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MindMap Gallery CFA Economics The most complete study notes
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CFA Economics The most complete study notes
CFA Economics is a summary of knowledge points. The number of knowledge points in 14-2 questions is second only to Financial Reporting and Analysis. Questions 18 or so. First half. Financial reports. Quantity. Economics. Mixed questions. Only the map can summarize multiple knowledge points. It is recommended to collect it.
Edited at 2022-05-02 01:14:05
- bacteria
This is a mind map about bacteria, and its main contents include: overview, morphology, types, structure, reproduction, distribution, application, and expansion. The summary is comprehensive and meticulous, suitable as review materials.
- Plant asexual reproduction
This is a mind map about plant asexual reproduction, and its main contents include: concept, spore reproduction, vegetative reproduction, tissue culture, and buds. The summary is comprehensive and meticulous, suitable as review materials.
- Reproductive development of animals
This is a mind map about the reproductive development of animals, and its main contents include: insects, frogs, birds, sexual reproduction, and asexual reproduction. The summary is comprehensive and meticulous, suitable as review materials.
CFA Economics The most complete study notes
- bacteria
This is a mind map about bacteria, and its main contents include: overview, morphology, types, structure, reproduction, distribution, application, and expansion. The summary is comprehensive and meticulous, suitable as review materials.
- Plant asexual reproduction
This is a mind map about plant asexual reproduction, and its main contents include: concept, spore reproduction, vegetative reproduction, tissue culture, and buds. The summary is comprehensive and meticulous, suitable as review materials.
- Reproductive development of animals
This is a mind map about the reproductive development of animals, and its main contents include: insects, frogs, birds, sexual reproduction, and asexual reproduction. The summary is comprehensive and meticulous, suitable as review materials.
- Recommended to you
- Outline
CFA Economics (8~12%)
Microeconomics
Demand and Supply (Demad&Supply) Analysis (Analysis)
Consumer demand analysis
Related concepts of demand
Law of demand Law of demand
Demand and price are negatively related
Demand fuction vs Demad curve
Consumer surplus
The difference between the total price consumers are willing to pay for a given quantity of a product and the total price they must pay
It is the sum of the value that consumers actually pay less than they are willing to pay.
Elasticity of demand Elasticity
Epx price elasticity
point elasticity
e.g.:
Distinguish absolute value
infinity perfect elastic
>1
elastic elastic
When there are many substitutes for a good, demand will be very elastic
Suppose there are two gas stations that provide the same quality of gasoline on your daily commute. If a gas station posts an advertisement that lowers the price, it will attract you to refuel at this gas station. If this gas station raises the price of gasoline, it will lead to You go to another gas station to refuel. Remember, when we calculate the elasticity of demand for a good, the price of the related product (in this case, the price of gasoline at another gas station) remains constant.
=1
total revenue max
unit elastic
<1
inelastic
= 0 perfect inelastic
eg:
When a good has few or no substitutes, demand will be relatively inelastic. For example, if a drug keeps your heart rate and keeps you alive, taking two tablets a day can keep you alive. You may not reduce the amount you buy because of the increase in price.
When a good has few or no substitutes, demand will be relatively inelastic.
calculate:
Influencing factors
Quantity of substitutes
The greater the quantity, the greater the flexibility
Proportion of income
The greater the proportion of income, the greater the elasticity
Change of time
The longer the time, the more substitutes there are and the greater the flexibility.
e.g.
arc elasticity
Other flexibility
Epy cross elasticity (Ec)
>0
alternatives
<0
Complementary Products
Study the impact of other goods on Q
It is the degree of influence of Pt on Q
Ec calculation
e.g.
Ei income elasticity income
>0
nominal goods
>1
luxuries
<1
necessities
<0
inferior goods
substitution effect and income effect
P&Q negative correlation
positive effect
On the contrary, it is a negative effect
substitution effect substitution effect
The substitution effect for all goods is positive
Px falls Qx rises
income effect income effect
Px falls, real purchasing power rises
Ei>0
normal goods are all positive effects
Qx rises
Ei<0
inferior goods have negative effects
Qx drops
Exceptions to the Law of Demand
total effects total effects
normal
substitution
income
total effect
Px falls Qx rises
Ordinary goods
inferior/veblen
substitution
income-
total effect
Px falls Qx rises
General inferior goods
-
Px falls Qx falls
Giffen goods (special inferior goods) Giffen goods
Potatoes of the Great Depression
Exception: Veblen goods Veblen goods
Conspicuous goods
No theoretical support has been found yet
demand curve shift
Manufacturer supply analysis
Basic concepts of supply analysis
depending on
Willing
capacity capacity
Influencing factors
Price Px
cost cost
wage wage
raw materials other inputs into the production process
technology technology
income
producer surplus producer surplus
The sum of the differences between the price a producer receives per unit of product and the marginal cost of production
Under , the combination of consumer surplus and producer surplus will be maximized
Barriers to efficient allocation and consumption losses
Consumption loss: The reduction in consumer surplus and producer surplus caused by underproduction or overproduction is called consumption loss.
