Global Economics Academic Essay C211 Study Guide Questions
Instructions:-
C211 Study Guide Questions
The following questions are developed as a study aid for the C211 COS. They cover important concepts in each competency. The questions are not comprehensive but are only designed to serve as an indicator of your preparedness take the C211 assessment. After reading the material for each competency, use these questions to reinforce your understanding and review further as necessary.
COMPETENCY: Globalization (Peng Chapters 1, 5, 6, 11)
1- Explain the New, Evolutionary, and Pendulum views of Globalization. How do these differ from one another?
2- What is Foreign Direct Investment?
3- What different political views exist on FDI?
4- What benefits exist to a country receiving FDI? Elaborate.
5- What costs exist to a country receiving FDI? Elaborate.
6- How do resources influence competitive dynamics of a business?
7- How do capabilities impact the competitive dynamics of a firm?
8- What is resource similarity and how does this impact competitive dynamics?
COMPETENCY: International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10)
1- Give a description of the classical theory of international trade.
2- How would the modern theory compare to the classical theory?
3- Compare absolute advantage to comparative advantage. What differences exist?
4- What is mercantilism and why is this an important term?
5- What are the critical features of the product life cycle?
6- How would you describe strategic trade?
7- How are supply and demand related to the exchange rate of a country?
8- Which theory came first, mercantilism or modern-day protectionism?
9- If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?
10- What is transaction risk?
11- Explain the concept of “hedging” as it relates to reducing various types of risk.
12- What is the difference between currency hedging and strategic hedging?
13- What advantages exist with first mover?
14- What advantages exist with late mover?
15- Consider the model of foreign market entries. How is scale-of-entry related/relevant?
COMPETENCY: Political and Economic Forces (Peng Chapter 2)
1- How do institutions reduce uncertainty?
2- Discuss and compare the three pillars (regulatory, normative, and cognitive)
3- Compare formal and informal institutions.
4- On what is the institution based view of global business grounded? What core propositions lie at the root of this view?
5- How is global business affected by democracy?
6- How is global business affected by totalitarianism?
7- What are the differences between democracy and totalitarianism?
8- Explain the core features of civil, common and theocratic law? How do they compare?
9- What is a property right? In what way are property rights essential?
10- What is an intellectual property right?
11- Contrast the market, command, and mixed economy types.
COMPETENCY: Consumer Behavior (Mankiw Chapter 21)
1- What is an indifference curve?
2- What are the four properties of an indifference curve?
3- Explain marginal rate of substitution.
4- What is a budget constraint?
5- How might a budget constraint be impacted by an increase in income?
6- What two graphical elements are needed in order to determine a consumer’s optimal point of consumption?
7- How is a consumer’s optimal point of consumption determined precisely? What is the condition that must be met?
COMPETENCY: Firm Behavior under Different Market Structures (Mankiw Chapters 13-17)
1- How is marginal cost derived?
2- How is marginal cost related to total cost?
3- What is the specific formula to calculate marginal cost?
4- If Dave’s company has a total cost of $100 when quantity output is 5, and a total cost of $115 when quantity output is 6, what is the marginal cost of producing the 6th unit?
5- Total cost is made of two types of costs, what are they?
6- How does a firm determine to shut down in the short-run? What rule characterizes this?
7- What is a price taker? Which of the market structures are characterized as being “price takers”?
8- When a market is characterized as being a price taker, what fundamental shape does the demand curve for this market take?
9- How is the demand curve for a perfectly competitive firm distinct from the demand curve for a monopolistic market?
10- What does “downward sloping” with regards to a demand curve mean?
11- Where do firms with market power determine the quantity of product/service they will produce?
12- What is the primary goal/objective of the firm?
13- If the firm has price setting capacity, how will they use information about marginal costs and marginal revenues in order to accomplish their primary objective?
14- Describe the basic distinctions between the market models with respect to: number of market participants, type of product being marketed, ease of entry/exit into the market, and the prevalence of advertising/marketing.
15- What fundamental truth is realized when studying the behavior of an oligopolistic firm within the context/model called “prisoner’s dilemma”?
16- How might an oligopolistic firm behave like a monopoly? What forces may prevent this?
COMPETENCY: Macroeconomic Principles (Mankiw Chapters 29 & 34)
1- What tools does the Federal Reserve have with regards to monetary control?
