ECO 121 MACROECONOMICS
Lecture Two
Aisha KhanSection L & M
Spring 2010
Inflation
Nominal vs. Real income
Real income = Nominal income / price index
Who is hurt by inflation? Fixed-income receivers Savers Creditors
Who is unaffected/ helped by inflation? Flexible income receivers Debtors
Deflation
Hyperinflation
Inflation
Effects of inflation on output Cost push inflation affects supply side
thus reduces output
Demand pull inflation affects demand side more output produced to satisfy demand
Consumer Price Index
Quanti
ty in
Basket
2006 2007 2008
(kg or
litre)Price
Cost of
basketPrice
Cost of
basketPrice
Cost of
basket
Flour 6 Rs. 200 1200 Rs. 300 Rs. 150
Oil 1.5 Rs. 80 120 Rs. 150 Rs. 50
Milk 1 Rs. 40 40 Rs. 55 Rs. 30
Rice 3 Rs. 300 900 Rs. 250 Rs. 250
Total
cost2260
Price
index100
The US Economy
Public and Private Sectors- M&B Ch. 5
Households, Businesses, the Public Sector/Government
Functional distribution of US income 2000
Personal distribution of US income 1999
Disposition of household income 2000
Composition of consumer expenditure 2000
Legal Forms of Businesses
Sole-proprietorship Partnership Corporation
Principal agent problem Principals (stockholders) Agents (managers) Differences in objectives (profits vs. salary)
Public Sector
Government’s role Providing legal structure Maintaining competition Redistributing income
Transfer payments Market intervention Taxation
Reallocating resources (market failures) Spillovers Public goods
Spillovers or Externalities
When some of the costs or benefits of a good are passed on to someone other than the immediate buyer or seller
Spillover costs Environmental pollution Correct by: legislation, specific taxes
Spillover benefits Health, education, Correct by: subsidize consumers, suppliers,
goods (postal)
Spillovers or Externalities
Public Goods
Indivisible Non-exclusive
No market incentive to produce e.g. streetlights Free-rider problem people receive benefit
from a good without incurring the cost
Quasi- public goods Can be exclusive streets/highways, education,
libraries
Product Market
Businesses Govrn’t
Household
Circular Flow
Resource
Market
(1) Costs
(2) Resources
(1) Money income (rents, wages etc)
(2) Factors of prodn
(8) Resources(7) Expenditures
(10 )Goods and Services (9)Goods and Services
(12) Net Taxes(11) Net Taxes
(5) Expenditures (6)Goods and Services
(4)Goods and Services (4)Goods and Services
(3) Revenue (3) Consumption expenditures
Government finance
Federal expenditures Pensions, income security National defense Health Interest on public debt
Federal Tax revenues Personal income tax Payroll tax Corporate income tax Excise taxes- charged on goods produced inside the
country
Pakistan's expenditure
Source: Economic Survey 07-08, Finance Division of Government Pakistan
Pakistan- Current Expenditure
Source: Economic Survey 07-08, Finance Division of Government Pakistan
Pakistan Tax Revenue
Source: Finance Division of Government Pakistan
Assignment 1
M&B Chapter 7 p. 157 Questions 2, 4, 6, 8, 10
Due next class: Monday