NSS Understanding and Interpreting the Economics Curriculum Session 2 Macroeconomics part of the NSS...

NSS Understanding and Interpreting the Economics

Curriculum

Session 2

Macroeconomics part of the NSS Economics Curriculum

9 April 2009 (Thu)

Agenda Topic F Measurement of Economic Performance Topic G National Income Determination and

Price Level (Max. 10 mins. Q&A)

Topic H Money and Banking Topic I Macroeconomic Problems and Policies

(Max. 10 mins. Q&A) Break (15 mins.) Topic J International Trade and Finance Elective 2 Q&A Session

(F) Measurement of Economic Performance

• National income • General price level • Unemployment and underemployment rates • Recent trends

(F) Measurement of Economic Performance - National income

(i) National income as a general term for aggregates like Gross Domestic Product (GDP) and Gross National Product (GNP)

(ii) Gross Domestic Product (GDP) • Definition of GDP• Concept of resident producing units (RPUs)• Items included / excluded in calculating GDP


• The three approaches to measure GDP: production approach (value-added approach), income approach, expenditure approach• Use the circular flow model to explain why

GDP can be measured by 3 different approaches


• Expenditure approach• Y = C + I + G + NX• Classification of the components• GDP by expenditure components in HK• Simple transformation of the equation

• (e.g. Y – C – G = I + NX => S - I = NX, where S is the national saving)


• Production / value-added approach• Sum of value-added of all production activities

by RPUs• Value-added

= value of output – intermediate consumption• GDP by economic activities in HK


• Income approach• (N.B. Components of GDP compiled under the

income approach NOT required)


• Meaning of GDP at current market prices (Nominal GDP)• Problem of using Nominal GDP :

Nominal GDP for different years are not exactly comparable with each other in terms of volume.

• Meaning of GDP at constant market prices (Real GDP)


• GDP at current and constant market prices

• GDP at factor cost• Meaning of GDP at factor cost• GDP at factor cost

= GDP at market prices – indirect taxes + subsidies


• per capita GDP• per capita GDP = GDP / population• both nominal and real

• Growth rate of GDP• Calculate the year-on-year change• Growth rate of nominal GDP, real GDP, per

capita nominal GDP, per capita real GDP, etc.


• (N.B. Other measures related to GDP NOT required)• Net Domestic Product (NDP) NOT

required


• Definition of GNP• GNP = GDP + NIA

• Meaning of residents• Meaning of NIA and examples

(F) Measurement of Economic Performance - General price level

(iii) GNP as GDP plus net income from abroad

• (N.B. Other measures related to GNP NOT required)

• GNP at constant market prices, GNP at factor cost, NNP, etc. NOT required


(iv) Uses and limitations of national income statistics as an indicator of economic welfare and for international comparison

• (N.B. Human development index NOT required)• HDI is required in Elective 2


General price level as measured by Consumer Price Index and implicit price deflator of GDP

• (N.B. Construction of CPI and implicit price deflator of GDP NOT required)


• Calculate the rate of change in the general price level (inflation rate) by CPI and GDP deflator

• Compare CPI and GDP deflator in terms of coverage, weighting, etc.


Unemployment and underemployment rates as measured in terms of the percentage of unemployed and underemployed persons in the labour force

(F) Measurement of Economic Performance - Unemployment and Underemployment rates

• Unemployment rate

= • Meaning of unemployed in economics (those who

want a job but failed to find one) – Topic I• Meaning of unemployed in compiling

unemployment rate NOT required

%100forcelabour

unemployed ofnumber


• Underemployment rate

=

• Meaning of underemployed in economics (those

who involuntarily work less than a specified working hours) – Topic I

%100forcelabour

yedunderemplo ofnumber


Recent trends of national income, general price level and unemployment in Hong Kong

• Interpret numerical / graphical data involving GDP deflator, CPI, and those national income statistics that are required in the curriculum

