = GNP - Depreciation
Personal Income:
Total income a person receives
Personal Income = National
income - Undistributed profits -
Social contributions + Transfer
payment
Disposable Income:
Measurement of funds
available for household
expenditure after taxes
DPI = Personal income -
Income tax
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USES IF GDP DATA
1. Measure standard of living
Availability of goods and
services
When national income is high,
standard of living is high
2. Expenditure pattern
Reflects various types of goods
and services made available
Conclude type of economic
system
3. Income distribution
Income approach gathers data
from:
i. Wages and salary
ii. Rental
iii. Profits
iv. Interest
4. National planning
Government uses data from
national income information to
plan
Government can decided
whether its actors needs
stimuli
5. Comparison over time and
between countries
Depicts whether the economy
is growing, stagnant or
declining
Problems from comparison
1. Changes in prices
2. Changes in quality
3. Composition of goods and
services
4. Working condition and time
5. Population size
6. Composition of government
expenditure
7. Income contribution
PROBLEMS OF ESTIMATING
INCOME DATA
A) CONCEPTUAL
i. Farm products kept for self-
consumption
Not counted as national income
data
ii. Services of housewives
No price and no market
iii. Unpaid services
ie. Cutting friends hair
iv. Non monetized trade
Rural folks has no specific
occupation
B) STATISTICAL/PRACTICAL
i. Output in subsistence sector is
not informed. ie. Cottage and
small-scale
ii. Large regional diversities -
language and customs
iii. Indifferent to Statistic
Department - false data and
non-cooperative
iv. Statistical staff are untrained
and inefficient
Limitation of use:
1. Does not measure negative
externals.
2. Does not measure black
market and illegal
transactions
3. Change in quality and
inclusion of new goods
4. Leisure/human costs
5. Non-market production
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MACROECONOMICS Government keeps inflation low

Definition of macroeconomics:
the study and observation of the
economy as a whole.
Macroeconomics objectives
(ELPF):
1) Economic growth
Definition:
percentage increase of output
over a 12-month period
Long-term expansion of a
countrys productive potential
Short-term growth is measured
by annual % change of real
national output - aggregate
demand (C+I+G+X-M)
Long-term growth is measured
by the increase in trend of
potential GDP
and stable
High inflation - lower money
value - lower spending power -
lower standard of living
Excess demand causes inflation
- too much money chasing too
few goods
Stable prices increases the real
output of a country
Inflation causes difficulty in
predicting the economys
future
4) Favorable balance of payments
Countrys balance of payment -
all transactions between locals
and rest of world
Spend more foreign currency =
deficit balance of payments

2) Low Unemployment
Definition:
number of people actively
seeking for a job but currently
jobless
Unemployment is (1) waste of
human resource and (2) drains
government revenue
Loss of potential output and
income
Cyclical phenomenon - ascends
and descends economic cycle
Zero unemployment is
impossible - change jobs or
fresh graduate

3) Price stability
Definition:
general increase in price level
Inflation rate measured by
using the Consumer Price
Index
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DEMAND
Definition of demand:
ability and willingness to buy at a
particular price and period
5. Quality associated with price
Price of a product symbolizes
its quality
SUPPLY

Definition of market demand: Definition of supply:

sum of all individual demands at price between goods and
a particular price services and quantity that firms
are wiling to offer
Law of demand:
When price is high, Definition of quantity supply:
Less quantity demanded, amount of product a firm is
When price falls, willing and able to offer for sale at
Quantity demanded rises a given price and period

Determinants of demand Law of supply:

1. Price of product itself (P) Increase in price will lead to an
2. Price of related product (P) increase in quantity offered
3. Income (I)
4. Taste and preference (T) Determinants of supply
5. Population (N) 1. Price of related product (P)
2. Cost of production (C)
Exceptional demand 3. Technology (T)
Exceptional demand occurs 4. Number of suppliers (N)
because:
1. Giffen goods
Special form of goods that
takes a large portion of a poor
mans income

2. Goods of snob appeal

A product that is unnecessarily
of high quality but a symbol of
wealth

3. Expectation of price increase

or decrease
If price of product is expected
to rise, demand increases and
vice versa.