2- What are open market operations?
3- When the Fed buys bonds, what impact does this have on the money supply and aggregate demand?
4- When the Fed sells bonds, what impact does this have on the money supply and aggregate demand?
5- What is a discount rate?
6- When the Fed reduces the discount rate, what impact will this have on the money supply and the aggregate demand?
7- When the Fed increases the discount rate, what impact will this have on the money supply and the aggregate demand?
8- What is a reserve ratio?
9- What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy?
10- What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy?
11- If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)?
12- If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand?
13- If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand?
COMPETENCY: Microeconomic Principles (Mankiw Chapters 4 & 5)
1- Explain the effect an income change might have on shifting the demand curve?
2- What is the difference between a normal good and an inferior good? Explain.
3- Explain how the price of related goods is related to changes in the demand curve?
4- If Luke and I are the only sellers of paper in a given market, and Luke drops his prices for paper, how will this impact the demand for my paper? Which way will the demand curve shift?
5- What other factors might influence the position of the demand curve?
6- What numerical value determines whether or not a product/service is considered price elastic versus inelastic?
7- What is income elasticity and how is it measured?
8- What is price elasticity of demand? Explain the distinctions between elastic, inelastic, and unit-elastic.
9- What two results stem from income elasticity? Why is this important to an economist?
10- What is cross-price elasticity? How is this defined and what result comes from this measure of elasticity?
11- Can you summarize the 3 types of elasticity, their equations, purpose and outcomes?
12- In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and supply?
13- In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and decrease in supply?
14- In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and supply?
15- In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and increase in supply?
COMPETENCY: International Trade (Mankiw Chapter 9)
1- Explain the concept of a tariff.
2- Explain dead weight loss.
3- How are tariff’s and dead weight loss related? Explain.
4- What are the two primary categories of trade barriers that exist?
5- If an import tariff is imposed on coconuts that are imported into the U.S., how will this impact the price of coconuts for U.S. consumers?
6- Why might a government be interested in imposed an import tariff on a good? What benefit would the government derive primarily?
7- How would imposing an import tariff on cigars impact the domestic production of cigars?
8- If an import tariff on coconuts was removed in the U.S., how would this impact the demand for coconuts by U.S. consumers?
9- What would happen to the overall domestic demand for a good if an import tariff were imposed on that good?
10- How does a tariff generally impact the following entities: consumers, producers, government? Compare the effects between the entities.
COMPETENCY: Measuring Economic Performance (Mankiw Chapters 7 & 23)
1- What is consumer surplus?
2- Who receives consumer surplus?
3- In relation to the demand curve and price, how is consumer surplus measured?
4- What is producer surplus?
5- Who receives producer surplus?
6- In relation to the demand curve and price, how is producer surplus measured?
7- How is total surplus determined?
8- In what ways might government or policy makers make use of surplus measures?
9- What is the difference between macroeconomics and microeconomics?
10- Why must income equal expenditure in an economy as a whole?
11- Define gross domestic product (GDP). What does it measure?
12- Describe the four components of GDP and explain how they affect aggregate demand.
13- Why are transfer payments such as social security not counted in government expenditures?
14- What is the difference between real and nominal GDP? Why do we need to measure GDP in real terms?
Solution
Global Economics Academic Essay C211 Study Guide Questions
Globalization
The new phenomenon started in the latter stages of the 20th century and was spurred by innovations in technology and a western ideology based on global exploitation and domination. The evolutionary view suggests that globalization has been part of our history dating back more than two thousand years ago in the Roman era. The third, Pendulum, view suggests that globalization is a result of the integration of people and countries all over the world due to trade. Globalization is not one-dimensional nor recent; it swings in between.
Foreign direct investment is when a business entity invests in another country for profit.
There are three main political views on FDI. The radical view sees FDI as an exploitative tendency by capitalists from one country. It is hostile towards FDI. The free-market view suggests that countries will benefit from their comparative advantage if FDI is let to process without government interference. A free-market view doesn’t exist. The pragmatic nationalist view suggests that FDI is only viable when the advantages outweigh the disadvantages. It sees FDI as being both beneficial and detrimental.
FDI makes positive contributions like supplying a country with expatriate knowledge. An influx of new technology, capital, and even managerial resources is an active injection towards the economic growth of a country. FDI gives employment opportunities to people in the host country, and they pay taxes too. All these add up to boosting the economy of the country.
