ECONOMY- a certain system of In existing economy, to produce a normal good, -a product for There are two main adjustments
here are two main adjustments in
production, distribution and
consumption of goods, The
system of trade and industry by
which the wealth of a country is
made and used.
Basic question of economy: what
should be produce (quantities,
what is the best for the
economy)), how(which resources
and technology should be used,
how to lower the costs of
production) and for whom (to find
the right amount of goods)
produce.
ECONOMIC PROBLEM- The
problem that is faced because
wants are infinite but resources
are scarce. Therefore resources
have to be allocated between
competing uses. Economics is the
study of how the economic
problem is resolved.
ECONOMICS- Social science
studying the production,
distribution, and consumption of
wealth. It consists of the
disciplines of microeconomics,
the study of individual producers,
consumers, or markets, and
macroeconomics, the study of
whole economies or systems (in
particular, areas such as taxation
and public spending).
Economics is the study of how, in
a given society, choices are made
in the allocation of resources to
produce goods and services for
consumption, and the mechanisms
and principles that govern this
process.
Its two central concerns are the
efficient allocation of available
resources and the problem of
reconciling finite resources with a
virtually infinite desire for goods
and services. Economics analyses
the ingredients of economic
efficiency in the production
process, and the implications for
practical policies, and examines
conflicting demands for resources
and the
consequences of whatever choices
are made, whether by individuals,
enterprises, or governments.
Economics aims to be either
positive, presenting objective and
scientific explanations of how an
economy works, or normative,
offering prescriptions and
recommendations on what should
be done to cure perceived ills.
economic problem
THE COMMAND ECONOMY-
(or planned economy).Economy
where resources are allocated to
factories by the state through
central planning. The government
makes all the decisions about
production and consumption.This
system is unresponsive to the
needs and whims of consumers
and to sudden changes in
conditions (for example, crop
failure or fluctuations in the world
price of raw materials). For ex. in
the former USSR. Planned
economies have not produced as
high growth as free-market or
mixed economies.
THE MIXED ECONOMY-
Type of economic structure that
combines the private enterprise of
capitalism with a degree of state
monopoly as in nationalized
industries and welfare services..
In mixed economies, governments
seek to control the public services,
the basic industries, and those
industries that cannot raise
sufficient capital investment from
private sources. Thus a measure
of economic planning can be
combined with a measure of free
enterprise. A notable example was
US President F D Roosevelt's
New Deal in the 1930s.
Most capitalist economies are
actually mixed economies, but
some (such as the US and
Japanese) have a greater share of
the economy devoted to free
enterprise.
THE FREE MARKET
ECONOMY- Economic system
in which the principal means of
production, distribution, and
exchange are in private
(individual or corporate) hands
and competitively operated for
profit. There is no government
intervention in the economy.
The production possibility
frontier- shows the maximum
amount of one good that can be
produced for each given level of
output of the other good. It also
shows the trade-offs that society
has to make in deciding what
goods to produce and illustrates
the central problem of scarcity,
because points outside the frontier
are not to be reached. It is
inefficient for society to produce
within the production possibility
frontier, since it zan have more of
at least one good by moving to the
frontier from any point within it.
Policy of OPEC countries is based
on it. Aims: to lover costs, not to
use up all resources in short time,
if you increase production of
one good, you have to lover the
production of other good.
REAL GNP- the value of
effectively the unemployment rate
should be 20% or even more (it is
not good- many unemployed
people). To solve the problem we
have to make new work –places,
by providing new services, by
investing.
Laws of diminishing returns-
the more people you employ, the
lower is productivity of them,
whenever the new worker is
added to certain group of people,
her effectiveness drops.
SECTORS OF ECONOMY:
1.extractive industry- primary
sector, coal mines, iron ore
2.manufacturing sector-
processing and transforming
products, to finished or semi
finished products
3.service sector- deals with
provision of certain service
4.construction sector- for some
people is regarded as a completely
different part of economy, for
others as a part of manufacturing.
MARKET-
1.Any situation, a set of
arrangements and transactions, by
which buyers and sellers of a
good are in contact with each
other to trade that good. This
could be a physical and also a
virtual place :street market or it
could be a world market where
buyers and sellers communicate
via letters, faxes, telephones, and
representatives. There are 4 main
elements of the market: demand,
supply, goods and money.