4. War
Disruption in the supply of
products
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MONEY AND BANKING
Definition of money:
anything that is accepted as a
medium of exchange
BARTER TRADE
Definition
Exchange of goods for goods
without the use of money
Problems
i. Double coincidence of wants
Buyer needs to agree to sellers
terms and seller needs to agree
to buyers terms
ii. Exchange rate
No standard value and
arbitrarily determined
iii. Divisibility
Cannot be divided into smaller
units without being damaged
iv. Portability
Some goods cannot be
transported due to its nature
FUNCTIONS OF MONEY
i. Medium of exchange
Provides convenient way of
exchange - eliminates double
coincidence
ii. Unit of account
Consistent way of quoting price
- yardstick of measurement
iii. Store of values
Transfer purchasing power from
present to future
iv. Standard of deferred payment
Facilitates contracts and
granting loans
CALCULATION OF MONEY
SUPPLY
Money in Circulation:
Notes and coins issued by
Central Bank
Demand Deposits:
Current accounts
M1 = Currency in circulation +
Demand deposits
Narrow Quasi-Money:
Sum of deposits/interests
bearing instruments
M2 = M1 + Narrow Quasi-
Money
Foreign Currency Deposits:
Deposits of foreign currency
held by residents and foreign
entities
NQM = Savings Deposits +
Fixed Deposits + NIDs + Repos
+ Foreign Currency Deposits
Time Deposits:
Interest-earning deposits with
specified maturity
Fiat Money:
Money declared by government
as legal tender - notes and
coins
Broad Quasi Money:
Amount of interest-bearing
deposits/instruments
Broad Money Supply = M2 +
Fixed Deposits + Savings
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Deposits@Financial Ins. FUNCTIONS OF CENTRAL

BANKS

1. Issues coins and notes

Over issue causes inflation
Too little money issued causes
deflation

2. Governments bank
Adviser to governments
macroeconomic policies
Manages public debt

3. Banks bank
Keeps commercial banks
reserves
Clearing house for commercial
banks
Advises commercial banks on
financial matters
Maintain reserve accounts for
financial institutions
Provides loans to financial
institutions

4. Lender of last resort

Avoids public panic after all
avenues are exhausted

5. Carries out nations

monetary policy
Control activities of commercial
banks and financial institutions

FUNCTIONS OF COMMERCIAL
BANKS

1. Accept deposits
i. Demand deposits
Current account
Earns no interest
Service charge by banks
No notice of withdrawal
Transactions via cheques only
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ii. Fixed deposits
Has maturity date
Withdrawal before maturity
loses interest
Earns interest
Earns higher returns than other
accounts
iii. Savings deposits
Common form of savings
Withdrawal at any time
Earns marginal interest
Transactions via ATM cards
2. Provide loans
i. Direct loans
Given to clients as long as
fulfills criteria required
ii. Overdrafts/Advance
Arranged to meet unexpected
demand for money
iii. Discounting bills of exchange
Banks collects money when the
bill matures
3. Provide cheque system
Allows current account holders
to issue cheques
Paying and receiving banks
does paperwork - money
transfer
4. Provide other services
i. Keeps clients valuables
ii. Night-safe facilities
iii. ATMs facilities
iv. Payment and collection of
shares and bonds
v. Trustee and executor for will
vi. Provides financial advice
vii. Provides cashless transactions
PUBLIC POLICY
1) MONETARY POLICY
Definition of Monetary Policy:
deliberate exercise of central
bank to induce expansions and
contractions in the money supply
Expansionary Monetary Policy
Cheap monetary policy
Increase money supply
Contractionary Monetary
Policy:
Restrictive/tight monetary
Reduce money supply
Aims of Monetary Policy
1. Price stability
Changes in general level of
prices
Price fluctuations disrupts
economic progress
2. High rate of economic growth
Price stability must first be
achieved to have high
economic growth
3. Eliminate fluctuations in
production and employment
Occurs if excessive high or low
demands
4. Full employment of resources
Under utilization of resources
leads to wastage
Tools of Monetary Policy
1. Reserve ratio
Commercial banks maintain
reserves equal to minimum
percentage of deposits
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Expansionary:
decrease in reserve ratio
More money can be lent
Contractionary:
increase in reserve ratio
Less money can be lent
2. Discount rate
Interests charged on depository
institutions loans from Central
Bank
Expansionary:
decrease in discount rates
Promote commercial banks to
borrow
Contractionary:
increase in discount rates
Demote commercial banks to
borrow
3. Open market operations
Buying and selling securities
Buying Securities
Buying from banks:
i. Central Bank buys from bank A
ii. Increases bank As reserves
accordingly
Buying from non-banks:
i. Central Bank pays via cheques
ii. Seller deposits cheque into
bank
iii. Bank sends cheque to Central
Bank
iv. Central Bank increases reserve
Selling Securities
Sells to banks:
i. Banks pay via reduction of
reserves
Selling to non-banks:
i. Pay via cheques
ii. Central Bank reduces reserve
from commercial banks
iii. Commercial banks reduce
deposits accordingly
Expansionary:
buy government securities
Contractionary:
sell government securities
4. Funding
Conversion short-term loans to
medium-term loans to long-
term loans
Expansionary:
conversion of long-term loans to
short-term loans
Contractionary:
conversion of short-term loans to
long-term loans
5. Margin regulations
Percentage down payments
when borrowing to buy finance
stock
Expansionary:
decrease in margin
Encourage security purchases
Contractionary:
increase in margin
Discourages speculation on
borrowed credits
6. Moral suasion
Oral or written appeal to
expand or restrict credit
Expansionary:
encourage borrowing
Contractionary:
discourage borrowing and
encourage saving
7. Selective credit controls
Inclusion to hire purchase
regulations and capital issue
control
Expansionary:
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measures to make borrowing ii. Raise real income and

