Netherlands VWO 6 (eindexamenjaar) Economics
Chapters: 2
1. Welfare and growth
Macro-economic circular flow · Structural growth · Income, welfare and well-being · Inequality and redistribution · Labour market and unemployment
- Circular Flow of Income and the Three Methods of Measuring National Income – In a two-sector economy households give factor services to firms and get factor payments (rent, wages, interest, profit); they spend this income on the firms' goods. Money moves in a circle opposite to the real flow of goods and services. Because the same money passes three points, national income can be measured three ways: value added by producers (product method), incomes paid to factors (income method) and spending on final goods (expenditure method). All three give the same total.
- Economic Growth: How a Country Makes More Each Year – Economic growth is a rise in a country's real GDP: the value of all final goods and services it makes in a year, after removing the effect of price rises. The growth rate is the percentage change in real GDP. GDP per head tells us the average output per person. Growth goes up and down around a trend in the economic cycle, creating output gaps. Growth comes from more and better resources (workers, skills, machines, technology) and brings higher incomes and jobs, but can also cause pollution, inequality and inflation.
- Income Inequality – Income inequality means income is shared unevenly between people. Economists rank people from poorest to richest, split them into five groups of 20% (quintiles) and compare their shares. The Lorenz curve plots the cumulative share of income against the cumulative share of people; the further it bends from the straight line of equality, the more unequal the society. The Gini coefficient = A ÷ (A + B) turns this into one number between 0 (perfect equality) and 1 (one person has everything). Wealth (what you own) is usually more unequal than income (what you earn). Causes include differences in skills, education, inherited wealth, discrimination and technology. Governments reduce inequality with progressive taxes, benefits, minimum wages and public services such as free schooling and health care.
- The Labour Market – The labour market is where workers sell their time and skills and employers buy them. Firms demand labour because people buy their products (derived demand). Workers supply labour, and more people offer work at higher wages. The wage settles where demand meets supply. A minimum wage above that level can raise pay but may cut jobs. Trade unions, a single big employer (monopsony), skills, discrimination and new technology all change wages and jobs.
2. Good times, bad times
Business cycle · Fiscal policy · Monetary policy and the central bank · Cycle analysis with the IS-MB-GA model
- The Business Cycle: Booms, Recessions and How Policy Helps – Real GDP grows along a long-run trend, but in the short run it swings above and below it. These swings are the business cycle: expansion, peak (boom), contraction and trough (recession). Booms bring low unemployment and rising inflation; recessions bring job losses and low inflation. Governments use fiscal policy and central banks use monetary policy to make the swings smaller.
- Fiscal Policy – Fiscal policy is how a government uses its spending (G) and taxes (T) to steer the whole economy. The budget compares the two: if spending is bigger than tax revenue the budget is in deficit and the government borrows; if tax is bigger, it is in surplus. In a slump the government can use expansionary policy (spend more or cut taxes) to raise total demand, output and jobs. When demand is too strong and inflation is high it can use contractionary policy (spend less or raise taxes). Because money is re-spent, a change in G has a bigger final effect on demand: the multiplier. Some changes happen by themselves (automatic stabilisers, such as falling tax receipts and rising benefits in a recession); others are chosen (discretionary). Fiscal policy has limits: time lags, rising public debt, higher interest rates (crowding out) and political pressure. It works alongside monetary policy, which is run by the central bank through interest rates.
- Money and Its Supply: Barter, Functions of Money and M1 – Barter (goods for goods) needs a double coincidence of wants and has no common measure of value. Money solves this. Its functions: medium of exchange (main), unit of account, store of value and standard of deferred payment. Money supply is the total stock of money held by the public (households and firms) at a point of time. Notes are issued by the RBI and coins by the government; demand deposits are created by commercial banks. Narrow money M1 = currency with the public (CU) + net demand deposits in banks (DD) + other deposits with the RBI (OD).
- Aggregate Demand, Propensities to Consume and Save, and the Investment Multiplier – Aggregate demand (AD) is total planned spending on final goods: C + I + G + (X − M); in a two-sector model AD = C + I. Consumption depends on income: C = c̄ + bY, where b = MPC. APC = C/Y, MPC = ΔC/ΔY, APS = S/Y, MPS = ΔS/ΔY; APC + APS = 1 and MPC + MPS = 1. Short-run equilibrium output is where AD = AS (planned spending = output), or saving = planned investment. A rise in investment raises income by a multiple: k = ΔY/ΔI = 1/(1 − MPC) = 1/MPS.