In a perfect or free market, there
are many buyers and sellers, so
that no single buyer or seller is
able to influence the price of the
product; there is therefore perfect
competition in the market.
In an imperfect market either a
few buyers or sellers (or even just
one) dominates the market.In the
UK, for example, the market for
telephone calls is imperfect
because one firm, British
Telecom, dominates the market.
SUPPLY AND DEMAND- One
of the fundamental approaches to
economics, which examines and
compares the supply of a good
with its demand (usually in the
form of a graph of supply and
demand curves plotted against
price). For a typical good, the
supply curve is
upward-sloping (the higher the
price, the more the
manufacturer is willing to sell),
while the demand curve is
downward-sloping (the cheaper
the good, the more demand
there is for it). The point where
the curves intersect is the
equilibrium price at which
supply equals demand.
DEMAND- In economics, the
quantity of a product or service
that customers want to buy at any
given price. (the amount of a good
that buyers want to buy at
different prices)It describes the
behavior of the buyers, consumers
at different prices. The lower the
price, the greater the quantity
demanded.
QUANTITY DEMANDED- the
certain, specific amount of a good
bought at a certain price in a
certain moment of time.
The level of demand is
determined by :
1)the prices of related goods
2)consumer income
3)consumer tastes
SUPPLY- In economics, the
production of goods or services
for a market in anticipation of an
expected demand. (It’s the amount
of a good that sellers want to sell
at different prices.) Describes the
behavior of sellers at different
prices.
The level of supply is
determined by :
1)consumer income
2)consumer tastes
3)the price of the product,
4the cost of production,
5)the level of technology
available for production,
6)and the price of other (related)
goods.
7)government(may increase the
supply of a good by subsiding a
certain product or limit the supply
by imposing taxes)
There is no guarantee that’supply
will match actual demand. The
figher the price, the larger
QUANTITY SUPPLIED- the
number of goods sold at a
particular price.
THE EQUILIBRUM PRICE- is
the price at which the quantity
demanded and the quantity
supplied are eqal. The price
always tend to move toward it. On
a graph it is the point where the
curves intersect, at which supply
equals demand.
A GOOD- In economics, a term
often used to denote any product,
including services. Equally, a
good is often distinguished from a
service, as in `goods and services
TYPES OF GOODS:
1 division:
which demand increases as a
person's income increases
an inferior good-the opposite of a
normal good, a product for which
demand decreases as income
increases.
A free good is one which an
individual or organization can
consume in infinite quantities at
no cost, like the air we breathe.
However, most goods are
economic goods, which are scarce
in supply and therefore have an
opportunity cost. In a free market,
economic goods are allocated
through prices.
2 division:
substitute goods- alternative
goods, are goods which can
replace one another (=normal g.
+inferior g.).
complementary goods- goods
that complete one another, used
together, car+ gasoline. When the
price of one of them increases, the
demand for the other good drops.
PRICE CONTROLLS-the
government imposes rules or laws
that forbid the adjustment of
prices to clear markets. They may
take form of floor prices
(minimum prices) or ceiling
prices (maximum prices)
Government(may increase the
supply of a good by subsidizing a
certain product or limit the supply
by imposing taxes).
Subsidizing- to produce more
when we want this good to be sold
at market price which is lawer
than costs of production
Taxes- because of them market
price is higher than this of
producers.
Maximum prices of a good-
ceiling prices-customer is
protected. You may sell at lower
price but not higher
Minimum prices of a good- floor
prices-protects producers, you
cannot sell at cheaper prices.
GNP- gross national product.
The most commonly used
measurement of the wealth of a
country. GNP is defined as the
total value of all goods and
services produced within a given
period, such a year, by
domestically owned factors of
production.
It is measured as the gross
domestic product plus income
from abroad, minus income
earned during the same period by
foreign investors within the
country.
value added- In measuring
production we have to avoid
double counting. To do so we
focus on each firm value added.
It is the increase in the value of
goods resulting from production;
the difference between the cost of
producing something and the
price at which it is sold. Is
calculated by deducting from the
value of firm’s production the cost
of the produced goods or raw
materials it buys.
Per capita GNP-is the value of
production per person including
children and others not eorking.
