ADNEOM BENELUX TRAINING ADNEOM BENELUX EXPERTS STRIVING FOR

ADNEOM BENELUX TRAINING ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Microeconomics is concerned with the behavior of individual consumers, firms, industries and markets. (ex : law of supply & demand) Macroeconomics is concerned with the economy as a whole, focusing on economic aggregates such as the total output of goods and services, unemployment and inflation ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Gross Domestic Product (GDP) is the value of all final goods and services produced in the economy over a given period, usually a quarter of year. It is the most widely used indicator of economic activity. Final goods and services are those purchased by their final users, and not sold on for use in the production of other goods and services. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Nominal GDP ADNEOM BENELUX GDP per Capita Purchase Power Parity EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Measuring GDP as Expenditure GDP can be measured by adding the four different types of final expenditures : GDP = C + I + G + NX Where : C = Households Consumption : durable and non-durable goods, services I = Corporate/Business Investment - Non residential fixed investment (machinery, buildings, etc. ) - Inventory investment (changes in the level of inventory stocks) - Residential investment (new homes or apartments) G = Government expenditure (all state levels, without social security, unemployment benefits, etc. ) NX = Net Exports (difference between exports (X) and imports (M)) ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Measuring GDP as Income Expenditure by one individual or sector must correspond to income received by another individual or sector. How is this income spent? Therefore : GDP = C + T + S ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Nominal and real GDP Nominal GDP measures the value of goods and services at current prices. Real GDP measures the value of goods and services at constant prices. Real GDP = nominal GDP / GDP deflator Chain weighted measures of real GDP eliminate some of the major problems associated with the 'fixed base year' methodologies ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics The theory of income determination Tries to explain why the GDP level is changing from year to year. Assumptions : 1) Constant prices 2) Distribution of corporate profits as dividends to households 3) Classification of expenditure flows (autonomous from GDP or induced by GDP) 4) Classification of consumption as induced by GDP ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics 5) Household expenditure of disposable income : spending a constant proportion of the disposable income. So, if t = average rate of taxation, then : - Income taxes = t x GDP - Disposable income = GDP – t x GDP = (1 -t) x GDP If b = the proportion of disposable income which household plan to spend, then : - Planned Consumption : C = b x (1 -t) x GDP 6) Equality of actual and planned autonomous expenditures (A) : as it doesn’t depend on GDP, A consist of investment, government expenditure and net export. A = I + G + NX ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Equilibrium GDP is said to be at its equilibrium level when actual expenditures are at their planned levels. When this is the case, households, firms, and the government will not wish to change their expenditures, and GDP will be constant. Total Planned Expenditures = b(1 -t) x GDP + A Total Actual Expenditures = GDP = C + A (where C is actual consumption) So, by 6, Actual Expenditures – Planned Expenditures = 0 Þ GDP = b(1 -t) x GDP + A Þ GDP – b(1 -t)GDP = A Þ GDP (1 – b(1 -t)) = A Þ ADNEOM BENELUX The GDP Multiplier = EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Balance of payment The balance of payments is a statement that summarizes the economic transactions of a country with the rest of the world during a specific time period, usually a year or quarter. The overall balance of payments is recorded as the sum of the various transactions across the current account and capital and financial account. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics The current account = Trade Balance + income + unilateral transfers - The balance of trade is the difference between the money value of exports and imports of goods and services. It is often divided into two separate accounts : the merchandise trade account and the service trade account. - Net Income is the difference between money coming in (credit) and money going out (debit) of a country in the form of compensation of employees (salaries) and investment income. Investment income refers to the difference between earnings from foreign investors' investments in the domestic economy and domestic investors' investment abroad. - Unilateral Current Transfers refers to unrequited receipts and payments, such as foreign aid, subsidies, and workers' remittances. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Capital & Financial Account - The capital account primarily records all international capital transfers. Such transfers include transfers of ownership of fixed assets, the acquisition or disposal of non-producted, non-financial assets, debt forgiveness, and migrants' transfer. - The financial account covers transactions in foreign financial assets and foreign financial liabilities, that is, claims on non-residents and obligations to non-residents. It can be sub-divided into direct investment, portfolio investment, other investments, and reserve assets. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics The balancing act In practice, the current and capital and financial accounts do not exactly offset each other for a number of reasons, including measurement errors, statistical discrepancies, accounting conventions, end exchange rate movements that change the recorded value of transactions. Therefore, the balance of payments more accurately conforms to the following identity : Current account balance + capital and financial balance + net errors and omissions = 0 ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Funding a Balance of Payments Deficit Short-term : - By borrowing (inflow of foreign capital) - By Central Bank action : selling reserve assets (implies that the country currency drops) - Long-term : by reducing investment or increase savings because : GDP = C + I + G + X – M GDP = C + T + S => C + T + S = C + I + G + X – M => M – X = (I – S) + (G – T) Imports(M) – Exports(X) = (Investment(I) – Savings(S)) + (Gov Expenditures(G) – Taxes(T)) Reducing investment is not considered as a good politic => increase savings is the most used (by increase interest rates). ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Fiscal Policy Budget deficit = i. B + G – T Where : i. B is the nominal interest payments on government debt G is the government spending on goods and services (including transfer payments) T is the Tax revenue If t = the average tax rate, then T = t x GDP When tax revenue depends on GDP, it acts as an automatic stabilizer in the sense that the decline in revenue moderates the fall in consumption and, as a consequence, the decline in equilibrium GDP. