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2 The Global Macroeconomy (Fach) / Accounting Entities (Lektion)

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  • Current Account =  Savings of countries  = Private Savings + Public Savings CA = S-I + (T-G)  CA = X-Z + NFI
  • Output per Worker y = c + i y = (1-s)*y + i consumption/worker + investment/worker
  • Consumption per Worker c + (1-s) * y dependent on his savings rate
  • GDP = Y Y = C+I+G +X-Z
  • CA GDP = Y = C + I + G + X-Z GNI =  GDP + NFI =   C + I + G + X-Z + NFI GNI = GDP + NFI = C + I + G + CA CA=X-Z+NFI GNI=GDP+NFI=C+I+G+CA GNI-T=C+I+(G-T)+CA (S-I) + (T-G)=CA  S-I is private saving and T-G is public saving
  • GNI Total income of domestic residents (which they can consume, save, or pay in taxes) (1) GNI = C + S + T  Equals GDP + NFI (2) GNI = C + I + G + CA (2) GNI = C + I + G + (X-M) + NFI Therefore (1) = (2) C + I + G + CA = C + S + T Rearranging = CA + (I-S) + (G-T) = 0 CA = Private Needs for funds + Public Needs for funds
  • MPC Marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption. The MPC will invariably be between 0 and 1. The marginal propensity to consume measures the change in consumption/change in disposable income MPC = Δc /  ΔY Factors that determine the marginal propensity to consume Income levels. At low-income levels, an increase in income is likely to see a high marginal propensity to consume; this is because people on low incomes have many goods/services they need to buy. Temporary/permanent. If people receive a bonus, then they may be more inclined to save this temporary rise in income. However, if they gain a permanent increase in income, they may have greater confidence to spend it. Interest rates. A higher interest rate may encourage saving rather than consumption; however, the effect is fairly limited because higher interest rates also increase income from saving, reducing the need to save. Consumer confidence. If confidence is high, this will encourage people to spend. If people are pessimistic (e.g. expect unemployment/recession) then they will tend to delay spending decisions and there will be a low MPC.
  • APC The average propensity to consume = consumption / income
  • The Multiplier b= 1/1-mpc The multiplier effect states that an injection into the circular flow (e.g. government spending or investment) can lead to a bigger final increase in real GDP. This is because the initial injection leads to knock on effects and further rounds of spending.
  • DD Desired Demand DD = C( Y-T) + I (r) + G + X - M
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  • Government Spending Multiplier Δ Y / Δ G If Prices are fixed, Government can kick in and provoide  a programme that will have a multiplier effect on income.
  • T in the Laffer Curve T = t* Y tmax skewed and higher than expected (aroung 75%) voodoo Economics
  • LM Curve: Positive Relationship between interest and Output Negative Relationship between interest and MD0 Demand Increase: Move along LM curve: interest increases - stable inflation FED accomodates M0: SHIFT LM Curve to RIGHT: Inflation, constant interest rate
  • Effect of V P = M V / Y V -  depend on the level of interest rates when interest rates are high, then holding cash is expensive Low interest rate: velocity of circulation will rise, so that at a given level of income, P increases M/P decreases
  • Leverage - Country Debt / GDP
  • Company Leverage Assets / Equity
  • Traditional Commercial Bank A: Securities Traded Assets / Vault Cash & Deposits at central Bank Loans to Customers L Net Worth Loans by Central Bank Deposity by Customers
  • Modern Commercial Bank A: Securities Tradeable Assets ↑  Vault Cash & Deposits at central Bank Loans to Customers L: Net Worth Wholesale Funding (Securitization) ↑  Loans by Central Bank Deposits by Customers ↓
  • Central Bank A: Securities Foreign Assets Loans to Banks L: Net Worth Currency in Circulation Deposits by Government Deposits by Banks
  • Keynesian Tax Multiplier ΔT x MPC/1-MPC
  • Savings rate s Determines allocation of output between consumption and investment for any output f(k), investment is i = s * y = s* f(k) for any output f(k), consumption is c = f(k) - s*f(k) Thus, for any output f(k), we have y = (1-s)y + i
  • Depreciation Investment - Increase in Capital Stock i = sy Depreciation - Proportional to Capital stock = ς * K Δ k = i - ς * K Law of Motion of Capital = Δ k = s*y - ς * K Steady State is reached when the Δ k = 0
  • Law of Motion of Capital = Δ k = s*y - ς * K Steady State is reached when the Δ k = 0
  • KA KA = Private Needs for funds + Public Needs for funds KA = -(I-S) = (G-T) 
  • NFI returns on the country’s assets - returns on the country’s liabilities
  • Money Multiplier m M2 / M0
  • Taylor Rule r = r(now + 1.5* (inflation(t) - inflation target)) + 0.5*(Y(t) - potential Y) the more conservative the country, the higher the weight on inflation
  • Debt Capacity NPVj,t = ∑ Yj,t • 1/ (pj-σj) = NPV = Ye / (g-r) Resources available to fund current and future spending and to repay current debt outstanding Sum of discounted future potential output YP where σ is growth rate of potential output, and p is discount factor

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