Macro Economic PDF

Macro Economic Money The first means of commercial exchange that appeared was barter, which is a process whereby one commodity is exchanged for another commodity, and as a result of the disadvantages of direct barter Which include: 1 - The difficulty of the seller...

Macro Economic Money The first means of commercial exchange that appeared was barter, which is a process whereby one commodity is exchanged for another commodity, and as a result of the disadvantages of direct barter Which include: 1 - The difficulty of the seller and buyer being present at the same time. 2- Difficulty matching buyers’ needs with sellers’ needs. 3- Difficulty storing some goods. 4- Difficulty dividing some goods into small units. All these difficulties and defects of the barter system led to the emergence of money, which took different forms, including gold money, silver, and then developed into instruments and paper currencies become an easy means of exchange, and therefore money is performs the function of an intermediary of exchange. Definition of money: Anything that society agrees upon as intermediary of exchange The money characteristics can be summarized as follows: 1 - Have general acceptance among members of society 2 - Homogeneity of its units 3 - Divisibility: It is divisible into units of appropriate value for convenience small transactions. 4 - Difficulty of damage. 1 5- Ease of carrying: An individual can carry a sufficient amount of money to buy the goods he needs, therefore, large financial denomination was issued, such as 100 and 200 pounds. 6 - Difficulty in counterfeiting. 7 - Stability of the value of money. Functions of money: 1 - A measure of value: The individual in any society needs to have a common unit that can measure the relative prices of different commodities among themselves. 2 - Means of exchange: Based on the use of a single unit as a means of calculation, it is also very useful for this commodity to perform the task of being the commodity through which exchange takes place. Money, then, plays the role of a means of exchange, and this is the most obvious function of money. 3 - Store of value: The commodity chosen as money is always something that can be kept for a long time without spoiling or being consumed. It is a form in which wealth can be kept, such that it remains undiminished from year to year. It is therefore necessary that money be is always an easy commodity to store safely, which explains why gold is used as money in the past, this is because gold is the least affected metal by environmental factors. 4- Standard for deferred payments: Loans are usually repaid with money, not goods, and as long as this is the case, it will be it is strange that debts should be settled by means other than money, and it’s also desirable that debts should always be measured in terms of money as it is a fixed store of value. It should be noted that the previous functions of money are not separated, from one perspective process: Once money ceases to perform its function 2 as a measure of value, it also ceases to act as a Store of value, so if spending money on repayable debts becomes insignificant due to the value of money decreases rapidly, money becomes no longer worth choosing, as the value of the stock may diminish greatly Quantity theory of money This theory indicates that the price level increases (or is directly proportional) to the increase in the quantity of money available and decreases due to its decrease. An increase in the quantity of money means a decrease in its value. This means that there is an inverse proportion between the quantity of money and its value, as well as between prices and the value of money. If the quantity of money decreases to By half, the price level has fallen and the value of money has doubled. Exchange equation It is called the Fisher equation, and it explains the relationship between the quantity of money and Prices level: This equation indicates that: P=QS/V Where: Q - Quantity of money , S - Speed of money circulation , P - The general level of Prices V - The volume of exchanges (goods and services produced in society during a period) The speed of money circulation is defined as the number of times a monetary unit moves from one hand to another during a certain period of time. It can be calculated by knowing the total value of exchanges during a certain period, and the amount of money in circulation during the same period, and we have the following equation: Speed of money circulation = National product * The general level of Prices / The Quantity of money Or, = National income (value of National product or total exchanges) / The Quantity of money 3 If the National income is 1000 million pounds & The Quantity of money is 200 million pounds, consequently: - Speed of money circulation = 1000 / 200 = 5 Meaning that the average number of times a monetary unit has changed from one hand to another during one year is five times, and there is no doubt that the speed circulation of money compensates for the decrease in the quantity of money in circulation, an increase in the speed of money circulation means implies an increase in the quantity of money in society. National income It is the study of national income and analysis of its components, methods of measuring it, and how it is distributed Among members of society is one of the most important economic studies nowadays. First: Gross Domestic Product: “It is the sum of the goods and services produced by society during a period A specific period of time, usually a year” Second: Net Domestic Product: Net Domestic Product is considered the true indicator of the economic activity of a society, because It is natural that society, in order to produce goods and services, must lose part of its capitalist origins, meaning that some machines must wear out and be consumed, Some establishments lose part of their production capacity, and thus the gross domestic product does not express the whole of new additions introduced during the year, but it contains a part was previously produced in previous years and consumed during the production process, accordingly society must compensate that part, meaning it must make some kind of replacement the Consume capital or deduct a portion of GDP equivalent to consumed capital in the production process and what remains after that represents what was the factors of production are actually produced, and this is what is known as the net domestic product. 