easier aggregate demand
Contractionary: iii. Redistribute income resources
tighter measure to discourage
borrowing Types of budget
i. Budget deficit G>T
8. Special directives ii. Budget surplus G<T
Regulating the extension of iii. Balanced budget G=T
credit for particular purpose
Not liquid asset Sources of government
revenue
2) FISCAL POLICY i. Tax revenue
ii. Non-tax revenue
Definition of Fiscal Policy: iii. Non-revenue receipts
deliberate actions by
government in spending and
taxing to achieve stability and to
bring nations output and
employment to desired level TAXATION

Expansionary Fiscal Policy: Purpose of taxation

Caused by decline in aggregate i. Collect revenue
demand/spending and ii. Redistribute income - reduce
unemployment inequality
Increase aggregate demand iii. Overcome inflation
via: iv. Curb consumption of
i. Increasing government undesirable goods
expenditure (G) v. Protect local/infant industry
ii. Decreasing tax (T)
iii. Combination of both Structure of tax
i. Proportional tax
Contractionary Fiscal Policy:
Tax rate
Caused by demand-pull
inflation
Excess demand/spending
resolved via: 0.5 1 1.5 2 2.5 3
i. Decreasing government Income
spending (G)
ii. Increasing tax (T) ii. Progressive tax
iii. Combination of both

Aims of Fiscal Policy

i. Counter effects of booms and
slumps to maintain stability
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Besides Fiscal and Monetary

Tax rate
Policy, direct measures are also
used to control money flow
i. Price pegging
0.5 1 1.5 2 2.5 3 ii. Price tagging
Income iii. Rationing
iv. Anti hoarding campaigns
iii. Regressive tax v. Control of militant unions
vi. Encourage savings
Tax rate
vii. Wage policy
viii. Increase output
ix. Import-export policy
0.5 1 1.5 2 2.5 3
Income

Classification of taxes:
1. Indirect taxes
taxes applied on goods and
services and indirectly on
individuals
Cheap and easy to collect
Sales tax, cigarettes and
gasoline tax, tariffs and
imports, property tax

2. Direct taxes
taxes applied directly upon
individuals and firms
Tailor to fit personal
circumstances
Personal income tax, social
security tax, inheritance and
gift tax

Types of taxes
i. Tax on income
ii. Cooperate income tax
iii. Consumption tax
iv. Taxes on wealth