MEASUREMENT OF GNP
1.we have to avoid double
counting by focusing on each firm
‘s value added
2.all output should be included in
GNP
3.it is the value of goods
currently produced that is part of
GNP
4.GNP measures the value of
output produced by domestically
owned factors of production. Part
of the GNP is produced abroad
GNP=C + I+ G + NX
C- consumption
I – investment
G- government
NX- net export (export-import)
GDP- gross domestic product-
Value of the output of all goods
and services produced by factors
of production located in the
domestic economy, whoever owns
them. It thus includes the
production of foreign-owned
firms within the country, but
excludes the income from
domestically owned firms located
abroad.
GDP can be measured either by
the sum of total output or
expenditure or incomes. However,
in practice there is usually a slight
discrepancy between the three
because of the highly complex
calculations involved.
GDP ignores unpaid work and
natural capital (for example, a
forest is regarded as having no
value until it is felled), and counts
as economic benefits the costs of
prisons, pollution, and so on, not
distinguishing between desirable
and undesirable consequences of
economic activity.
GDP fluctuates in relation to the
trade cycle and standard of living.
In the UK, the percentage increase
in GDP from one year to the next
is the standard measure of
economic growth.
GNP AND NATIONAL
INCOME.
going from GNP to national
income.
1)The deducation from GNP of
depreciation, or the capital
consumption allowance.
Czyli: GNP- c.c.all.=net national
product (NNP)
2)to go from GNP to NI we have
to adjust for the excise taxes that
are paid on many goods.For these
goods, the market price exceeds
the income received by the firm.
Thus indirect taxes have to be
deducted from GNP to calculate
NI.
Other goods receive subsidies
which reduce the market price
below the price received by
sellers. For these goods, income
received by factors of production
exceeds the value of sales of the
goods. In this case wehave to add
the value of subsidies to GNP to
calculate NI.
Zatem: GNP – indirect taxes +
subsidies=NI
INCOME -Earnings of an
individual or business
organization over a period of
time.
Part of the income for a company
is the value of its turnover. The
income of a whole economy is
often measured by gross national
product or gross domestic
product.
TYPES OF INCOME:
1.income from labor
(compensation of employees-
wages and benefits, and
proprietors’ income- the income
of unincorporated businesses and
includes the income the owners
make as a return to the labor they
put into the business), this income
accounts over 75% of NI.
2.income from property-
( corporate profits),accounts all
the rest of the income, less than ¼
of NI (part of proprietors’ income,
rental income, corporate profit,
etc)
Income- from labour ( emploees’
income + proprietors’ income
-actionners income-from
property (corporate profits)
NATIONAL INCOME AND
PERSONAL DISPOSABLE
INCOME
national income-total income of
a state in one year, including both
the wages of individuals and the
profits of companies. It is equal to
the value of the output of all
goods and services
during the same period. National
income is equal to gross national
product (the value of
a country's total output) minus an
allowance for replacement of
ageing capital stock.
Personal disposable income- the
income available for spending or
saving by hausholds.
Over 90% of it is consumed
(consumption expenditure of
households is all their spending on
goods and services exept for
purchases of houses), 2,7% goes
to pay interest to businesses from
which hausholds have borrowed.
The rest is saved. Personal
saving is a part of disposable
income which hausholds use to
add to their wealth. The share of
PS in DPI is the personal saving
netto (rate).
In USA: NI= corporate
profits+personal divident
receipts+Interest adjustment-
taxes+transfers=PDI
transfers-payment from
government and business even
when you don’t provide any
service in return (pension, dole)
In Poland:NI= Interest
adjustment –personal Income
Tax+ personal divident receipts+
transfers- corporate profits=PDI
Opportunity cost-the money you
could get if you offered some
services but you didn’t- koszt
alternatywny/ utraconych
możliwości
Gross income-przychód brutto
Nett income- przychód netto
capital consumption allowance-
amortyzacja
nett national product- NNP-
dochód narod.netto(NNP= GNP-
capital consumption allowance)
national income- NI- dochód
narodowy-
personal deisposable income-
PDI-dochód dyspozycyjny
ludności
consumption expenditure-
wydatki na konsumpcję
net economic welfare-NEW-
dobrobyt ekonomiczny netto
IRS- Internal Revenue Service-
Urząd Skarbowy
NOMINAL GNP- the value of
production of each year measured
in the prices of that year.It is
expressed in current year prices of
goods and services provided.
production measured in a
common set of prices (the base
year prices) It is a measure of the
economy’s output that adjust for
inflation. It is expressed in real
prices of goods,ervices provided.
