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DiagFuncMacroSyst.jpg

Economics is the subject that considers the means for describing, analysing and understanding the production and distribution of wealth (in the form of goods, services and valuable legal documents) within the community. This includes the decision-making by which the economics activity is set in motion. Money is normally used in trading for the purposes of these exchanges. Another way of looking at economics is that it involves the satisfaction of unending human desire after making the least effort, so in one sense it expresses the fact that we are both greedy but lazy!

Macroeconomics is the study of the economical structure and behavior of the entire state, region or nation. This could even be extended to the global economy. Macroeconomic issues can only be dealt with on a macro-scale, so unlike microeconomics, and to help us envisage these macro-matters, it is usual to view the situation from afar without too much micro-detail and to build a macroeconomics model which applies to what in effect is the whole socal system being taken.

Important concepts of macroeconomics include the circulation of money, GDP, unemployment, and inflation.

National Income[]

The diagram of circular money flow as shown above is based on some very general aspects of the big picture which avoid any microeconomics aspects of it. It is aimed at "Making Macroeconomics a Much More Exact Science" the article being reproduced below:

Today macroeconomics is treated inexactly within the humanities, because at a first look it appears to be a very complex and easily confused matter. But this does not give it fair justice, because we should be trying to find an approach to the topic and examine it in a better way that avoids these problems of complexity and confusion. Suppose we ask ourselves the question: “how many different KINDS of financial (business) transaction occur within our society?” Then the simple and direct answer shows that that only a limited number of them are possible or necessary.

Although our sociological system comprises of many millions of participants, to properly answer this question we should be ready to consider the averages of the various kinds of activities (no matter who performs them), and simultaneously to idealize these activities so that they fall into a number of commonly shared ones. This employs some general terms for expressing the various types of these transactions, into what becomes a relatively small number of operations. Here, each activity is found to apply between a particular pair of agents—each one having individual properties. Then to cover the whole sociological system of a country, the author finds that it requires only 19 kinds of exchanges of the goods, services, access rights, taxes, credit, investment, valuable legal documents, etc., verses the mutual opposing flows of money. Also these flows need to pass between only 6 different types of representative agents.

The analysis that led to this initially unexpected result was prepared by the author and it may be found in his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modeling”. In this model these 19 double flows of money verses goods, etc., are shown to pass between the 6 kinds of role-playing entities. Of course, there are a number of different configurations that are possible for this type of simplification, but if one tries to eliminate all the unnecessary complications and sticks to the more basic activities, then these particular quantities and flows provide the most concise result, which is presentable in a comprehensive and seamless manner, and one that is suitable for further analysis of the whole system.

Surprisingly, past representation of our sociological system by this kind of an interpretation model has neither been properly derived nor presented before. Previously, other partial versions have been modeled (using up to 4 agents, as by Professor Hudson), but they are inexact due to their being over-simplified. Alternatively, in the case of econometrics, the representations are far too complicated and almost impossible for students to follow. These two reasons of over-simplification and of over-complexity are why this non-scientific confusion is created by many economists and explains their failure to obtain a good understanding about how the whole system works.

The model being described here in this paper is unique, in being the first to include, along with some additional aspects, all the 3 factors of production, in Adam Smith's “Wealth of Nations” book of 1776. These factors are Land, Labor and Capital, along with their returns of Ground-Rent, Wages and Interest/Dividends, respectively. All of them are all included in the model, as a diagram in the paper.

(Economics’ historians will recall, as originally explained by Adam Smith and David Ricardo, that there are prescribed independent functions of the land-owners and the capitalists. The land-owners speculate in the land-values and rent it to tenants, whilst the capitalists are actually the owners/managers of the durable capital goods used in industry. These items may be hired out for use. Regrettably, for political reasons, these 2 different functions were deliberately combined by John Bates Clark and company about 1900, resulting in the later neglect of their different influences on our sociological system-- the terms landlord and capitalist becoming virtually synonymous along with the expression for property as real-estate.)

The diagram of this model is in my paper (noted above). A mention of the related teaching process is also provided in my short working paper SSRN 2600103 “A Mechanical Model for Teaching Macroeconomics”. With this model in its different forms, the various parts and activities of the Big Picture of our sociological system can be properly identified and defined. Subsequently by analysis, the way our sociological system works can then be properly seen, calculated and illustrated.

This analysis is introduced by the mathematics and logic that was devised by Nobel Laureate Wassiley W. Leontief, when he invented the important "Input-Output" matrix methodology (that he originally applied only to the production sector). This short-hand method of modeling the whole system replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what is going-on within our sociological system. Subsequently it will be found that it is the topology of the matrix which actually provides the key to this. The logic and math are not hard and is suitable for high-school students, who have been shown the basic properties of square matrices.