Means to influence resource allocation
price controls
rent control
minimum wage system
taxes and trade restrictions
subsidy
Increase producer income
Reduce consumer spending
tax
reduce producer income
Increase consumer spending
quota
Limit production
external costs
external benefits
Public goods and public resources
price ceiling
The impact is greater when the limit price is lower than the equilibrium price
price floor
supply curve supply curve
As long as the supply curve S crosses the demand curve D from top to bottom, this equilibrium is still stable.
The independent variable Px is on the vertical axis y and the dependent variable Q is on the x-axis.
Draw graphs using inverse functions and treat Q as an independent variable.
Supply analysis: profit maximization, shutdown point, break-even point
Related concepts
Profit Profit
Accounting Profit Accounting Profit
excess profit economic profit
Implicit costs included
=Accounting profit - Implicit opportunity cost = Total revenue - Total economic cost
Normal Profit Normal Profit
=Accounting profit - excess profit = implicit opportunity cost
Yield Products
Total product (TP)
=Q
Average product (AP)
=Q/L= TP/L
Marginal product (MP)
=Delta TP/Delta L (Labort Labor force)
Revenue Revenue
Total revenue(TR)
=P*Q
Average revenue(AR)
=TR/Q=P
Marginal revenue(MR)
=Delta TR/Delta Q
=P(1 1/E)
Cost Cost
Long run
All costs are variable
short run
Total cost (TC)
Total Variable cost(TVC)
Q change cost change
labor force
Total fixed cost(TFC)
Q changes, cost remains unchanged
capital
Average total cost Total cost (ATC)
Average variable costAvarage Variable cost(AVC)
=TVC/output
Average fixed costAvarage Fixed cost(AFC)
=TFC/output
Marginal cost(MC)
principle of diminishing marginal returns Law of Diminishing Marginal Returns
MP is the slope of TP
MP=0 TP maximum
When MP is greater than AP
AP rises
When MP is less than AP
AP decreased
When MP is equal to AP
AP Max
Profit Maximization Profit Maximization
TR-TC Max
MR=MC
Breakeven Point and Shutdown Point
perfect competition perfect competition
P=MC=AC reaches the equilibrium point of long-term operation
D=P=AR=MR
P=MC=AVC reaches the shutdown point
imperfect competition imperfect competition
TR=TC reaches the break-even point
TR=TVC reaches the shutdown point
Economies of scale and diseconomies of scale
Economies of Scale Economies of Scale
Q rises ATC falls
Diseconomies of Scale Diseconomies of Scale
Q rises ATC rises
Firms and market structure
perfect competition market perfect competition market
Characteristics of a perfectly competitive market
1. Number of manufacturers: many
2. Product features: homogeneous goods no difference
3. Barriers to entry: very low
4. Pricing power: passive price taker no market-pricing power No pricing power Price taker
Price =Demand = Marginal Revenue = Average revenue
5. e.g.
Some agricultural products
Economic profits in a perfectly competitive market
Ep=0
In the long run, you can only earn a normal profit
Symbols used to judge perfectly competitive markets
P=MR=MC=ATC P=MT=AR=D
imperfectly competitive market
monopolistic competition market mo'nopo'listic competition
Monopolistic competition market characteristics (imperfect competition market)
1. Number of manufacturers: many
2. Product features: differentiation some difference
3. Barriers to entry: low
4. Pricing power: Not high pricing power price searcher
Narrow price range
5. e.g.