Real GNP is in practice used as a
measure of economic welfare, but
it has major shortcomings in this
role. First, the value of nuisance
outputs such as pollution should
be deducted. Second, the value of
leisure should be added to GNP.
This gives a measure of NET
ECONOMIC WELFARE
(NEW).NEW is not calculated on
a regular basis and therefore
serves mainly to remind us to be
cautious in using GNP as a
welfare measure.
GNP DEFLATOR =Nominal
GNP/Real GNP x100
It is the ratio of nominal GNP to
real GNP, expressed as an index.
Expressing the deflator as an
index means that the ratio of
nominal to real GNP is multipled
by 100. The deflator gives an idea
of the average behavior of prices.
It is widely used measure of
inflation.
INFLATION- In economics, a
rise in the general level of prices.
The many causes include cost-
push inflation, which results from
rising production costs .
Recession, overemployment,
limiting the consumption,
stagnation in the economy may
couse the inflation to go up.
Stagflation-is a period of
continuing inflation combined
with recession or stagnation of
economic activity.
Slumflation-inflation combined
with high unemployment.
Deflation, a fall in the general
level of prices, is the reverse of
inflation.
THE PHILIPS CURVE- Graph
showing an inverse relationship
between the inflation rate and the
unemployment rate. The higher
the rate of inflation, the lower
the rate of unemployment.
The Philips curve represents a
trade-off between inflation and
unemployment in the following
sense. If aggregate demand is
expanded through tax cuts,
increased money, or higher
government spending, output can
be increased and the
unemployment rate can be
reduced. But with lower
unemployment and less slack in
the economy, there is more
pressure on wages, costs, and
prices. Therfore, prices will be
rising at a more rapid ratee the
lower the rate of unemployment.
FIGHTING INFLATION
-governments may use ‘incomes
policy’ to affect wages and prices
directly. This kind of policy is to
help monetary and fiscal policy to
fight inflationton
- try to change the monetary and
fiscal policy in a way that
prevents the growth rate of money
being high in future and keep the
iflation rates low.
-try to live with inflation
COSTS OF INFLATION
Inflation does have real costs,
which depend on two factors:
1.whether the inflation is expected
or not
2.the extent to which the economy
has adjusted its institutions to deal
with inflation
Shoe-leather Costs- The costs of
expected inflation-in an economy
whose institution have adapted.
Ehen there is inflation, it is more
expensive to hold currency than it
is when there is no inflation. The
increase in inflation and the
interest rate has increased the cost
of holding the currency. Because
the higher cost, people decide to
hold less currency. They have to
go to the bank more often. They
go to the bank to take out smaller
amounts each time. They go to the
bank more often. The cost is the
nuisance of going to the bank and
bank’s need to hire more people
to handle the increase business.
We describes these costs as the
shoe-leather costs of inflation.
The inflation wears out the shoe
leather of consumers by making
them walk to the bank more often.
Menu costs
When prices are rising, price tags
have to be changed. Menus have
to be be reprinted with the new
higher prices. Catalogs have to
adjust their prices more often.
These are the menu costs of
inflation. There are also the menu
costs of deflation. If prices an
average are falling all prices have
to be adjusted more often than
they do when prices are constant.
Both shoe-lether costs and menu
costs of inflation happen even the
inflation is expected and when the
economy’s institutions have
adopted to it. It is very difficult to
pay interest on currency and to get
along without putting prices on
goods, and so there is no practical
way of avoiding these costs even
when people see them coming.
EXPECTED INFLATION
when Institution have not
adapted
Bracket Creep- occurs as a
consequence of inflation when
rising prices put people into
higher tax brakets even though
their real income has not changed.
Unther bracket creeppeople pay a
larger fraction of their income in
taxes because of inflation
(inflation tax)
Adjusting for bracket creep can be
handled in two ways. One way is
to readjust the tax schedules and
the other is tax bracket indexation.