By this technique it is comparatively easy to introduce a change to a preset sociological system that is theoretically in equilibrium (even though we know that this ideal is never actually attained--it simply being a convenient way to begin the study). This change creates an imbalance and we need to regain equilibrium again. Thus, sudden changes or policy decisions may be simulated and the effects of them determined, which will point the way to what policy is best. In my book about it, (see below) 3 changes associated with taxation are investigated in hand-worked numerical examples. In fact when I first worked it out, the irrefutable logical results were a surprise, even to me!

Developments of these ideas about making our subject more truly scientific (thereby avoiding the past pseudo-science being taught at universities), may be found in my recent book: “Consequential Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me at chesterdh@hotmail.com for additional information.

The rest of these writing (below) are from another source and are not directly related to the above new and original macroeconomics theory.

National income is a way of comparing how well off some countries are compared to others. There are three methods of measuring national income: Output, Expenditures, and Income. The Output model of measuring national income is the sum of all the final market prices of all the goods and services produced in each industry of the nation's economy. The Expenditure model takes the sum of Consumption, Government Spending, Investment, and Net Exports subtracted by Imports. The formula for GDP (Gross Domestic Product; the total market value of all final goods and services produced within the borders of a given country in a given year) is GDP= C + G + I + (X-M), with 'X' representing exports and 'M' representing imports. The Income model is the sum of all incomes of the country. All these models are slightly adjusted depending on which kind of predictor you are using. For instance, GDP(Gross Domestic Product) and GNP(Gross National Product) are different numbers. See the section on Different Measures of National Income.

National Income= National expenditure= national output

Income method= payments to factors of production

Output method: the value of final output produced by various industrial sectors

Expenditure method= GDP= C+I+G+(X-M)

Net= Gross-depreciation (capital consumption)

National= Domestic + Net property income from abroad

Factor cost= Market prices-Indirect taxes + subsidies

Real National Income= Nominal National Income- Inflation

National Income per capita= National income/population

Macroeconomic Models[]

Main article: Macroeconomic Models

Demand-Side Policies[]

Main article: Demand-side Policies

Demand side policies can be the cure for involuntary unemployment.

Economic growth can be stimulated and sustained by:

  • Fiscal policy (cut taxes, increase government spending)
  • Monetary policy (reduce the rate of interest)

Supply-side Policies[]

Main article: Supply-side Policies

Supply side policies can be the cure for voluntary unemployment.

Aggregrate supply can be increased by:

  • increasing incentives to work
  • increasing labour mobility
  • decreasing disincentives to work
  • human capital improvements

Unemployment[]

Main article: Unemployment

Unemployment is those people who are regristered as willing, able, and available for work at the market clearing wage, but who are unable to find work.

Unemployment is bad for the economy. Underemployment is when workers who want full time jobs are only able to find part time employment.

The costs of unemployment are:

  • loss of output
  • waste of productive potential
  • government finances including loss of tax revenue and increased benefit spending.
  • social problems
  • loss of consumer spending

The types of unemployment are:

  • cyclical (demand deficient)
  • frictional
  • seasonal
  • structural
  • real wage (classical)
  • technological

Inflation[]

Main article: Inflation


Inflation is a constant rise in prices over a given period of time.

The costs of inflation are:

  • Redistribution of income
  • Devaluation of money
  • Reduction in investment
  • Reduction of international competetiveness
  • A potential for a wage- price spiral if inflation runs out of control
  • Shoe- leather and menu costs


The causes of inflation are:

  • Rising raw materials costs
  • Rising labor costs


The cures for inflation are:

1.Demand Side:

  • Monetary policy
  • Fiscal policy

2. Supply Side:

  • Policies to increase the total supply of goods and services to the economy



Demand- Pull Inflation can be caused by:

  • Reduced taxation
  • Increased government spending
  • Reduced intrest rates
  • Rapid money supply growth
  • Rising consumer confidence stimulated by rising asset prices
  • Economic growth in other countries
  • Depreciation of a countries exchange rate

Distribution of Income[]

Main article: Distribution of Income

Any analysis of income distribution needs to consider whether taxes have been removed and benefits been added.

Taxes can be:

  • Progressive (the average rate of tax rises as income rises)
  • Regressive (the average rate of tax falls as income rises)
  • Proportionate (the average rate of tax is constant)

Direct taxes- taxes on income and wealth that are paid directly to tax authorities.

Direct taxes tend to be progressive.

Indirect taxes- taxes on spending that are paid by suppliers and therfore not directly by consumers.

Indirect taxes tend to be regressive.

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