OCS Economics -The Natioinal and International Economy Review by David

Today I was not late to my economics class, but thing was after about 2 minutes, my mom rung my phone and I told Mr. Chris " May I go talk 2 her?" and maybe he did not hear what I said. Anyway, I had to talk 2 her because I do not have any money right now and I need her to support my spending so I needed to talk to her. After I talked to her I was trying to come in with those guys who were late to class and Mr. Chris said " Get out!" and I asked " Even me? I told you that my mom called me!" but he said "Get out". I was kind of depressed because economics class is my favorite class and I had to miss it. And I did not understand why I had to be outside even though I was not late for the class and I knew why! Because there is a post says " PLEASE SWITCH OFF YOUR CELL PHONE!" I have never seen it before. But I felt better. lol After the school was over, Mr. Chris called me to one empty class and gave me a book called `Economics-The National and International Economy`. and told me to review it by midnight today. So that is what I am going to talk about from now on. Okay Start!


This book is basically divided into three big chapter; Aggregate demand and aggregate supply and their interaction, Government economic policy objectives and indicators of national economic performance, and the application of macroeconomic policy instruments and the international economy. I am going to explain, actually talk about things that I think is really important or that I did not know before and I am going to talk about in order.

Aggregate Demand and Aggregate Supply and Their Interaction

• In unit `Markets in action`, we studied in which markets are analyzed using supply and demand curves to produce an equilibrium prices and output conditions.
• In this part of course we are looking at the economy as if it was one big market place.
• Aggregate Demand: is the total demand for goods and services produced in an economy at a given price level and in a given time period.
• Aggregate Supply: the total amount that producers in an economy are willing and able to supply at a given price level in a given time period.

All the sum of individual market demand curves----> Aggregate demand curves
C+ I+ G+ X-M----> Aggregate demand curves
All the sum of individual market supply curves-----> Aggregate Supply curves

* The aggregate demand curve can shift to the left or right, if more or fewer products are demanded at the same average level of prices. This Could be caused by changes in any of the determinants of consumption, investment, government spending or imports and exports.

* The aggregate supply curve is dependent upon changes in the conditions for supplying products. For example, an improvement in technology may shift the curve to the right, while and increase in factor costs may shift it to the left. The slope of the aggregate supply curve varies, dependent upon the underlying assumptions used in its construction.

As you see at the above, this is AD and AS diagram.
Blue colored line is Aggregate Demand and it slopes down from left to right which means that if the average level of prices falls, then demand increases and also decrease.
Red colored line is Aggregate Supply and it slopes upwards from left to right because they made an assumption that firms expand their output as prices rise and potential profits increase.


This diagram show normal Aggregate Supply curve with dark blue colored line.




The diagram above show us the perfectly inelastic aggregate supply with blue colored line which also means that all the resources are employed so no matter how many more or less quantities does not affect the price of it.



Circular flow of income

The term circular flow of income or circular flow refers to a simple economic model which describes the reciprocal circulation of income between producers and consumers. The reason that we have know this is because that we learned a shift in one curve causes a movement along the other, and this is same theory I believe maybe more detail.
Circular flow of income is determined by the propensity to consume plus the injections of income into the flow that increase its value and the withdrawals from the flow that have a reducing effect.


Here are some main injections ( J) and withdrawal (W) that affect the circular flow of income in pair from the book.

Injections Withdrawals
investment (I) Savings (S)
government expenditure (G) Taxation (T)
exports (X) Imports (I)

Important thing is that because income flows from one economic unit to another, and the difference between the final change in GDP and the original change in withdrawals or injections is measure by the multiplier, any change in value of injections into or withdrawals from the circular flow of income have an effect which is greater than the original change.


Government economic policy objectives and indicators of national economic performance.

Inflation are calculated in two methods;
1) Retail Price Index( known as the headline rate of inflation and RPIX): This method excludes mortgage interest rates because this method can not count all the changes in prices in a certain amount of period.
2) Consumer Price Index( introduced to conform to the Eurozone measure): This method excludes the cost of volatile items such as energy and food.
-Because of the difference in measuring, they always have debate over which is better measurement.

Unemployments are also measure in two methods:
1) Claimant Count: is a total measure of those claiming unemployment benefits.
2) International Labour Organizsation (ILO): is estimated from a sample and includes those available, willing, looking and in the process of changing jobs.

Growth rates of the economy is most commonly accounted for using Gross Domestic Products. This can be measure in any of these 3 ways.

• Income
• Output
• Expenditure

* Even though, those 3 factors have to be exactly the same according to the theory, but it never happens, so we need estimation to cover the errors.


The Application of Macroeconomic Policy Instruments and The International Economy

• In macroeconomics's management, the division between those policies which target the demand side of the economy and supply side of the economy.

Fiscal and Monetary policies aim to boost or suppress aggregate monetary demand while Supply-side policies focus on specific problems and solutions, such as the creation of motives to work harder and the reform of trade union law. Privatization and deregulation have been used to encourage more competition.

Fiscal Policy: Using Taxation and Government spending to manipulate aggregate demand.
* Fiscal policy could be divided into two different terms by the ratio between tax and Gov.spending.
1) Expansionary Fiscal Policy: More spending and/or less taxation.
2) Contractionary policy: More taxation and/or less Gov. spending.

Monetary Policy: is concerned with adjustments to the supply of money in the economy and changes in the rate of interest.

Exchange rates: are determined by supply and demand, and government can intervene in the buying or selling of currency to pursue an exchange rate policy as their macroeconomic management.

Those policies that I just explained can be used separately or in combination to shift the AD and/or AS curves to a new position depends on which one is priority:

• Expansionary fiscal and/or monetary policies shift the AD curve to the right to lower unemployment.
  
• To lower inflation, contractionary fiscal and monetary policies could be used to remove the excessive monetary demand.
  
• To remove a balance of payments, current account deficit, contractionary fiscal and monetary policies could be used or exchange rates lowered.
• Supply-side policies designed to boost productivity and improve technology could be pursued to promote economic growth.

Closed Economy: One that does not trade with other countries.

* The theories of absolute advantage and comparative advantage explain not only the benefits of internal trade, but also those of international trade.

Absolute Advantage: One need only to be able to make something at a lower cost,in terms of other goods sacrificed, to oneself to gain from trade.
Comparative Advantage: The fact that although one country may have an absolute disadvantage with another, value can be created for both countries by allocating resources to the most competitive area of the disadvantaged country.

These are the important things that I saw from the book:
The main difference between internal trade and international trade is that internal trade is usually conducted in one currency and is relatively free from trade restrictions, whereas international trade is made more difficult by the need to trade currencies as well as products, and the degree to which countries protect themselves using options such as:

• Tariffs
• Quotas
• Subsidies to domestic industry
• Legislation
• Quality Control
• Differential tax rates

The case for protectionism includes a variety of more or less sound economic arguments including:

• The protection of infant industries
• The protection of senile industries to allow them time to regenerate
• The countering of unfair trading practices such as dumping
• Protection against illegal imports
• The protection of employment in industries sensitive to foreign competition
• A source of revenue for government

The case against protectionism includes:

• The advantages of free trade
• The problem that infant industries may never grow up and therefore may not be able to compete
• The fact that protecting an inefficient industry while it regenerates can lead to a permanent rather than temporary mis allocation of resources
  
• The retaliations other countries may impose
• The rise in the cost of living and the restriction of consumer choice.