There are also disadvantages of FDI to a host country. The main drawback is that multinationals will repatriate profits back to their countries hence leaving the host country with minimal financial benefit. There is a lot of uncertainty with multinationals in FDI since they can move at any moment to seek better opportunities elsewhere.
Resources must first and foremost add value to the ideas or business model of the multinational companies. Rarity off certain assets also creates a pull to multinationals. If a country has comparative advantages in certain areas, multinationals are very interested. There is a benefit if resources in a country cannot be easily imitated by other nations. Multinationals are aware that their competitive advantage could be enhanced in such regions.
Capabilities always affect how competitive a multinational firm is going to be. If the human resource is highly skilled and knowledgeable, the company is going to be more competitive. In this case, the only requirement is additional training since most of the skills are already in practice.
Resource similarity is a measure of how much resources employed by one firm are entirely similar to those used by a competitor. Resource similarity has an influence on competitive dynamics since the strengths and weaknesses of companies are all similar, and hence they all employ similar strategies. It limits the competitive advantage of the firms.
International Trade and Foreign Exchange Market
The classical theory relies on assuming a simple model consisting of two nations as well as two goods. The assumption is that there is perfect resource mobility across industries. In the classical theory, there is no foreign exchange, and there are no transportation costs.
The modern theory can be compared with the classical theory in certain ways. In the conventional theory, the comparative advantage in production is based on the efficiency of the workforce in a given country. in the modern theory, the comparative advantage is attributed to factor endowments and how they vary across various countries. The classical theory does not account for the difference in factor prices whereas the modern theory views these differences as the driving force behind commodity pricing, which provides a basis for international trade.
Absolute advantage looks at the productivity of different countries while comparative advantage focuses on the opportunity cost of production. If a producer uses a smaller quantity to produce a certain good compared to another producer, the former is said to have an absolute advantage in producing the good. A certain country might have an absolute advantage in producing goods, but comparative advantages would still differ across countries.
Mercantilism considers international trade to be a zero-sum game. It suggests that a country that exports more than it imports will eventually bene fit from the inflows of silver and gold thus becoming richer and if you import more and export less, you become poorer. It is important since it encourages countries to become exporters and hence enjoy a healthy balance of trade.
Several critical features exist in the life cycle of a product. The introduction stage when a company launches a new product to the market is the first feature. Costs of marketing, research and customer acquisition can be very high. The growth stage is second and is characterized by a strong increase in sales and the company capitalizes in economies of scale to increase its profit margins. The maturity stage is next, and here there is an established product. Decline stag is when the demand for the product in the market starts to shrink.
Strategic trade is a policy that seeks to influence the strategic interaction amongst firms in an oligopoly.
If prices go up, the demand falls but if prices fall demand increases. If prices of products in a certain country are lower than in yours, you buy from the other country and hence end up using their currency. It makes the currency of that other country stronger.
Mercantilism came before modern day protectionism.
The most effective way to limit foreign exchange exposure using the forward option is by fixing a standard rate of actual payment at a future date.
Transaction risk is found in the exchange rate. It is associated with the time from when one enters a contract up until the time for selling it. The time difference is directly proportional to the transaction risk.
Hedging reduces risks by ensuring that the company is certain of the prices of a commodity even in future by entering into contracts, such as a futures contract, to determine future prices in advance.
In currency hedging, the aim is to minimize the risk of foreign exchange. A forward contract is used to determine the exchange rate now, but the currency transaction is in the future. In strategic hedging, price movement and not the foreign exchange is the main driver. The company takes an offsetting position in a futures contract.
Several advantages exist with the first mover:
- The
fact of being a pioneer is likely to create a lasting impression in the minds
of people. It builds brand loyalty and recognition.
- There is room for error and maneuvering. Companies can fine-tune their methods to be at the most competitive.
- They might have a strategic advantage in gaining controlling power over vital resources in the way of location or workforce.
There are advantages with late movers too:
- Late
movers can observe how the market reacts to a certain product before investing
their money. It reduces risk on their part in case the product fails.
- The late mover can also watch other companies then come up with slightly improved methods that will eventually appeal to the consumers.
- If a product is well received, there is a buzz around it. Late movers take advantage of the buzz to come up with variations at a lower cost especially in creating awareness.
