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ECO 121 Macroeconomics

ECO 121 Macroeconomics. Spring 2010. Aisha Khan Section L & M. Lecture Two. Inflation. Nominal vs. Real income Real income = Nominal income / price index Who is hurt by inflation? Fixed-income receivers Savers Creditors. Inflation. Who is unaffected/ helped by inflation?

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ECO 121 Macroeconomics

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  1. ECO 121 Macroeconomics Spring 2010 Aisha Khan Section L & M Lecture Two

  2. Inflation • Nominal vs. Real income • Real income = Nominal income / price index • Who is hurt by inflation? • Fixed-income receivers • Savers • Creditors

  3. Inflation • Who is unaffected/ helped by inflation? • Flexible income receivers • Debtors • Deflation • Hyperinflation

  4. 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

  5. Consumer Price Index

  6. The US Economy • Public and Private Sectors- M&B Ch. 5 • Households, Businesses, the Public Sector/Government

  7. Functional distribution of US income 2000

  8. Personal distribution of US income 1999

  9. Disposition of household income 2000

  10. Composition of consumer expenditure 2000

  11. Legal Forms of Businesses • Sole-proprietorship • Partnership • Corporation • Principal agent problem • Principals (stockholders) • Agents (managers) • Differences in objectives (profits vs. salary)

  12. Public Sector • Government’s role • Providing legal structure • Maintaining competition • Redistributing income • Transfer payments • Market intervention • Taxation • Reallocating resources (market failures) • Spillovers • Public goods

  13. 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

  14. Spillovers or Externalities • Spillover costs • Environmental pollution • Correct by: legislation, specific taxes • Spillover benefits • Health, education, • Correct by: subsidize consumers, suppliers, goods (postal)

  15. 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

  16. Circular Flow (1) Money income (rents, wages etc) (1) Costs Resource Market (2) Resources (2) Factors of prodn (7) Expenditures (8) Resources (10 )Goods and Services (9)Goods and Services Businesses Govrn’t Household (11) Net Taxes (12) Net Taxes (5) Expenditures (6)Goods and Services (4)Goods and Services (4)Goods and Services Product Market (3) Revenue (3) Consumption expenditures

  17. 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

  18. Pakistan's expenditure Source: Economic Survey 07-08, Finance Division of Government Pakistan

  19. Pakistan- Current Expenditure Source: Economic Survey 07-08, Finance Division of Government Pakistan

  20. Pakistan Tax Revenue Source: Finance Division of Government Pakistan

  21. Assignment 1 • M&B Chapter 7 p. 157 • Questions 2, 4, 6, 8, 10 • Due next class: Monday

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