ECONOMICS

ABBE1033

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The study guidelines for final exam are as follows:

Lecture 8 (CHAPTER 6): Calculation + Theory

Lecture 9 (CHAPTER 7): Calculation + Theory

Lecture 10 (CHAPTER 8): Diagram drawing

Lecture 12 (CHAPTER 10): Theory + Diagram drawing

Lecture 13 (CHAPTER 11): Calculation + Theory

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 LECTURE 8:
Chapter 6
MACROECONOMICS
MEASUREMENTS:
GDP & REAL GDP

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 GDP is the total marketvalueof all finalgoods and services produced
annually within a
country's border

1: DEFINE AND COMPUTE AN ECONOMY’S

OUTPUT AND NATIONAL INCOME
▪ GDP is the total market value of all final goods and
services produced annually within a country’s borders.

GDP
Calculation
Methods

Expenditure Income
Approach Approach
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Expenditure Approach
(1) GDP
= Consumption (C) + Investment (I) + Government
Purchases (G) + (Export, X – Import, M)

(2) NI
= GDP + Income earned FROM the rest of the world -
Income earned BY the rest of the world - Capital
Consumption allowance* - Indirect business taxes -
Statistical discrepancy
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Income Approach
(1) National income (NI)
= Compensation of employees + Proprietors’ income + Corporate
profits + Rental income + Net interest

(2) GDP
= NI – Income earned from the rest of the world + Income earned
by the rest of the + Indirect business taxes (IBT) + Capital
consumption allowance + Statistical discrepancy

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NOMINAL GDP REAL GDP
The total market value of
The total market value of all
all final goods and services
final goods and services
produced annually within a
country’s borders, VS produced annually within a
country’s borders, adjusted
unadjusted for changes
for changes in price level)
in price level)

GDP
Price Index
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 GDP PER
CAPITA
GDP ▪ Is a measure of a
GDP per capita = country’s
Population economic output
that accounts for its
number of people

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2: DEFINE ECONOMIC GROWTH

▪ Economic Growth is measured by increases in Real GDP

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3: DEFINE BUSINESS CYCLE AND IDENTIFY THE
FIVE PHASES OF THE BUSINESS CYCLE
▪ Business cycle: Recurrent swings (up and down) in Real GDP.

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5 PHASES OF THE BUSINESS
CYCLE
Peak Contraction Trough
• Real GDP is at • A decline in • The Low Point of the real
a temporary the real GDP GDP, just before it begins
high to turn up

Recovery Expansion
• When the real GDP is • when the real GDP expands
rising from the trough and beyond the recovery
ends at the initial peak

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4: IDENTIFY THE SHORTCOMINGS OF GDP

GDP excludes non-market activities

• GDP does not measure some very useful output because it
is unpaid

GDP ignores environmental problems

• GDP fails to consider the negative impacts of pollution on the
environment and our well-being.

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 LECTURE 9:
Chapter 7
Price & Unemployment

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The study guidelines for final exam are as follows:

Lecture 8 (CHAPTER 6): Calculation + Theory

Lecture 9 (CHAPTER 7): Calculation + Theory

Lecture 10 (CHAPTER 8): Diagram drawing

Lecture 12 (CHAPTER 10): Theory + Diagram drawing

Lecture 13 (CHAPTER 11): Calculation + Theory

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1: DEFINE INFLATION AND COMPUTE
INFLATION RATE
Inflation: A persistent rising general level of prices
(CPI).

How to calculate the CPI:

Total expenditure on market basket in current year

CPI = X 100
Total expenditure on market basket in base year

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How to calculate the inflation rate (Percentage
change in prices):

CPI in the later year

CPI in the earlier year

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2: EXPLAIN TYPES OF INFLATION
Demand-Pull Inflation
• Caused by an excess of total spending beyond
the economy’s capacity to produce.
• Due to too much money chasing too few goods
• Demand-side inflation

Cost-Push Inflation
o Caused by rising per-unit production costs
o Due to increase in costs of raw materials or
increase in wage rate
o Supply-side inflation 17
WHO IS HURT, UNAFFECTED OR
HELPED BY INFLATION?

• Flexible income receivers

• COLAs receivers
Winner • Property owners
• Debtors (borrowers)

• Fixed income receivers

• Savers
Loser • Creditors (Lenders)

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3: DEFINE UNEMPLOYMENT AND
COMPUTE UNEMPLOYMENT RATE
▪ Unemployment rate (U)
Number of unemployed persons
x 100
Civilian labour force

▪ Employment rate (E)

Number of employed persons
x 100
Civilian noninstitutional population

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4: GROUPS OF PEOPLE WHO ARE UNEMPLOYED

A person quit A person who is

his or her job Job Re- currently reentering
voluntarily the labor force
leaver entrant

New
Job loser entrant
Who are the
Unemployed?
A person was either A person who has never held
fired or laid off a full-time job and is looking20
for a job.
5: EXPLAIN AND DISTINGUISH AMONG THE
TYPES OF UNEMPLOYMENT
FRICTIONAL STRUCTURAL
UNEMPLOYMENT UNEMPLOYMENT

Loss of employment due to the Loss of employment due to

natural friction of the economy, structural changes that eliminate
which is caused by changing some jobs from the economy and
market conditions create others

It is represented by qualified The unemployed are unqualified

individuals with transferable skills or do not have transferable skills
who change jobs
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 Frictional
Unemployment

Natural Cyclical
Unemployment
= Unemployment
(Full VS workers lose their jobs
during downturns in
Employment) the business cycle.