The scale of entry into the foreign markets is based on three main considerations:
- Industry
based- they include; inter-firm rivalry, entry barriers, bargaining power among
others.
- Resource-based- considers the value, rarity, and imitability of the resources in a country.
- Institution based- considerations include; trade barriers, regulatory risks, currency risks, institutional norms, and culture.
Political and Economic Forces
Institutions are faced with the task of reducing uncertainties. Institutions look at activities and group them according to their legitimacy. The company then deals with the legitimate ones hence reducing uncertainty.
The three pillars are; regulatory, normative and cognitive.
- Regulatory-
this includes all laws, rules, and regulations. It is the arm of government
that has to do with enforcing the law.
- Normative- looks at how the actions, beliefs, and values of relevant players influence the behavior of firms.
- Cognitive- it is linked to the informal sector and looks at the internal values and ethos of a company that guides the behavior of workers.
Formal institutions are characterized by laws, rules and regulations. They are supported by the regulatory pillar.
Informal institutions are characterized by culture, norms, beliefs, and ethics. They are supported by the normative and cognitive pillars.
The institutional-based view of global business is based on the inter-relation between institutions and firms, which results in the firm behavior. There are two key propositions in this view:
Firms and managers make their choices by institutional constraints. Firms have to move how similar firms across the world are moving.
Informal and formal institutions will work together to govern firm behavior. Informal constraints can be relied upon in the case where formal constraints are uncertain. Democracy influences global business in a positive manner. In a democracy, people are free to make political choices and hence they are less susceptible to corruption or civil war. Democracy creates a level playing field for businesses to take place with minimal interference.
Totalitarianism comes in four ways:
- Communist
totalitarianism- power is wielded by a single communist party such as in China.
- Right-wing totalitarianism- has the military backing and displays hatred for communism.
- Theocratic totalitarianism- power is wielded by a religious group.
- Tribal totalitarianism- one ethnic group has the political power.
Totalitarianism is, generally, not a good environment for business. The political risk is high due to uncertainty and instability due to riots and protests.
Democracy and totalitarianism are very different from each other:
- In
a democracy, the choice of political power is given to the people while a
totalitarian regime gives power to a certain group only.
- There is a higher political risk in a totalitarian regime compared to democracy.
- There are ease and more independence of doing business in a democracy compared to a totalitarian regime.
The core features of civil, common ad theocratic laws:
Legal representation- lawyers and judges are present in all. However, the judge is the main investigator while the lawyer only plays an advisory role. In common law, two lawyers argue out the case, and the judge is just a referee.
Constitution- it is not always the case for countries that practice common law to follow a constitution. In the case of civil law, there are specific codes of law that, added up, create the constitution that must be followed.
Contracts-in countries with common law, there is extensive freedom of contract unlike in civil law settings.
Precedent- in common law, the decision of the judge is binding but can be appealed. In civil law, only constitutional and administrative decisions are binding.
Property rights are the legal and theoretical ownership of certain property by individuals as well as the power to decide how the said property is used. In areas where the property rights are well defined and responsibly enforced, individuals have the ability to prosper.
Intellectual property entails human inventions and commercial images like logos. An intellectual property right gives exclusive authority over an invention or image to the owner alone. If another party uses this right, they can be taken to court.
Contrast the market, command, and mixed economy types.
- Command
system- a huge chunk of the economic system is under the control of the
government.
- Market system- there is little government interference and the enterprises run by the people are responsible for determining the state of the economy.
- Mixed system- it has characteristics of the command system and the market system since it is a combination of both.
Consumer Behaviour
A graph that shows a combination of two goods that offer the same satisfaction to the consumer no matter which combination they choose. There is an equal utility.
Four properties of an indifference curve:
- People prefer high indifference curves to lower ones. Consumers will prefer to obtain greater quantities of a commodity, not less.
- Indifference curves slope downwards.
- Indifference curves never intersect.
- The slope represents the marginal rate of substitution of a product. The slope bows inwards.
The marginal rate of substitution refers to the rate of the willingness of a consumer to trade off a certain commodity for another.
A budget constraint considers the goods that a consumer can buy given the prevailing prices and the income level.
When the income of a consumer increases, they buy more of a superior good and less of an inferior one. In that case, increased income causes the budget constraint to shift outwards.
Marginal utility and price are used to determine optimal consumption.
