03 Sectors
Trickle-down Effect¶
The benefits of improving a particular country/sector will improve others also eventually
Health of an economy¶
- Real GDP/National Income (not GNP)
- Inflation
- Unemployment
What is a Model?¶
Simplified representation of a system with assumptions
Purpose¶
- simplify economic decisions
- how to change outcomes
- focus on what's important
- built with assumptions
- omits details
Characteristics of a good model¶
- Simple
- Easy to work with
- Insightful
- Generalizable
- Easy to test, and thereby accept/reject
- Empirically consistent
- Predictive precision
Basic Economic Models¶
we are gonna learn 2 models
- circular flow
- production possibility frontier
Circular Flow Model¶
More cycles \(\implies\)higher output
Cashless economy allows to complete more cycles Credit card basically provides preponed salary; instigates flow from consumer sector to production sector
Sectors of Economy¶
- consumer
- business/production
- financial
- Govt
- external/foreign/international
All of these sectors are inter-linked and anything that affects one sector affects the others too
2 sector¶
Consumer and production
Production sector produces goods and services; consumers buy them
Production sector provides jobs; consumers work
3 sector¶
Financial sector provides investments to the producers
Consumers deposit the savings into the financial sector, and they gain more or assets go through depreciation
4 Sector¶
International sector allows
- imports/exports
- remittance(overseas transfers) - consumer the money sent back to the family in another country
- net lending overseas - financial sector gives out loans to other countries
- overseas income from foreign to all other sectors
5 sector¶
Govt
- consumers
- collect taxes
- provide direct income transfers (like pensions)
- business
- collects taxes
- govt purchases
- transfer payments (tax holidays)
-
financial sector
- loans in times of govt deficit
- liquidity injection Hot money/cash for the banks
- foreign sector
- import duties/taxes
Budget deficit leads to high inflation¶
When the govt spends a lot of money in development, then the demand for investment and labor will increase
Developing countries always try to spend more than their revenue, because they're trying to develop as quickly as possible
Monetization of budget deficit¶
When the govt prints money/borrows from banks, instead of selling assets
This leads to inflation as there is more money in the system
Duopoly¶
A situation with multiple buyers, but only 2 sellers
Nash equilibrium (by John Nash) says that
An agent who has a competitor will always design the best policy, with the assumption that the competitor will also design its own best policy
Prisoner's dilemma¶
(not in portion; just extra)