ECO 121 MACROECONOMICS Lecture Two Aisha Khan Section 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 Quantity in Basket (kg or litre) Price Cost of basket Price Cost of basket Price Cost of basket Flour6Rs Rs. 300Rs. 150 Oil1.5Rs Rs. 150Rs. 50 Milk1Rs. 4040Rs. 55Rs. 30 Rice3Rs Rs. 250 Total cost2260 Price index 100

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’tHousehold 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 (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