The budget line and the indifference curve are drawn. The optimum point of consumption is the intersection of the budget line and the indifference curve.
Firm Behaviour under Different Market Structures
Marginal cost is derived by dividing the changes in cost with the changes in output.
When output increases by a single unit, total cost increases too. This amount by which total cost increases is known as marginal cost.
What is the specific formula to calculate marginal cost?
Total cost is made up of fixed costs and variable costs.
A firm that aims at making a profit will shut down in the short-run if the quantity produced has a marginal cost that falls between average total cost and average variable cost.
A price taker is a firm that has no power to influence prices and thus sells at the prevailing market prices. A good example is a perfectly competitive market structure.
In a price taker market, the demand curve lies horizontally equal to the market’s equilibrium price.
The demand curve of perfect competition is a horizontal line while the graph of a monopoly slopes downwards.
A downward sloping demand curve implies that the demand for a particular commodity increases as its price decreases.
Firms with market power fall under the category of price makers. They change prices and quantities produced at will since they essentially control the market.
The primary objective of a firm is to create profits for the investors.
If a firm is a price setter, it should ensure it produces at a quantity where marginal cost and marginal revenue are equal. This way, the company can maximize profits.
Pure Monopoly-
- One supplier
- There are barriers to entry and exit
- Software makers
Perfect competition-
- Many suppliers
- No barriers to entry
and exit
- Agricultural produce
- No barriers to entry
and exit
Monopolistic-
- Many suppliers
- Low barriers to entry and exit
- Health and beauty products
Oligopoly-
- Few suppliers
- there are barriers to
entry and exit
- Automobile manufacture
- there are barriers to
entry and exit
Prisoner’s dilemma in an oligopoly means that firms cannot cooperate because it is not in their individual best interest to do so. The fact is that they would improve efficiency in production by cooperating but they don’t.
An oligopolistic firm behaves like a monopoly in that it can set prices for its commodities. However, it cannot set very high prices as a monopoly since it aims to remain competitive with the other few producers.
Macroeconomic Principles
The tools of monetary control are:
- Open- Market Operations
- Discount rate
- Reserve requirements
Open- Market operations- buying and selling of government securities in a bid to influence the reserve levels within the banking system.
When the Federal Reserve buys bonds, the circulation of money in the economy increases since there is an injection of payment into the banks. It means that banks now have surplus reserves to lend out to the public as loans
When the Federal Reserve sells bonds, the opposite occurs. Money is reduced from the banks after they buy the bonds hence no surplus is left to offer as loans. Supply of money reduces.
The discount rate refers to the minimum rate at which the Federal Reserve lends to commercial banks.
When the discount rate is reduced, banks can borrow more and hence there will be a lot of money for loans.
When the discount rate goes up, banks borrow less and hence there is less money circulating in the economy.
Reserve ratio is set by the Federal Reserve, and it refers to the basic amount that all banks should hold in reserve without lending out.
The Fed should reduce the reserve ratio to increase the amount of money available to the banks.
The Fed should increase the reserve ratio to reduce money supply in the economy.
When monetary supply increases, the banks have surplus reserves, and hence they seek to lend more by reducing the interest rates. There will be increased demand for money since the interest rates are lowered.
Expansionary fiscal policy increases Government spending thus boosting aggregate demand.
Contractionary fiscal policy causes the government to decrease its spending hence aggregate demand is lowered.
The expansionary fiscal policy allows the government to cut taxes so as to encourage investment. Companies will be able to produce at reduced costs hence the final cost of the commodity will be little. Aggregate demand for the product increases and interest will be lowered.
Microeconomic Principles
Change in income impacts the demand curve. An increase in income causes the demand curve to shift outwards in a normal good and inwards in the case of an inferior good.
A normal product is one where demand rises with an increase in income and vice-versa but the price stays constant.
An inferior good is one that the consumer demands less when their income increases and vice versa.
A change in the price of substitutes causes a movement along the demand curve. When the price of a substitute rises, demand for commodity increases and vice versa.
Luke sells his papers at a lower price hence there will be more demand for his paper and less so for mine. There will be an upward movement in my demand curve.
Other factors that influence the demand curve:
- Consumer tastes
- Income
- Change in price of substitutes
- Customer expectation
Numerical values that determine if a product is perfectly elastic or inelastic is 0 and 1.