Direct Measures
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INFLATION
Definition of inflation:
increase in the general price
level
Types of inflation:
1. Mild inflation
demand rises but supply lags
behind
General price increases <3%
2. Creeping inflation
demand increases but supply
constant
General price increase of 5%
3. Hyperinflation
value of money persistently
falling
Nation prints excessive money
for war
General price increase of >25%
4. Disflation
process of bringing down prices
5. Stagflation
economy that is stagnant and
has inflation
Causes of inflation:
1. Demand-pull inflation
Theoretically:
Aggregate demand increases
but supply is increasingly
limited
Resources are fully utilized or
production cannot be increased
fast enough
Too much money chasing too
little goods
Practically:
Government increases
expenditure (G)
Increase in investment (I)
Increase in net exports (X - M)
Increase in money supply
2. Cost-push inflation
Price increase because factor
payments of groups of
resources owners increase
faster than technical efficiency
3. Import-induced inflation
Foreign countries experience
inflation - price of import goods
increase - inflationary pressure
sets in
Effects of inflation:
1. Savings
Fixed value savings (fiat money):
Depreciate - purchasing power
Assets and real estate:
Increases - price of assets
increase
2. Balance of trade
Deficit balance of trade
Exports cheaper and imports
expensive
3. Internal/external value of
money
Value of money inverse the
general price level
General price increase, value of
money decrease
4. Terms of trade (ToT)
Term of trades:
exchange rate of exports for
imports
ToT = average price of exports
average price of imports
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5. increased risk and slow
growth
Reduction of capital investment
by investors - long-term
commitment
6. Administrative cost and
inefficiency
7. Internal impacts
Policies to control inflation:
1. Monetary Policy
Contractionary monetary policy
via:
i. Increase reserve ratio
ii. Increase discount rate
iii. Sell securities
iv. Convert short-term to long-
term loan
v. Tighten margin requirements
vi. Tighten credit
2. Fiscal Policy
i. Increase direct tax
Peoples disposable income
decrease, demand decrease
ii. Government cut emoluments
Civil services salaries are cut
iii. Government cuts down
expenditure
Exchange rate falls value
Project of less importance
postponed
iv. Government increase public
debt
Government borrow internally
and externally
3. Direct measures
i. Price pegging
Government fix floor and
ceiling prices
ii. Price tagging
Prevents producers charging
indiscriminately
iii. Rationing
Coupons are issued and goods
are rationed
iv. Anti hoarding campaigns
Hoarders are prosecuted
v. Control of militant unions
Convince unions that demand
for wage do more harm than
good
vi. Encourage savings
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Restrict increase in wages
forcing to save
vii. Wage policy
Request to increase wage must
come with productivity
improvement
viii. Increase output
Reallocate resources from
excess goods to necessities
and limited goods
ix. Import-export policy
Imposing import quota and
duties
Promote import of necessity
goods, demote import of luxury
goods
UNEMPLOYMENT
Definition of unemployment:
someone of a working age
unable to find a job but seeking for
full-time employment
Measuring unemployment
Employed between 16 - 35 if:
Works for pay
Works without pay for >15
hours per week in a family
enterprise
Temporarily absent from job
Not employed if:
Unemployed
Not in labor force
Unemployment rate =
Unemployed x 100%
Employed +
Unemployed
Types of unemployment:
i. Frictional unemployment
voluntarily out of job for a short
period
Causes:
Moving from one job to another
Moving from one place to the
other
Graduates entering market
School leavers entering the
market
ii. Structural unemployment
Changes in economys structure
causing loss of jobs
Causes:
Technology changes
Change in goods and services
demand
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Reorganization of process and
position in firms
Closing of domestic firms
Mismatch of skills
iii. Cyclical unemployment
unemployment during recession
and depression
Causes:
Insufficient aggregate
expenditure
Not enough job vacancy
Vulnerable workers:
Working in certain industries
Young and lack seniority
Automotive and construction
work
iv. Seasonal unemployment
unemployment caused by
seasonal change
Causes:
Seasonal vacation
Availability of work
Weather related seasons
v. Disguised unemployment
excess workers in a industry
Costs of unemployment:
i. Economic cost
ii. Social cost
Measures to reduce
unemployment:
i. Monetary policy
Expansionary Monetary Policy:
Increase money supply - more
business activities and
employment
Increase bank reserves - allows
banks to give loans
Increase aggregate demand -
rise in employment
Risks:
Inflationary tendency
ii. Fiscal Policy
Expansionary Fiscal Policy
Deficit Fiscal Policy
Increasing expenditure -
increase aggregate demand
Reducing tax - increase
disposable income
Risks:
Long-term financial deficit
iii. Direct control
Provide training facility
Workers adapt themselves to
technological change
Reduce technological ad
structural unemployment
Create new job opportunities
Reduces dependency on
specific sectors
Reduce structural
unemployment
Developing new land
Reduce seasonal
unemployment
Encourage mobility
Give information on vacancies
and higher pay for labor
Accelerate capital formation
Acceleration via encouraging
savings
Population control
Increasing awareness of family
planning
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INTERNATIONAL TRADE
Definition of international
trade:
buying and selling goods
between countries
Trade Balance = Exports -
Imports
Advantages
1. Benefits of specialization
Countries produce goods they
specialize at low price
Buy the opposite goods at
lower price oppose to
expensive production
Increase output
2. Efficient allocation of resources
Countries specialize cause
better resource allocation and
lower cost
Eliminates trade monopoly
3. Larger market
Market expands beyond
