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