(F) Measurement of Economic Performance - Recent trends

(G) National Income Determination and Price Level

• AS-AD model• Aggregate demand • Aggregate supply • The determination of level of output and price

Aggregate demand

(i) Reasons for a downward sloping AD curve • Wealth effect :

• P decreases Wealth increases (in real terms) Consumption expenditure increases


• Interest rate effect :

• P decreases Real interest rate decreases Investment expenditure increases

• Exchange rate effect :

• P decreases exports becomes relatively cheaper and imports becomes relatively more expensive net exports increases


(ii) Determinants of aggregate demand:• Private consumption expenditure, which in turn

depends on disposable income, the desire to save, wealth (value of assets), interest rate, etc

• Investment expenditure, which in turn depends on business prospect, interest rate, etc.


(ii) Determinants of aggregate demand:• Government expenditure• Net exports, which in turn depends on the

economic conditions of trading partners, exchange rate, etc


• (N.B. Derivation of the AD curve, magnitude of the shift in the AD curve and factors affecting the slope of the AD curve NOT required)

• Why is AD curve downward sloping?• Factors that cause a shift in AD curve


Aggregate supply

(i) Reasons for an upward sloping short run AS curve


• sticky-wage model• sticky- price model• worker-misperception model• imperfect-information model

• As the price level rises / falls, real production remains constant at the full-employment level. Due to flexible prices, the same level of real production is generated at every price level.


(ii) Reasons for a vertical long run AS curve

• Factors affecting SR AS curve• Cost shocks• Government policies (changes in taxes,

regulations)• Other factors, like weather condition


(iii) Factors affecting short run and long run AS curve

• Factors affecting LR AS curve • Factors affecting aggregate supply: factor

endowments (labour, capital, land) and technological changes, etc

• (N.B. Explanation by the Phillips curve and magnitude of the shift of the AS curve NOT required)


The determination of level of output and price

(i) Determination of the equilibrium level of output and price level in the AS-AD model

• (N.B. Quantity Theory of Money NOT required)


(ii) Changes in the equilibrium level of output and

price level caused by change(s) in the AD and/or AS

• Both SR and LR effects


(iii) Relationship between employment and output level • Output increases more resources are needed employment increases

• (N.B. Interest rate is treated as exogenously determined)


10 Minutes Q&A

(H) Money and Banking

• Money• Banks: functions and services • Money supply • Money demand • Determination of interest rate in the money market • Hong Kong as a financial centre

Money

(i) Definition of money

• Anything that is generally accepted as a medium of exchange


(ii) Nature and functions of money

• Nature of money : scarce, homogeneous, stable in value, divisible into smaller denominations

• Functions of money:

• Medium of exchange

• Store of value

• Unit of account

• Standard of deferred payments


Banks: functions and services

(i) Commercial banks and central bank

• Commercial banks

• Function of commercial banks :• Channel savings to investment

• Services provided by commercial banks

• Central bank

• Functions of a central bank


(ii) Licensed banks, restricted licence banks and deposit-taking companies in Hong Kong• Features in terms of minimum capital

requirements and types of deposits that could accept

(iii) How central banking functions are performed in Hong Kong


Money supply

(i) Definitions of money supply in Hong Kong

• M1, M2 and M3


(ii) Credit creation/contraction and the banking multiplier

• Required reserve ratio, maximum banking multiplier

• Calculate maximum change in money supply, deposits, loans, etc.