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Discretionary Fiscal Policy Any change in government expenditure changes equilibrium GDP as it is a part of autonomous expenditure. The impact of any change in G on equilibrium GDP will be magnified further by the effect of the multiplier. Any change in the tax rate will change the equilibrium GDP as it is part of the multiplier. A cut in the tax rate increases the value of the multiplier and real GDP (and vice versa). The effect of discretionary fiscal policy on real GDP therefore depends on the multiplier - the greater the multiplier, the greater the impact of discretionary fiscal policy. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Financing the budget deficit To finance excess expenditure, the government must borrow from other sectors in the economy. In most cases, this financing is achieved by issuing government securities. To make these securities more attractive to other sectors of the economy, the government must increase the rate of interest. To maintain their share of the economy's savings, these other sectors must also increase interest rates. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Inflation is a persistent rise in the general level of money prices. It is typically measured by a consumer price index (CPI). The CPI is an index of the average level of prices of goods and services bought by households each year. It uses base year weight in every year. CPI = 100 ( Cost of base year quantities at current prices / Cost of base year quantities at base year prices ) A chained CPI uses different weights each year to take account of changing consumption patterns and to overcome the substitution bias of the CPI. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Causes of inflation - Demand-pull : a stimulus to demand causes the aggregate demand schedule to shift, which may result in higher prices. - Cost-pull : an increase in production costs is passed on to consumers, causing a shift in aggregate supply. - Sustained inflation is the result of decisions taken by the major players in the economy : unions, firms and government. This is what economists are primarily concerned with, and it is caused by a combination of cost-push and demand-pull factors. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Costs of inflation Unanticipated inflation = Actual inflation - Expected inflation The cost of inflation depend on whether it is anticipated or unanticipated - Rapid changes in price level obstruct the efficient working of the market. -Redistribution of wealth : real value of contracts are changing in time. -Reduced international competitiveness -Inflation impacts negatively on the capacity of an economy to generate wealth and therefore can hinder economic growth. - People on fixed incomes, such as retirees, suffer from the decline in the real value of money as their purchasing power falls. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Monetary Policy Monetary policy refers to actions undertaken by a central bank to influence the availability and cost of money and credit in an attempt to achieve national economic objectives. The overall demand for money - the amount of money that people want to hold - is the sum of all the individual demands for money by the people in the economy. It depends on the level of transactions in the economy, which can be considered roughly proportional to nominal income (GDP), and also on interest rates. -The demand for money increases when GDP increases, and falls when GDP falls (positive relationship) - The demand fro money decreases when the interest rates rise, and increases when interest rates fall (negative relationship). ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Money market equilibrium requires that money supply is equal to money demand. In the vertical money supply model shown below, equilibrium occurs at point E, and the equilibrium interest rate is r. - if the central bank wants to increase interest rates, it must decrease the supply of money. - if the central bank wants to reduce interest rates, it must increase the supply of money. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Implementation of monetary policy Required reserve ratio primary liquidity ratio : Central banks require other banks to hold a specified percentage of their assets in the form of reserves. - if the supply of reserve assets is increased by lowering the required reserve ration, then banks can increase their lending and deposits, and thereby expand the money supply (thus lowering the interest rate). - if the supply of reserve assets is reduced by increasing the required reserve ratio, then banks must decrease their lending and deposits, and thereby contract the money supply (thus raising the interest rate). - Open market operations refer to the purchase and sale of securities by central banks on the open market in order to influence credit conditions, the money supply, and interest rates. - Interest rates : - By reducing the interest rate, the central bank is encouraging banks to borrow additional reserve assets. This increases the supply of reserves and the money supply, thus lowering the interest rate. - By increasing the interest rate, the central bank is discouraging banks from borrowing additional reserve assets. This decreases the supply of reserves and the money supply, thus raising the interest rate. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Unemployment The unemployment population is defined as those of working age who, in a specified period, are without work and are both available for, and have taken specific steps to find work. The unemployment rate is the percentage of the labor force that is unemployed. Unemployment imposes both social and economic costs on society. The most obvious social cost is a loss of human dignity and self-esteem for those who are unemployed Economic costs includes : - higher taxation - loss of human capital - loss of economy output ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Types of unemployment The different types of unemployment are : - Frictional unemployment - imperfect labor market information causes workers to require time to search for suitable openings. - Structural unemployment - this is caused by a decline in traditional industries and low labor mobility. - Cyclical unemployment - caused by a lack of effective demand - Seasonal unemployment - caused by the seasonal nature of some types of business activity - Classical unemployment - interference with the market by labor unions and the government causes wages to be too high. ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics The Philips Curve ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics Influence of macroneconomic indicators on financial markets ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com

Macroeconomics ADNEOM BENELUX EXPERTS STRIVING FOR EXCELLENCE ADNEOM TECHNOLOGIES: EXPERTS STRIVING FOR EXCELLENCE www. adneom. com