Macroeconomic equilibrium in the circular flow of income model.
Inner flow of income model include 2 groups: firms and households.
Full circular flow of income model.
J=I+G+X
W=S+T+M
Economy is in equilibrium when inJections equal Wealth.Ad=As
Economic growth and its sources. The phases and character of the business cycles.
Economic growth-rate of economic growth-percentage increase in national output over at well 1 period
Potential EG – the % increase in the capacity of the economy to produce (supply factors - SR: increase in the Q of resources; LR: increase in the productivity of resources. Potential may be illustrated by the PPC. PPC shows all various of 2 types of goods produced in the economy when all resources are fully effectively
Actual EG – the % increase in the national output actually produced (demand factors – SR 1. AD^, the faster growth 2.Effective allocation of resources 3.Non-economic factors
Solow growth model – show how saving technological progress determine level and growth of national output.
Business cycle – is the periodic fluctuations of the national output rounds its long-trend.
BC theories: non-economic: old-fashioned sunspot cycle theory explains by periodical sun activity and fluctuations in the harvest especially in agricultural countries. Psychological theory explains fluctuations by periodical fluctuations in people. Random shops theory explains by national, international, social events. Political theory explains by changes in government policy before and after election. Economic: theory of innovations explains by eventually replacement & improvement of capital equipment. “Echo” effect theory explains by eventually replacement and improvement of durable consumer goods. Ceilings and floors effect explains by ceilings and floors for change in national output, economy cannot increase (fall) forever. Keynesian trade cycle theory explains by instability in AD (in investment). Real-business cycle theory explains by real change in AS (change in technology & changes in labor supply)
Benefits of EG: increase in current consumption and welfare; redistribution of income may be more fair; solving macroeconomic problems; smoothing out scarcity. Costs: decrease in consumption in order to invest more (relative decrease); possible environmental problems; increase in race of living.
19. Unemployment: types and costs.
Unemployment – is the % of labor force that is unemployed (U=unemployed people/labor force *100%) Natural rate of unemployment – is the rate that takes place when actual output equals potential; is the rate of U that exists when the labor market is in equilibrium. ADL = total demand of labor in the economy at different real wage levels. ASL = total number of people willing & able to work at different real wage levels. Labor Force (N) – is the total number of people who would like employment.
Types of natural U:
Frictional-search U is caused by leaving of people their previous jobs and looking for other jobs or by the time of workers to look for a new job (temporary & voluntary U).
Structural (technological & regional) is caused by changes in the composition on structure of demand & supply among industries or regions.
Seasonal (seasonal types of work)
Types of disequilibrium U:
Real wage (classical U) is caused by the wage inflexibility or wage rigidity.
Cyclical (demand deficient U) is caused by the fall in AD for labor in the period of recession and inflexibility of wages after the same time. The U caused by the increase in ASL and wage inflexibility.
Causes of wage inflexibility: the min wage law; monopoly power of trade unions; personnel management of firms.
Costs for the economy: actual output is below potential output; government loses tax revenues and encounters administrative costs; firms lose profit that that could have earned; higher u. leads to crime and vandalism.