domestic markets
4. Economies of scale
Producers produce in large
quantities - lower cost per unit
5. More and improved choices
Consumers have a wider choice
New products emerge on
markets
Higher standard of living
6. Increased competition
Producers have to compete for
the best quality at lower costs
Affordability increases for
consumers
7. Technological transfer
New technologies acquired
Research and development
occurs domestically
8. Improves national relationship
Encourage cooperation and
support
9. Increase employment
Producers demand larger labor
force
Absolute advantage:
nation produces goods and
services at lower costs to other
nations compared to expensive
production domestically
Adam Smith,
Law of Absolute Advantage.
Comparative advantage:
a country should import goods
they specialize and has low
opportunity cost to where the
opportunity cost is higher
Ricardo
Terms of trade protectionism
Terms enables consumer to
obtain goods at lower
opportunity cost
ToT = Average price of exports
x 100%
Average price of imports
Price of exports rise,
Favorable terms of trade,
More goods obtain from
exports
Price of imports rise,
Non-favorable terms of
trade, Less goods
obtain from exports
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Protectionist Policy
Imposing barriers of trade
Protect local industries
Policy instruments
1. Tariffs
custom duty or tax on an import
May be specific (tax per unit) or
ad valorem (percentage of
price)
Purpose:
Collect revenue
Increase domestic output
Control imports
2. Quota
precise legal limit to the number
of units a commodity may be
imported per period
Implemented when tariff fails
to curb import of goods
Effect:
May increase price of goods
3. Embargo
total ban on goods
Reason:
No ties between nations
Socially undesired goods
Economically disruptive
Countries of different
ideologies
4. Exchange control
amount of currency that can be
brought into and out of country
5. Subsidies/Grants
government payment to firms to
encourage export production
Exports sold below cost of
production
6. Import license
permit that allows to import in
specific quantity and specific
period
Reason:
Restrict foreign currency
outflow
Improve balance of payments
Protect domestic industries
7. Preferential treatment
trading bloc that grants special
privileges to certain products
Reducing tariffs
PTA established via Act stating
the benefits
Reasons for Protectionism:
Economic reasons:
1. Infant Industry Argument
New industries cannot compete
international competitors
Shielded temporarily with high
tariffs or quotas
Until develop technological
efficiency
2. Diversified Economy Argument
Enables to build variety of
industry for greater economic
stability
Small countries avoid trades
leading to political dependency
3. Employment Protection
Argument
Tariff or quotas reduce imports
than exports
Surplus of exports - higher
domestic income, employment
and production
4. Protection Against Unfair Trade
Practices
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Large quantity of goods priced
lower than locally produced
goods
Purpose:
Clear large stockpiles or
maximizing profit
Non-economic reasons:
1. Ideological reasons
Against countries of different
ideology and belief - embargo
2. Protect strategic goods
Industry representatives
requests protection from
foreign competition
Purpose of national defense
BALANCE OF PAYMENT
Definition of Balance of
Payment:
a statistical statement that
summarizes transactions between
residents and non-residents in a
period
A) CURRENT ACCOUNT
1. Goods
Merchandise covers most
movable goods that residents
export or import
Undergoes change in
ownership (actual or imputed)
2. Services
Types of services:
i. Transportation
Done by residents for non-
residents (vice versa)
Shipment and other
transportation services
Freight and passenger
transportation
All modes of transportation and
distributive and auxiliary
services
Rentals and crew
ii. Travel
Acquired by travelers
Business and personal
purposes
Less than one year of stay
Students and patients =
travelers
Military and embassy personnel
= non-residents
iii. Communication
Communication transactions
between residents and non-
residents
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iv. Construction
Construction and installation
projects
Temporary basis
Resident/Non-resident
enterprises
Exclusion the undertaking of
foreign affiliate
v. Insurance
Insurance by resident
enterprises to non-residents
(vice versa)
Freight insurance
(import/export), direct
insurance (life/non-life) and
reinsurance
vi. Financial
Financial intermediation and
auxiliary services
Letter credits commission and
fees
Lines of credit
Financial leasing services
Foreign exchange transaction
Consumer and business credit
services
Brokerage services
vii. Computer and information
Hardware consultancy
Software implementation
Information services
viii. Royalties and licensing
Receipts (export) and
payments (import) of residents
and non-residents
Authorized use of intangible
non produced, non financial
assets and proprietary rights -
trademark
Use through licensing
agreements of produced
originals and prototypes
ix. Other business services
Merchanting and trade-related
services
x. Personal, cultural and
recreational services
Audiovisual and related
services
Cultural services
Production of motion pictures -
audiovisual services
Libraries, museums and
sporting activities - cultural
services
3. Primary Income
i. Compensation of employees
Wages, salaries and benefits
ii. Investment income
Receipts and payments of
external financial assets
a) Direct investment income
Income on equity (dividends,
earnings and branch profit)
Income on debt (interest)
b) Portfolio investment income
Income on equity (dividends)
Income on debt (interest)
c) Other investment income
Interest from capital (loans)
Life insurance reserve and
pension funds
4. Secondary Income
i. Capital transfer
Transfer of ownership (fixed
asset)
Transfer of funds
Debt forgiveness
ii. Current transfer
General government (current
tax)
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Other transfers (claims on non-

life insurance)