Tax bracket indexation adjust
tax brackets automatically for
inflation. In effect taxes are paid
on the real value of income.
UNEXPECTED INFLATION-
the costs we single out in this case
arise from unanticipated
redistributions of income or
wealth between borrowers and
lenders.
Redistribution- when prices rise
unexpectedly, everyone who owns
a nominal asset such as money or
bonds loses. Everyone who has
borrowed and ownes a sum fixed
in nominal terms, for example, to
a bank or for a local loan or a
house, will gain. Borrowers gain
and lenders lose because the
purchasing power, or real value of
the payment declines. Of course,
for almost every nominal asset in
the economy there is a
corresponding debt.
When there is unexpected
inflation, the depositor at the bank
loses because the value of the
deposit has fallen. The person
who borrowed from the bank
gains, because the value of the
debt dfalls. These two gains and
losses approximately cancel.
Incomplete adjustment-the
worst problem of inflation occurs
when inflation is unexpected and
institutions have not adapted. This
case involve all the problems
associated with the tax system that
we have already seen:: bracket
creep, inappropriate taxation of
inflation adjustment in interest
ratea, and problems of interest
rate ceilings. It also has all the
redistribution consequences. In
this situation most economies find
themselves.
In few countries is inflation fully
predictable from one year to the
next. But there are a handful of
countries where adjustment to
inflation has gone very far and
where most contracts are
automatically adjusted for
inflation, as is the tax
system(Israel, Brasil)
INDEXATION- automatically
adjusts payments for the affects pf
inflation
Tax bracket indexation-adjusts
tax brackets automatically for
inflation. In effect taxes are paid
on the real value of income.
MPS- Marginal Propensity to
Save- a part of every 1 zl which
will be save when my income
rises= fraction of 1 by which
savings rises when income rises
MPC- Marginal Propensity to
Consume- fraction of 1 zl which
will be consumed when my
income rises
PPP- Purchasing power parity
rate-the exchange rate that
maintains the relative prices of
goods in two countries. When
exchange rates follow PPP,
depreciation of the currency
exactly offsets differences in
inflation in the two countries.
With the relative prices of goods
remaining constant, import and
export demands are not affected
by the combined exchange rate
and price level changes.
Gold parity- the exchange rate
calculated from the relative price
of gold in the two countries.
The gold standard- is a regime
of fixed exchange rates. Under the
gold standard, countries or central
banks fixed the value of their
currencies in terms of gold; it has
three features:
1.the government fixes the price
of gold in terms of its currency
2.the government maintains
convertibility of the home
currency into gold. The gov. will
buy or sell home currency for
gold at the par value (par value of
gold- is the price of gold in terms
of monej fixed by the gov.)
3.the gov. follows a rule that links
money creation to its holding of
gold. The gov. can issue dollar
bills only by buying gold from the
public- behind the dollar bills
stands an equivalent value of
gold.
dollar standard- under the dollar
standard, countries or central
banks fixed the value of their
currencies in terms of dollars.
Under the dollar standard ,
currencies were supposed to be
convertible into dollars rather than
gold. At the officially fixed
exchange rate, central bank would
buy or sell dollars from the public
in exchange for their own
currency.
International reserves- are a
country’s holding of foreign
currency and other assets that can
be used to meet demands for
foreign currency.
Sterilization- s. of gold or reserve
losses (gains) occurs when the
central bank of a deficit country
offsets the automatic decline of
money by an open market
purchases (sales) of bonds, that
exactly balance the changes in the
reserves.
Appreciation- natural rise in the
value of currency, increase of
exchange rates in foreign
countries.
Depreciation- falling demand on
currency- market determines the
price. The higher the demand on
currency, the higher the rate of
currency.
Revaluation- increase of rate of
exchange made by Central bank
or government.
Devaluation- reduction in the
value of a currency against other
currencies drop of exchange rate
made by central bank or gov.
After dev. imported goods are
more expensive.
Money- sth that is generally
accepted in exchange for goods
and making payments. Money
includes banknotes and coins, also
cheques and credit cards.