Part of the retail industry
Relax at least one condition than the perfect market
monopoly
short term
perfect competition
long
6. Facing falling demand and high demand elasticity
There are many similar substitutes
7. Unique typical characteristics
Focus on innovation and differentiation innovation and product development
Focus on brand recognition brand names
Focus on advertising (90%)
business
short-run equilibrium short-run equilibrium
Similar to a monopoly market
The point of differentiation is similar to a monopoly
High pricing power
You can use MR=MC
Little elasticity
long-term equilibrium long-term equilibrium
As long as EP>0, manufacturers will continue to be attracted to enter. Substitutes will increase. Qs will increase. Px will decrease.
causing EP to tend to 0
Still equal MR=MC
But the flexibility is getting bigger and bigger
But not to the level
oligopoly
feature
1. Number of manufacturers: More than one but not many
2. Product features: small differentiation, some difference/homogeneity
3. Barriers to entry: high
4. Pricing power: higher pricing power price searcher
5. e.g.
oil
Operator
steel
6. economies of scale
Q rises ATC falls
7. Will consider competitors when making decisions interdependence among competitors
decision making
Kinked Demand Curve Model Kinked Demand Curve Model
Expand market share
price reduction
Other manufacturers reduce prices (follow)
Less elastic and steeper
raise price
Other manufacturers do not follow
More elastic and steeper
Main disadvantages
The market equilibrium price cannot be determined
MR is a piecewise function
It is impossible to determine the point of profit maximization through MR=MC
Nash Equilibrium Model Nash 'Equilibrium Model
game theory
prisoner's dilemma
hypothesis
a b are held in different interrogation rooms
Both a and b confessed, and both of them were sentenced to two years in prison.
Neither a nor b confesses, and the two of them serve 6 months in prison.
If one party confesses, one will not go to jail, and the other will go to jail for 10 years.
analyze
Based on the premise of maximizing personal interests
in conclusion
Both of them served 2 years in prison
Nash equilibrium point judgment
1. Maximize personal interests
2. inference
When other parties do not change their decisions, they cannot make their own benefits greater.
It is not necessarily the best overall benefit
Nash equilibrium may not exist
3. e.g.
Just tick the box and choose the one with the most ticks.
Collusion
unstable contract
Several major conditions to be met
1. Few manufacturers
2. Little product differentiation
Substitutability is obvious
3. Similar cost
4. Small quantity but frequent purchase
Durable goods are not suitable
5. Penalties for breach of contract are greater than benefits
6. There is little competition outside of the cartel (enterprise alliance) and no tendency to lower prices.
7. e.g.
OPEC Oil
Color TV conspiracy
Durable goods conspire not to last
Dominant manufacturer model
1 dominant player and several follower vendors
Leading manufacturer
Price searcher Price searcher
MR=MC
Several following manufacturers
price taker
hypothesis
Non-leading manufacturers cut prices to increase market share
Leading manufacturers follow
Market share Makert share (MS) is large Economies of scale ATC is small
Set price below the non-dominant ATC and above own ATC
Non-leading manufacturers have no profits, MS will rise again
Conclusion 1
Non-leading manufacturers exit the market
MS rises for leading manufacturers
Conclusion 2
Dominant manufacturers have excess profits
New manufacturers enter and MS is divided
MS declines over time
Cournot model
Basic assumptions
1. duopoly duopoly
2. MC1=MC2 and is constant
3. Know each other’s supply
4. Final output Q1=Q2
monopoly pure monoply
Causes of monopoly
Graphical Characteristics of Monopoly Market Structure
maximize profits
MR=MC
Compared to a perfectly competitive market, MR=MC=ATC lowest point
Smaller output Higher price
The relationship between MR and price elasticity
MR=P(1-1/|Ep|)
Applicable to imperfectly competitive markets
Marginal revenue MR
price discrimination price discrimination
first-degree price discrimination first-degree
Pricing is different for each customer
The highest psychological price that customers are willing to pay
It is impossible to achieve in real life
Unable to prevent communication between customers
At this time, the consumer surplus CS=0, the manufacturer has obtained all CS, and the consumer has no sense of satisfaction.
Second-degree price discrimination second-degree
Buy different quantities at different prices
20% off 1 piece
30% off 2 pieces
40% off 3 pieces
third degree price discrimination second-degree
Customers have different pricing based on geography or other characteristics
Student card
Senior Citizen Card
Military ID
government regulated pricing
P=ATC=D
No EP profit
Porfit=TR-TC=(P-ATC)xQ=0
The government prefers
P=MC=D
MC is close to horizontal due to economies of scale
Porfit=TR-TC=(P-ATC)xQ<0
The government needs subsidies 'subsidy
feature
1. Number of manufacturers: one
2. Product Features: No substitute sole product
3. Barriers to entry: no way
1. legal barriers
military
2. natural barrier
economies of scale
water
electricity
4. Pricing power: maximum pricing power considerable
5. e.g.