• Assumptions made in calculating the maximum change

• Meaning of monetary base

• Describe the process of credit creation / contraction


Money demand

(i) Meaning of transactions demand for money and asset demand for money


• MT : holding money for making transaction (buying goods and services)• MA : holding money as a form of holding assets

(ii) Money demand as a function of nominal interest rate and income

• Increase in income more transactions needed to be made demand more transaction balances to make transactions

Md is a positive function of income


• Cost of holding money is the nominal interest rate (holding money gives up the opportunity of earning interest from holding interest earning assets – bonds)

Md is a negative function of nominal interest rate• Return of holding money and other benefits of

holding money


• Interaction of money supply and money demand

• Alternative models of explaining the determination of interest rate (e.g. loanable fund theory) NOT required


Determination of interest rate in the moneymarket

(i) Factors contributing to its development as a financial centre

(ii) Effects on the Hong Kong economy


Hong Kong as a financial centre

(I) Macroeconomic Problems and Policies

• Business cycles • Inflation and deflation • Unemployment • Fiscal policy • Monetary policy

Business cycles: a description of the short run fluctuations in real GDP around the long run trend

• (N.B. Theories of business cycles NOT required) • Features of the 4 phrases of a business cycle


Inflation and deflation

(i) Definitions of inflation and deflation

• Inflation: persistent increase in the general price level

• Deflation: persistent decrease in the general price level

(ii) Relationship between nominal and real interest rates• Nominal interest rate

= real interest rate + expected inflation rate


(iii) Redistributive effects• Explain why debtors will gain and creditors will

lose (illustrated with example) with unanticipated inflation

• Explain why debtors will lose and creditors will gain (illustrated with example) with unanticipated deflation

• Explanation by comparing expected real interest rate and realized real interest rate


• (N.B. Velocity of circulation of money assumed to be constant)

• Quantity equation / equation of exchange• Mv ≡ Py

• Meaning of velocity of circulation : ratio of nominal GDP to money stock


(iv) Inflation and Quantity Theory of Money

• Short-run QTM• Assumes: v constant• Prediction:

• % change in money supply = % change in nominal income

• Both P and y may change


• Long-run / Classical QTM• Assumes: • (1) v constant • (2) y constant at full-employment (classical

assumption) • Prediction:

• Only P will change (change in money supply cannot affect income ; money is neutral)

• % change in money supply = % change in price level


Unemployment(i) Meaning of unemployment

• See Topic F• Inflationary income gap: Y>Yf when the economy has an

‘excess demand’ for labour

(ii) Meaning of underemployment• See Topic F

(iii) Cost of unemployment• to the unemployed• to society

• (N.B. Phillips curve NOT required)


Fiscal policy

(i) Meaning of fiscal policy

• Policies that involve changes in government expenditures (G) and/or taxes (T) to achieve certain economic goals

• Definition of budget; surplus budget, deficit budget and balanced budget


• Adam Smith’s 4 taxation principles• Economy• Equity• Certainty• Convenient

• Taxation principle in HK : source principle


• Taxation:• Principles

• Direct and indirect taxes

• Meaning of direct and indirect taxes


• Classification

• Progressive, proportional and regressive taxes

• Effects of the above types of taxes on income equality (Topic E)

• Meaning of progressive, proportional and regressive taxes

• (N.B. With special reference to Hong Kong)• Education, Social Welfare, Health,

Security, Infrastructure, Economic, Housing, Environment and Food, Community and External Affairs, Support

• Public expenditure as percentage of GDP• http://www.budget.gov.hk


• Public expenditure: classification by function

(ii) Effect of fiscal policy on the level of output and price• Explain the effects of expansionary fiscal policy,

contractionary fiscal policy, and balanced budget change in G and T on price level and output with the AD-AS model


Monetary policy(i) Meaning of monetary policy

• Changes in Ms and / or interest rate in affecting the economy

• Monetary tools (methods in affecting the Ms or interest rate)• Open market operations, discount rate, required

reserves ratio, printing money• Brief discussion of monetary policy in HK

(ii) Effect of monetary policy on the level of output and price


10 Minutes Q&A

(J) International Trade and Finance

• Free trade and trade barriers • Brief introduction to the balance of payments

account • Exchange rate

Free trade and trade barriers

(i) Absolute advantage; comparative advantage and gains from trade

• (N.B. Illustration by the production possibility frontier NOT required)


• Meaning of absolute advantage and comparative advantage

• Identify which country has an absolute and a comparative advantage (illustrated with numerical data)