Structural
Unemployment Cyclical Unemployment
(UC) =
Unemployment rate (U)
–
Natural unemployment (UN)
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 LECTURE 10:
Chapter 8
Aggregate Demand and
Aggregate Supply

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The study guidelines for final exam are as follows:

Lecture 8 (CHAPTER 6): Calculation + Theory

Lecture 9 (CHAPTER 7): Calculation + Theory

Lecture 10 (CHAPTER 8): Diagram drawing

Lecture 12 (CHAPTER 10): Theory + Diagram drawing

Lecture 13 (CHAPTER 11): Calculation + Theory

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1: EXPLAIN AGGREGATE DEMAND AND
AGGREGATE SUPPLY AND DRAW AD-AS DIAGRAM
Aggregate Demand (AD) Short Run Aggregate Supply
(SRAS)

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2: EXPLAIN THE FACTORS THAT CAUSE
A CHANGE IN AGGREGATE DEMAND

Expansionary fiscal policy

Depreciated 26
3: EXPLAIN THE FACTORS THAT CAUSE A
CHANGE IN SHORT-RUN AGGREGATE SUPPLY

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 Short-Run Aggregate
Aggregate Supply Demand

An increase in SRAS A decline in SRAS An increase in AD A decline in AD

P1
P1
P2
P2

Real GDP (Q)

Q1 Q2 Real GDP (Q) Q2 Q1 Real GDP (Q) Q1 Q2 Real GDP (Q) Q2 Q1 28
 Using aggregate demand and aggregate supply (AD-SRAS) diagrams,
explain what will happen to the equilibrium price level and Real GDP
EXAMPLE: when each of the following events occurs:
▪ A beneficial supply shock (5 marks)

Answer:

1. Aggregate Supply increases; SRAS curve Price Level

shifts rightward from SRAS1 to SRAS2

2. Equilibrium price level decreases from P1

to P2

3. Equilibrium Real GDP increases from Q1

to Q2 Q1 Q2
Real GDP (Q)

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LECTURE 12:
Chapter 10:
Monetary Policy

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The study guidelines for final exam are as follows:

Lecture 8 (CHAPTER 6): Calculation + Theory

Lecture 9 (CHAPTER 7): Calculation + Theory

Lecture 10 (CHAPTER 8): Diagram drawing

Lecture 12 (CHAPTER 10): Theory + Diagram drawing

Lecture 13 (CHAPTER 11): Calculation + Theory

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 1: DEFINE MONEY AND EXPLAIN ITS
FUNCTIONS
Medium of Exchange Store of Value

• Money is used as a Money keeps its value over

means of payment as it time, allowing individuals to
is generally acceptable save and store wealth.
in exchange for goods
and services • If you save RM1,000 in a bank
account, you expect that money
• You buy a cup of coffee with to still be worth RM1,000 when
RM10 cash you withdraw it 1 year later.

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 1: DEFINE MONEY AND EXPLAIN ITS
FUNCTIONS
Unit of Account Standard of Deferred Payment

• Money is used as a Money allows people to

measure of the value of make agreements to pay
goods, services, and for goods or services later.
resources
When you take out a loan to buy a
• If a laptop costs RM1,000 and a car, you are agreeing to pay a
smartphone costs RM500, you certain amount of money in the
can compare their prices future.

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BNM deliberates changing of the
money supply to influence interest rate
& thus AD in the economy

Eg: MS ↑, Interest rate ↓, AD ↑

2: DEFINE MONETARY POLICY 34

2: EXPLAIN THE TOOLS OF MONETARY POLICY USED
AND HOW THEY AFFECT THE MONEY SUPPLY

To Increase Money Supply To Decrease Money Supply

( MS) ( MS)
Buy government bond Sell government bond
Lower the required reserve ratio Increase the required reserve
ratio
Lower the discount rate Raise the discount rate

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3: DISTINGUISH BETWEEN EXPANSIONARY
AND CONTRACTIONARY MONETARY POLICY
Problem: Recessionary gap
- Real GDP produced (Q1) < Natural Real GDP (QN) Price Level
AD2 LRAS
- Unemployment Rate (U) > Natural unemployment SRAS
AD1
Rate
- Surplus in labour market
• 2
Monetary policy: Expansionary
• 1

