Economics and Statistics

Aggregate supply -short run analysis- : The aggregate supply is the total amount of goods and services the firms in a country produce at each price level in a fixed period of time. Sticky-wage and price model: In the short run, wages and other costs of production are relatively fixed. In other words, workers will not accept to receive a lower wage, when firms want to reduce their costs. Thus, firms must reduce output and layoff workers when aggregate demand drops. However, firms can also benefit from these fixed costs, if the aggregate demand increases (i.e shifts to the right). Prices increases but the costs stay the same, firms earn a bigger profit in the short run. Short run aggregate supply curve (SRAS): The SRAS curve is upward sloping, but is relatively flat below the full-employment level of output because of the "stickiness" of wages. The SRAS curve is relatively steep beyond the full employment level of output, since the firms are  physically constraint to ...

Multiplier effect: whenever   any of the components of AD increases, the increase in GDP will be greater than the initial increase in expenditures. The impact on GDP of a particular increase in spending depends on the proportion of the new income that is taken out of the system to the proportion that continues to circulate in the economy. The multiplier effect tells us the impact a particular change in one the components of AD will have on the total income (GDP).  Let k denote the spending multiplier, which is a function of MPC and MPS. The larger the marginal propensity to consume, the larger the spending multiplier. Notice that the larger the MPC, the greater the impact a particular change in the spending variables will have on the nation's GDP. The crowding out effect: If government spending increases without an increase in taxes, the government must borrow funds from the private sector to finance its deficit, thereby increasing the interest rate. This increase in interest ...

Consumption: purchases of durable and non-durable goods and services by domestic households In the US, consumption is the largest component of aggregate demand, equaling about 70% of the nation's GDP as of 2019. Determinant of consumption: The level of income  determines the level of consumption. If the income level increases, consumption rises. Average propensity to consume (APC)  and save (APS): at low (high) income levels the APC is high (low). This is the proportion of national income that goes to consumption. At low (high) income levels the APS is low (high). Marginal propensity to consume (MPC): the change in consumption that results from a change in income. Marginal propensity to save (MPS): the change in savings that results from a change in income. MPS + MPC =1 in a closed economy.   Wealth impacts the level of consumption. Household wealth includes assets minus liabilities.  Assets include real estate, stocks, bonds, and savings. When asset prices rise (fal...

Aggregate demand: Aggregate demand: a function relating price level and the amount of output of a nation demands in a given time period. This function aggregates the demands of all consumers for all the goods and services produced in a nation in a given time period at different price levels. There is an inverse relationship between the quantity of real output demanded and the price level. The lower (higher )the price levels, the greater (lower) the amount of output demanded. Aggregate demand measures the demand for a nation's output of goods and services in a year.  It closely resembles the expenditure approach of calculating the GDP. Aggregate demand for a country depends on four types of spending: Consumption (C): all spending by domestic households on goods and services. Investment (I): all spending by firms on capital goods and by households on real estate. Government spending (G): measures a country's government's expenditures on goods and services. Ne...

Exercise: Assume that country Y has a population of 458 with a constant yearly (population) growth rate of about 2.8%. Find real GDP per capita and the real GDP growth rate for each year from 2015 to 2019. Describe the relationship between the per capita GDP and the GDP growth rate. Year Population  Real GDP  p.c GDP   GDP growth rate 2015 458 $23,457 ... n.a 2016 ... $23,943 ... ... 2017 ... $24,035.2 ... ... 2018 ... $25,431.1 ... ... 2019 ... $24,950.6 ... ... Solution: Year Population  Real GDP  p.c GDP   GDP growth rate 2015 458 $23,457 $51.1 n.a 2016 471 $23,943 $50.7 2.06% 2017 483 $24,035.2 $49.8 0.39% 2018 498 $25,431.1 $51.1 5.81% 2019 510 $24,950.6 $48.8 -1.89% General formula for constant population growth: i stands for year (2015, 2016, etc ...). Example: To find the per capita GDP divide the GDP of year i by its population. Example: GDP growth rate is simply the percentage change between this year's GDP and the GDP from the previous year (rem...