Core Principles¶
Markets are usually good¶
Government¶
Standard of living¶
Standard of living of a country depends on its production level
Productivity: amount of goods and services produced by a worker during an hour of work - As efficiency increases, time to produce goods/services decreases, standard of living increases
Disparities in standard of living is caused due to difference in productivity - i don’t exactly agree with this cuz women have a history of earning less for the same productivity
Prices rise when govt prints excess money¶
If you print money without them producing anything, money loses its value and inflation occurs However, if you print money due to increase in the country's output, then it's fine
When prices of commodity increases, value of money reduces
value of money \(\propto \frac{1}{\text{price of commodities} }\)
Micro Effects¶
Money-givers gain
Fixed income money-receivers lose eg: regular employees
Variable income money-receivers not affected business people, freelancers
Macro Effects¶
Imports increase: demand for domestic products decreases, as they are costlier Exports decrease: as other countries do not want a more expensive product
Hence, high inflation is not good
Welfare Cost¶
The cost associated with any action that has macro-level consequences and affects entire society eg: taxes, interest rates have welfare costs associated with them
Economy faces a short-run trade-off between inflation and unemployment¶
Short run: period where contracts cannot be renegotiated (monthly, quarterly) Lon run: a long period (annually) which contains multiple renegotiations of contracts
Phillips Curve Relation¶
- y-axis = inflation
- x-axis = unemployment
- \(\pi_t =\) Inflation
- \(\alpha =\) inflation when there is no unemploment
- \(\beta =\) cost for reducing unemployment by a unit
- \(U_t =\) actual rate of unemployment
This relation is only short-run for long run, whatever is the inflation, unemployment tends to natural unemployment the graph will be a straigth line parallel to the y-axis
During shortrun, the contracts for raw materials, employees is fixed but prices for commodity increases therefore, producers increase production to maximize profit (misperception by producers); this is done by increasing employees Unemployment rate decreases
Moreover, workers suffer money illusion (only focus on the nominal income increase; don’t realise that the real income is the same)
Then in the long run, few months later, the employees will renegotiate for higher wages; then the producers will hesitate as they no longer see the attraction for producing at such large volume and paying such wages; so they fire employees; therefore, the unemployment rate will increase again