• Calculate the gains from trade (illustrated with numerical data)

• State the principle of comparative advantage• PPF is required in Elective 2


(ii) Using the pattern of trade in Hong Kong to illustrate the principle of comparative advantage


(iii) Importance of trade to Hong Kong's economy• Verbal description of the importance of trade to

HK• Importance of trade to HK as reflected by the

ratio of exports and imports to GDP


(iv) Trade barriers: Types

• Tariff, quota, import surcharge, embargo, etc. Effects of tariff and quota on price and output for a small open economy

• Discussion on effects of trade barriers is limited to tariff and quota ONLY


Pw+ t

Pw

S

D

C DBA

P

QTariff


P’Pw

S

D

C DBA

P

QQuota

SQ

SQ : domestic supply + supply of imported goods with quota


(v) Trade barriers faced by Hong Kong and attempts to overcome them • Trade promotion• Role of the HKSAR Government• Role of international economic institutions (e.g.

World Trade Organisation)


Brief introduction to the balance of payments account

• Current account• Main components of the current account: goods,

services, income and current transfers• (N.B. Sub-classification of these components NOT

required)


• Capital and financial account• (N.B. Sub-classification of this account NOT

required)

• Balance of Payments is always balanced in accounting sense

• Meaning of BoP surplus and deficit


Exchange rate

(i) Meaning of exchange rate• (N.B. Graphical analysis NOT required)• Exchange rate: price of a foreign currency in terms

of domestic currency• Meaning of appreciation and depreciation,

revaluation and devaluation


(ii) Effect of a change in the exchange rate on import price and export price

• Appreciation of domestic currency fall in import price and rise in export price(iii) Brief introduction to the linked exchange rate system in Hong Kong• Brief history• Note-issuing mechanism (currency broad system)• (N.B. Mechanism of maintaining the linked

exchange rate NOT required)


Elective 2

• Extension of trade theory• Economic growth and development

Extension of trade theory

(i) Illustration of comparative costs and gains from trade with the aid of production possibilities frontier

• (N.B. The use of indifference curve NOT required)

Elective 2

• Slope of PPF as the marginal cost of producing good X

• Illustration of comparative costs with the aid of PPF

• Determination of production point• Determination of consumption point NOT required

(because IC NOT required)• Show the gains from trade

Elective 2

(ii) Comparative advantage and its relation to globalization

• Meaning of globalization (focus on the economic

aspects)• Comparative advantage and its relation to

globalization (e.g. Mainland China as ‘the world factory’)

Elective 2

Economic growth and development

(i) Measurement of economic growth and development• Changes in real GDP• Changes in per capita real GDP• Changes in human development index

Elective 2

• Human development index • 3 Dimensions:

• A Long and Healthy life (as measured by life expectancy at birth)

• Knowledge (as measured by adult literacy rate, the combined gross enrollment ratio for primary, secondary and tertiary schools), and

• A decent standard of living (as measured by GDP per capita in purchasing power parity)

• http://www.undp.org/

Elective 2

(ii) Factors affecting growth of an economy

Elective 2

• Inputs: physical capital, human capital, natural resources, technological change

• Policies: saving and investment, foreign direct investment, trade, education, population, property rights, research and development

• (N.B. The analytical framework of aggregate production function and the theories and models of economic growth NOT required)

• A descriptive approach

Elective 2

• Current versus future consumption • Trade off between current and future

consumption• Growth, living standard and income distribution• Resources exhaustion, pollution and sustainable

development

Elective 2

(iii) The desirability and costs of economic growth

(iv) International/regional comparison

Elective 2

• Interpret graphical and numerical data

Q&A Session

NSS Understanding and Interpreting the Economics Curriculum Session 2 Macroeconomics part of the NSS...

Documents

Transcript of NSS Understanding and Interpreting the Economics Curriculum Session 2 Macroeconomics part of the NSS...