4 That is: Net Domestic Product = Domestic Product - Capital Consumption Third: Gross National Product: It is known that no society practices its productive activity in isolation from other societies, as countries cooperate with each other in the field of production and exchange. Each country imports from other countries the goods it needs and exports to them what they need. Gross National Product = Gross Domestic Product + Exports - Imports Fourth: Net National Product: Net National Product = Net Domestic Product + Exports - Imports Fifth: National income: The national product is achieved through the interaction of production factors with each other. Each element of production contributes to a certain extent to the production process, therefore deserves to receive a portion of the production or a return for his participation in the production process. Where the worker participates in the effort, whether mental or physical, and therefore deserves a wage in exchange for the effort he exerts, and the owner of the capital contributes his capital and therefore deserves his interest in exchange for giving up his liquidity and retaining liquid capital in the form of fixed assets. The owner of the land is entitled to rent in exchange for his contribution to the rare natural resources, and the organizer receives a profit as a price for his organizational ability and for the risks he bears, and the total amount the production factors obtain of returns are what is known as national income. Sixth: National Product and National Income: The national product is defined as “the value of goods and services produced by society during a specific period of time, minus the value of the capital consumed,” and national income is defined as “the sum of the incomes that individuals receive in exchange for their participation in the 5 production process.” These two definitions are considered identical. (In the absence of indirect taxes or indirect subsidies) that is: national product = national income The correspondence between these two definitions is due to the fact that the value of any commodity is the sum of what is paid to the production factors that participate in its production, in addition to the profit margin that the producer calculates for himself, and what pays the factors of production is the same as the income that these factors receive in exchange for their participation in the production process, it is clear from the above that this conformity is achieved if the government does not impose indirect taxes on goods and services or grant indirect subsidies to them (taxes imposed on income are called taxes Direct taxes are due because they are due on individuals as soon as they obtain income, while taxes imposed on goods and services are called indirect taxes because they are not due on income directly once individuals obtain an income, but rather are due only when individuals spend their income on the goods and services on which taxes are imposed. Direct subsidies are those subsidies that are given to individuals directly, while subsidies are not direct subsidies are those subsidies given to the producer for the purpose of reducing the price of the commodity, such as those borne by the government in order to reduce the price of bread. Imposing a tax on the commodity or granting a subsidy to it will lead to a difference between the value of the commodity in the market and the value of what the factors of production receive for its production. This difference is exactly equal the amount of this tax or subsidy. It is clear from the above that imposing an indirect tax would make the value of the national product higher than the national income by the amount of the tax, and granting indirect subsidies would make the value of the national product lower than the national income by the amount of the subsidy. Economists differentiate between the two by calling the national product including subsidies and Indirect taxes as the national product at the market price, and called the national product after excluding the effect of taxes and the effect of subsidies as the national product at a factor cost. 6 Production and we can show the relationship between them as follow: National Production at market price = National Production at factor cost + indirect taxes - indirect subsidies. Consumption In the economic sense, consumption means “the amount of money spent on goods and services that achieve immediate or direct satisfaction.” According to this definition, the car that the consumer buys is considered to have been consumed upon signing the contract to purchase it. By the same logic, purchasing bonds that achieve a flow of income in the future does not achieves direct satisfaction. Consumption is affected by several variables, the most important of which is income. Factors determining consumption: The level of consumption of a certain national income depends on several factors, including: 1- Equity of income distribution: How national income is distributed is one of the important factors affecting consumption comes after the level of income. If national income is concentrated in the hands of a small proportions of population, and because people with large incomes usually save a large percentage of income, the percentage of income spent on consumption purposes is small, Conversely, if income is distributed in a way that is very close to equity, then income is concentrated in the hands of those with relatively low incomes are expected to increase spending on them consumption, and therefore it is expected that the proportion of consumer spending out of income will be large. Thus, it is believed that national consumption is directly proportional to the degree of fairness of income distribution. 2- Interest rate: In the past, economists believed that saved money increases with the Interest rate, thus, the national consumption is inversely proportional to the Interest rate. 7 3- Desire to keep money (consumer tastes towards consumption and saving): Individuals and companies want to keep a portion of money as a reserve. If individuals’ desire to keep money increases, this means that they may reduce their consumption. However, if members of society do not want to keep money, they will spend it on Goods and services, and therefore we expect that the percentage spent on consumption will increase. 4- General Price level: If the general price level decreases, the purchasing power of money increases. This may lead to individuals purchasing capital assets instead of spending their incomes on consumption purposes. This means that the national consumption is directly proportional to the General Price level. Savings Saving in any society is measured by the difference between the national income and national consumption during a specific period, usually a year. The factors that determine saving: 1- Average income per capita in society An individual's ability to save depends mainly on the amount of income available to him. For people with low incomes, their ability to save is limited. Conversely, people with high incomes direct a large portion of their income to save. 2- Social customs and traditions We find that individuals in some societies tend by nature to keep a portion of their income in the form of savings, and this is not due to a high or low level of income available to them, but rather due to customs and traditions that have been rooted in their souls throughout history as a result of the nature of the environment in which they live and the quality of their culture, while individuals in certain societies other may be accustomed to extravagance as a result of certain traditions or customs. 