Transcript ECO 121 Macroeconomics

Spring 2010
Aisha Khan
Section L & M
ECO 121
MACROECONOMICS
Lecture Two
Inflation

Nominal vs. Real income

Real income = Nominal income / price index

Who is hurt by inflation?
 Fixed-income
 Savers
 Creditors
receivers
Inflation

Who is unaffected/ helped by inflation?
 Flexible
income receivers
 Debtors

Deflation

Hyperinflation
Effects of inflation on output


Cost push inflation  affects supply side  thus
reduces output
Demand pull inflation  affects demand side 
more output produced to satisfy demand
Consumer Price Index
Quantity
in
2006
2007
2008
Basket
(kg or
Price
litre)
Flour
Cost of
basket
Price
Cost of
basket
Price
6
Rs. 200
1200
Rs. 300
Rs. 150
Oil
1.5
Rs. 80
120
Rs. 150
Rs. 50
Milk
1
Rs. 40
40
Rs. 55
Rs. 30
Rice
3
Rs. 300
900
Rs. 250
Rs. 250
Total cost
Price
index
2260
100
Cost of
basket
The US Economy


Public and Private Sectors- M&B Ch. 5
Households, Businesses, the Public
Sector/Government
Functional distribution of US income 2000
Personal distribution of US income 1999
Disposition of household income 2000
Composition of consumer expenditure 2000
Legal Forms of Businesses



Sole-proprietorship
Partnership
Corporation
 Principal
agent problem
 Principals
(stockholders)
 Agents (managers)
 Differences in objectives (profits vs. salary)
Public Sector

Government’s role
 Providing
legal structure
 Maintaining competition
 Redistributing income
 Transfer
payments
 Market intervention
 Taxation
 Reallocating
resources (market failures)
 Spillovers
 Public
goods
Spillovers or Externalities

When some of the costs or benefits of a good are
passed on to someone other than the immediate
buyer or seller
Spillovers or Externalities

Spillover costs
 Environmental
pollution
 Correct by: legislation, specific taxes

Spillover benefits
 Health,
education,
 Correct by: subsidize consumers, suppliers, goods
(postal)
Public Goods


Indivisible
Non-exclusive

No market incentive to produce e.g. streetlights
Free-rider problem  people receive benefit from a
good without incurring the cost

Quasi- public goods

 Can
be exclusive streets/highways, education, libraries
Circular Flow
(1) Money income (rents, wages etc)
(1) Costs
(2) Resources
Resource
Market
(7) Expenditures
(8) Resources
(10 )Goods and Services
Businesses
(9)Goods and Services
Govrn’t
(11) Net Taxes
Household
(12) Net Taxes
(5) Expenditures
(6)Goods and Services
(4)Goods and Services
(3) Revenue
(2) Factors of prodn
(4)Goods and Services
Product
Market
(3) Consumption expenditures
Government finance

Federal expenditures
Pensions, income security
 National defense
 Health
 Interest on public debt


Federal Tax revenues
Personal income tax
 Payroll tax
 Corporate income tax
 Excise taxes- charged on goods produced inside the country

Pakistan's expenditure
Source: Economic Survey 07-08, Finance Division of Government Pakistan
Pakistan- Current Expenditure
Source: Economic Survey 07-08, Finance Division of Government Pakistan
Pakistan Tax Revenue
Source: Finance Division of Government Pakistan
Assignment 1

M&B Chapter 7 p. 157
 Questions

2, 4, 6, 8, 10
Due next class: Monday