Functions of money:
1.medium of exchange
(acceptability)-people must be
willing to accept it in exchange
for goods and services
2.measure of value-makes it
possible to compare the value of
different goods and services
3.store of value-money is not
perishable and is suitable way to
amass wealth
4.standard of deferred payment-it
allows the amount of credits
(future payments) to be stated
5.a legal tander- it means that by
law, units of money have to be
accepted to settle a debt
Characteristics:
1.stability-value should not
change rapidly over short period
of time
2.transferability-must be
exchangeable for goods and
services in a simply way
3.durability-must not be
perishable and it has to service
many transactions without
wearing out
4.divisibility-must permit precise
evaluation of goods and services
5.portability-the holder of money
must be able to carry it easily
6..Recognizability-all units of
money must have the same size ,
weight, shape and content to
ensure immediate recognizability
which contributes to the
acceptability of money.
7. Should be difficult to be
counterfeited- in order to ensure
the user’s confidence, money
must be well protected against
counterfeiters.
8.Must be commonly accepted
Exchange rate-is the price of one
country’s currency measured in
terms of another country’s
currency (Fixed exchange rates-do
not change in a long period of
time, Flexible e.r- are changing
every day, hour
Credit cards- the holder can take
a credit up to a prescribed limit
each month. there is a preset
spending limit.
Cheque cards- issued to current
account holders. They carry the
name of the customer and his
account number. The cust. has to
sign the card on a special strip
paper.
Charge cards- the user of a
charge card makes purchases on
credit and at the end of the
accounting period (usually
monthly) is sent a bill for full and
complete payments for purchases
made. Contrary to credit cards
there is no preset spending limit.
Token monies- are those means
of payments whose value of
purchasing power as money
exceeds the cost of production and
the value in alternative uses.
Commodity money- is used as a
medium of exchange and also is
bought and sold as an ordinary
good. It is worth as much as the
material
IOU money- a medium of
exchange based on the debt of a
private firm or person i.e. bank
deposit, traveler’s checks, all
papers which state how much I
owe to another person
Near monies- money that are
recognize as means of payment
but do not fully posses all the
features of money and functions
that money must filfull, i.e.
shares, bonds), you can use them
in the shop rather than on stock
exchange or bank.
Fiscal policy- the policy made by
the gov, it determines the money
flow, circulation in the country
and the decisions concerning
collection of money- taxas,
spending, eg.to guarantee
payments of transfers
Monetary policy- determines the
creation of money by making it
available for private business etc,
determines the issue of the
money, all questions concerning
currency and stability of currency:
interests rate, stabilizing money,
controlling money-this is the task
of National bank.
budget deficit- a situation when
government outlays exceed taxes,
a sit. when the gov. expenditures
are higher than its incomes, or
when the incomes are low. It is
higher during recession, when
national income falls and is lover
during expansion when national
income increases.
The balance of trade- record of
all trade : export and import. It
only takes into consideration the
visible export and import: how
many goods, exports to
export/import.
The current account of the balance
of payments is the excess of
exports over imports. There is a
current account surplus when
exports exceed imports and a
current account deficit when
imports exceed exports.
The balance of payment- is a
systematic record of all
transactions between the residents
of the country (households, firms
and the gov.) and the rest of the
world.
Okun’s law- describes systematic
relationship between economic
activity and unemployment. Each
time there is a recession the
unemployment rate rises. Once
the recovering expansion begin,
the unemployment rate comes
down again. During recession
output falls and some of that
decline in output translates into a
reduction in the demand for labor.
Thus, unemployment is linked to
GDP. O.L states that annual GDP
growth of 3% keeps the
unemployment rate constant. For
every 2 percentage point increase
in growth over a year, the unempl.
rate declines by 1 percentage
point. For every 2 percentage
point decrease In growth below
3% over a year, the unempl. rate
rises 1%
The unemployed-
1.a person who doesn’t have a
paid job but is looking for one or
not and is willing to have one.
2A person is reported as unemp. if
he did not work in the last week
but had looked for work during
the past 4 weeks
The natural unemployment
rate- is the unempl. rate that
correspondes to practical full
employment in the economy. It is
detrrmined by:
-the nature of teenage
unemployment
-the types of work patterns people
have over their lifetimes with
young people taking short-term
jobs
-the unemployment benefits that
affect the amount of time for
which people who become
unemploywd remain unemployed
-the rate at which firms and the
jobs in them die