8 3- Savings institutions: The amount of savings depends on the extent of the existence and development of various institutions that help in creating savings, such as insurance companies, savings banks, and stock markets. Some concepts related to the consumption function and the saving function: It is possible to extract some information from the consumption and saving functions to know how consumers respond to changes in income. Among this information are the following concepts: 1 - The marginal propensity to consume (slope of the consumption function) (MPC): It is the change in consume spending divided by the change in income Which led to a change in consume spending, that is: Marginal propensity to consume (MPC) = ∆C / ∆I 2 - Average propensity to consume (APC): It is the ratio between consumption to income, that is, it is a consumption volume at any point divided by the amount of income at that point: Average propensity to consume (APC) = C / I 3- Marginal propensity to save (slope of the saving function) (MPS): It is the change in saving as a result of the change in income, meaning that: Marginal propensity to save (MPS) = ∆S / ∆I 4- Average propensity to save (APS): It is the amount of savings divided by the amount of income, meaning: Average propensity to save (APS) = S / I 9  Investment Investment: It is a new addition to the existing productive assets in society. Factors that determine investment: In general, it can be said that there are two basic elements that determine the size of investment in society and these two elements are: 1 - The prevailing interest rate in society: Interest is the price that producers pay in exchange for their use of capital. Therefore, the lower the interest rate, the more it tempts producers to borrow and establish new projects or expand existing projects, and vice versa. 2 - Investors’ vision of the current economic situation and their future expectations: Whether the interest rate is high or low depends mainly on the ability of projects to generate revenues in the future. If producers’ expectations for the future are optimistic, they will make such an investment. However, if the producers’ view of the future is pessimistic, they will refrain from make this investment. Economic Organizations First: Commercial Bank: Commercial banks occupy a major position in any economic system due to the multiple economic functions they perform, and perhaps the most important of these functions are the following: 1- A safe deposit box in which individuals keep their cash wealth. 2- It collects individuals' savings and directs them to various investment aspects. 3- It provides short- and medium-term loans and is thus considered one of the most important sources of financing for various investments. 10 4- It finances some types of deficits in the government budget, by purchasing treasury bills. 5- It transfers money from one person to another, whether in the same country or in different places. Second : Central Banks The central bank is the bank that deals in credit, like other banks. But it differs from them in terms of its ownership. aims of the Central Bank: In general, the Central Bank aims primarily to achieve the following objectives: (1) Maintaining the value of the country's currency, whether internally or externally. (2) Influencing the quantity of money to achieve monetary and economic stability. (3) Government advisor on monetary, financial, and economic policies. Functions of the Central Bank: Central banks, in their various forms, perform the following functions: - 1- Issuing Bank This function is considered one of the oldest functions performed by the Central Bank, and the Central Bank monopolizes this function, as it is the only entity entitled to issue banknotes and no other entity shares in it. Unification of the issuing entity has many advantages, including the following: A - Unifying the type of money prevalent in society and determining its different categories. B- Controlling the money supply and changing its quantity in line with the prevailing economic conditions in society. C- Increasing individuals' confidence in the currency and achieving stability in monetary transactions. 11  2- Bank of Banks: The Central Bank plays the role of a bank for other banks. Just as commercial banks deal with individuals and various institutions in society, the Central Bank plays the same role with commercial and specialized banks. The dealings between the Central Bank and other banks are represented in three main operations: A- Commercial banks maintain mandatory accounts with the Central Bank to facilitate settlements between them. B- The central bank plays the role of a lender for commercial banks. It is the last resort to which they turn if they need money. 3- Bank of the government The central bank is considered the government's bank, its Monetary advisor, financial agent, and implementing appliance the financial and monetary policies. 4- Credit control and regulation: The central bank's means of controlling the money A - Open market operations Open market operations mean that the central bank sells or buys government treasury bills in the market for the purpose of reducing or increasing the amount of cash available in the market. We mentioned that the central bank grants loans to commercial banks, and usually charges interest on these loans at a specific rate. This rate is known as the discount rate. B- Discount rate policy: We mentioned that the central bank grants loans to commercial banks, and usually charges interest on these loans at a specific rate. This rate is known as the discount rate. 12 C- Changing the legal reserve ratio: As the ability of commercial banks to create credit is inversely proportional to the legal reserve ratio imposed by the central bank. Therefore, in the case of marriage, the central bank tends to raise the legal reserve ratio. It may also work to reduce it in cases of recession. Third: Specialized banks Characteristics of specialized banks: A- Specialized banks do not usually receive deposits from individuals. B- Specialized banks depend on their capital in as a large part of their resources. C- Although the goal that specialized banks seek to achieve is profit, they usually serve national economic goals of great importance. D- Specialized banks usually not limited to lends, but they often make direct investments. E- The functions of specialized banks often go beyond the credit role, and they provide expertise and advice. Types of specialized bank: 1 - Real Estate Banks: 2 - Agricultural banks: 3-: Industrial banks: 13