Income elasticity of demand is the degree by which demand increases due to increase in income.
Price elasticity of demand measures how demand responds to change in price.
- Elastic demand- when
the quantity demanded decreases by a larger amount with a small price increase.
- Inelastic demand- there is little change in volume with a substantial change in price.
- Unitary elastic demand- a change in price generate an equal change in demand.
In income elasticity of demand, we look at the percentage change in demand versus the percentage income change. Income elasticity allows us to determine whether a product is a necessity or luxury.
Cross-price elasticity studies the responsiveness to demand a good when the price of another change, all factors held constant. Cross-price helps us to determine whether goods are complements, substitutes or independent.
Price elasticity of demand measures the responsiveness of demand to price changes.
PeD= %change in quantity demanded
%change in price
It can be used to determine pricing and sales forecasting.
Income elasticity of demand is the responsiveness of demand to changes in real income ceteris paribus.
IeD= %change in quantity demanded
%change in income
Enables us to know whether goods are normal or inferior.
Cross-elasticity measures how demand of a product reacts to change in the price of another.
Cross Elasticity Ea,b= %increase in quantity demanded of a
%increase in price of product b
Determines whether products are complements or supplements.
If supply and demand increase simultaneously, the equilibrium quantity also increases hence price falls.
A simultaneous increase in demand and decrease in supply leads to a shortage of the commodity.
A concomitant decrease in demand and supply means that the quantity decreases as the price remains constant. There is a surplus.
A concomitant decrease in demand and increase in supply means that less is consumed at a lower price.
International Trade
Tariff- it is a tax imposed on exports. It encourages local consumption by making imports more expensive.
Deadweight loss- loss of efficiency that occurs when equilibrium is not reached.
Tariff and deadweight loss are related in the sense that; tariffs are subsidies that prevent the market from achieving balance.
Tariff barriers- they discourage imports by imposing taxes on them making them costly.
Non-tariff barriers- are rules and regulations imposed to make trade difficult.
The coconuts are imported from the US and hence imposing a tariff decreases demand leading to a build-up of stock in the U.S since not many are sold. The excess amount leads to a drop in coconut prices in the U.S.
Governments impose tariffs to protect local industries. When imports are made more expensive, people are forced to consume local products which are way cheaper.
Imposing a tariff on cigars will make them costly compared to locally made cigars. Demand for local cigars rises.
If a tariff were removed, people would demand more coconuts from other countries since they would be cheaper.
The overall demand would decrease the prices of that good would increase.
Higher commodity prices will reduce consumption in the short-run by individuals and businesses, and the government will record an increase in revenue. In the long-run, business undergoes reduced consumption due to the presence of substitutes. The government will experience increased demand for public services.
Measuring Economic Performance
Consumer surplus is the difference between the amount consumers are able and willing to pay for a product against the amount paid.
Consumer surplus is enjoyed by the consumer.
In a demand curve, the consumer surplus is the area below the demand curve but above the market price.
Producer surplus is the benefit to a producer when he sells products in the market.
Producer surplus is enjoyed by the producer.
In a supply curve, the producer surplus is the area above the supply curve but below the price.
Total surplus is obtained by adding the total area of consumer surplus with that of producer surplus.
Surplus means that the consumers and producers are left with more money to use. The government can create a favorable environment for these excess amounts to be invested back into the economy.
Microeconomics studies economics at a group, individual and company level. Macroeconomics examines the national economy as a whole.
Income must equal expenditure for an economy because there are a buyer and seller in every transaction. Buyer and seller mean income and expense which measure the GDP.
GDP (Gross Domestic Product) is the value of the finished goods and services that are produced within the borders of a country over a given period.
Four components of GDP:
- Personal
consumption expenditure- counts investment in business as well as private
purchases. The increase in consumption increases aggregate demand.
- Investments- Investments in housing and industry will improve aggregate demand
- Net exports- equals total exports minus imports. Exports are increased while imports are deducted from the GDP equation
- Government expenditure- figures on government projects like defense and infrastructure are added to the GDP model.
Transfer payments are not included in GDP because they are not actual payments for commodities and services.
The difference between nominal and real GDP is
that nominal values are not adjusted for inflation whereas actual values are
adjusted. GDP is measured in real terms to cater for inflation.
References
Peng, M. W. (2009). Global strategy. Mason, Ohio: South-Western/Cengage Learning.