Tools:
1. Buy government bonds
2. Lower reserve ratio
3. Lower discount rate
Real GDP
Q1 QN
Effects: MS↑, AD↑, real GDP moves to natural
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real GDP
Problem: Inflationary gap
- Real GDP produced (Q1) > Natural Real GDP (QN)
- Unemployment Rate (U) < Natural unemployment
Rate
- Shortage in labour market Price Level
LRAS
AD1 SRAS

Monetary policy: Contractionary AD2

Tools: • 1
1. Sell government bonds
2. Higher reserve ratio • 2

3. Higher discount rate

Effects: MS↓, AD↓, real GDP moves to natural Real GDP

real GDP QN Q1
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 LECTURE 13:
Chapter 11
International Trade

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The study guidelines for final exam are as follows:

Lecture 8 (CHAPTER 6): Calculation + Theory

Lecture 9 (CHAPTER 7): Calculation + Theory

Lecture 10 (CHAPTER 8): Diagram drawing

Lecture 12 (CHAPTER 10): Theory + Diagram drawing

Lecture 13 (CHAPTER 11): Calculation + Theory

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1: DISTINGUISH BETWEEN ABSOLUTE ADVANTAGE
AND COMPARATIVE ADVANTAGE

Absolute Advantage
• The situation in which a country has total
advantage in producing goods with FEWER
RESOURCES compared to another country.

Comparative Advantage
• The situation in which a country can produce
a good at a LOWER OPPORTUNITY COST
than another country.
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 ▪ The following table shows the production
of iPads and car in South Korea and Japan.
Q: Identify and explain which country enjoys the Both countries have equal allocation of
resources between iPads and cars.
absolute advantage in the production of iPads and
cars, respectively. iPads Cars
(units) (units)
South Korea 320 400
A: South Korea has the absolute advantage
in the production of iPads and cars because Japan 240 230
South Korea produces more iPads and cars
than Japan.

2: DETERMINE WHICH COUNTRY HAS THE ABSOLUTE

ADVANTAGE & COMPARATIVE ADVANTAGE IN
PRODUCING A PARTICULAR GOOD
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 Q: Explain which country has the comparative advantage in the production of iPads.
STEP 1: Calculate opportunity cost of 1 unit of iPads iPads Cars
(units) (units)
South Korea: Japan: South 320 400
320 i = 400 C 240 i = 230 C
1 i = 400 C / 320 1 i = 230 C / 240
Korea
1 i = 1.25 C 1 i = 0.96 C Japan 240 230

STEP 2: Compare opportunity cost of 1 unit of iPads at South STEP 3: Conclusion

Korea & Japan
Japan has the
South Korea: Japan comparative advantage
To produce 1 iPad, South To produce 1 iPad, Japan in producing iPads at a
Korea gives up 1.25 cars gives up 0.96 car lower opportunity cost
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 Q: Explain which country has the comparative advantage in the production of cars.
STEP 1: Calculate opportunity cost 1 unit of car iPads Cars
(units) (units)
South Korea: Japan: South 320 400
400 C = 320 i 230 C = 240 i
1 C = 320 i / 400 1 C = 240 i / 230
Korea
1 C = 0.8 i 1 C = 1.04 i Japan 240 230

STEP 2: Compare opportunity cost of 1 unit of cars at South STEP 3: Conclusion

Korea & Japan
South Korea has the
South Korea: Japan comparative advantage
To produce 1 car, South To produce 1 car, Japan in producing cars at a
Korea gives up 0.8 iPad gives up 1.04 iPad lower opportunity cost
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 2: DESCRIBE THE METHODS OF TRADE
RESTRICTION
The types of trade restriction
Import Quota
Tariffs A legal limit on the maximum
A tax on imports amount of a good that may be
imported in any period

Revenue Tariff Protective Tariff

to provide the government to protect domestic producers
with revenue. from foreign competition

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3: DISCUSS THE 5 ARGUMENTS FOR TRADE
RESTRICTION
5 Arguments Description
National The country can not depend on other countries for its national
Defence defence and as such these industries should be protected.
Argument
HOWEVER, producers may exaggerate their own importance
to national defence just to obtain protection from government.

Infant-Industry New industries need to be protected or they won't have the

Argument opportunity to grow up

HOWEVER, that protectionism may persist even after industrial

maturity is realized.

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5 Arguments Description
Antidumping Dumping is the sale of goods abroad at a price below their cost and
Argument below the price charged in the domestic market.

HOWEVER, consumers benefit from the imported goods that are

dumped.

Foreign Export Some governments subsidize the firms that export goods. They have an
Subsidies unfair advantage against unsubsidized competitors (domestic
producers).
Argument
HOWEVER, consumers can enjoy extra-cheap products subsidized by
the other country’s taxpayers
Job Argument Trade destroys jobs in industries that are outcompeted by imports from
foreign producers

HOWEVER, the job loss is a signal that resources could be put to better
use in an industry in which the country holds a comparative advantage.
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