Business is not allowed
water
electricity
military
6. demand curve slopes downward
Market Concentration Measures
Advantages, Disadvantages and Calculation of 2 Indicators
N-firm Concentration Ratio
Add up the market shares of the largest N manufacturers
3firm/4firm has more exams
shortcoming
Not sensitive to M&A (mergers & acquisitions)
Failure to consider barriers to entry
The herfindahl-Hirschman Index The herfindahl-Hirschman Index
N firm HHI
The sum of the squares of the top N market shares
Advantages and Disadvantages
Sensitive to M&A (mergers & acquisitions)
Failure to consider barriers to entry
macroeconomics macroeconomics
Four objectives of macro-control
Economic Growth
Promote employment
Stabilize prices
Balance of Payments
Total output (GDP), price level (inflation) and economic growth
Total output, total revenue and total expenditure
Gross Domestic Product (GDP)Gross Domestic Product
definition
1. a country or region
2. a period of time
3. Current production department
4. Have market value
Cleaning yourself does not generate GDP
The labor of the cleaning lady generates GDP
5. final goods and services
tire
Used in assembling cars and not final goods
Used to replace worn out tires. Can be used as final product
e.g.
include
Final goods and services produced during the period
Goods and services provided by the government
Self-occupied residence
Not included
second-hand goods resalable
government transfer payments
pension
Transfer fee
Unemployment benefits
Semi-finished products
Buy services with market value
Clean your own home
by-products of production
subtopic
black market
barter transaction
The exchange of goods or services for goods or services rather than the payment of money and delivery of services
Illegal transactions, etc.
Measurement method
Real Real GDP
Prices in the base period
For example, a base period of 5 years
The earliest year given in the question
Excluding price level changes
Nominal GDP
Current GDP
GDP Deflator
normal/real
GDP deflator
Changes in the price level from the base period to the current period
What it essentially measures is inflation
GDP Measurement
The value-of-final-output method (calculate output based on the price of the final product)
The sum-of-value-add method (calculates output based on the cumulative sum of raw materials and intermediate added value)
e.g.
farmer—sells for 0.15—mill miller—sells for 0.46—baked bread baker—sells for 0.78—retailer—sells for 1—customer
The result is still 1
The results should be equal
GDP Calculation
expenditure approach expenditure approach
hypothesis
Everything produced in the current period will be sold in the current period.
GDP=C I G (X-M)
C stands for consumption
The function of disposable income C=a bY(1-t)
1-t: Consider tax issues
b: Marginal propensity to consume MPC
Proportion of the proportion spent on consumption for each additional unit of income
1-b: Marginal propensity to save MPS
MPC MPS=1
I stands for investment
Function about the interest rate r
The interest rate r is inversely related to investment I
Logic: The higher the interest rate r, the higher the cost of obtaining funds. If the investment income remains unchanged, profits will decrease and investment i will decrease.
Consider the real interest rate
Does not take into account price changes
Does not take inflation into account
private sector individual business
G stands for Government spending purchases
Influenced by government fiscal policies
X-M stands for International Department
X export
Foreign disposable income impact
M import import
Influenced by the disposable income of the country
X-M net export net export NX
Assumed to be constant
Consider parallel movement
More stable
income approach income approach
All income in the current period should be the total value of the current period
formula
GDP = Gross domestic income (GDI) Gross domestic income = Net domestic income Consumption of fixed capital (CFC) Fixed capital investment Statistical dis'c're'pancy Statistical difference
Gross domestic income (GDI) Gross domestic income
CFC includes fixed capital depreciation
Statistical dis'c're'pancy Statistical difference The United States believes that the expenditure method is more accurate, so this item is added under the income method
simplify
GDP=Y=C（consumption） S (savings) T (government department)
C S private sector
T is mainly tax
Personal income
Main indicators of consumption
Personal disposable income Household disposable income (HDI) disposable income = personal income-personal taxes
Household net saving = income HDI - household final consumption expenditures net change in pension pension entitlements
formula deformation
The result should be the same
Per-Capita Real GDP
Related concept distinctions
Gross Domestic Product (GDP)Gross Domestic Product
territorial concept
No matter which country you are from, as long as you produce in China, you belong to
Gross National Product (GNP)
human concept
No matter which country you produce in, as long as you are Chinese, you belong
Aggregate demand, aggregate supply and market equilibrium
Aggregate Demand Aggregate Demand
aggregate demand curve
Reflect who is related to whom
P: price level price level
Y: aggregate income
National total income for the current period
Y=GDP
condition
Goods market equilibrium
money market equilibrium
MS=MD
Influencing factors
Assumption: Nominal money supply remains constant
Wealth effect Wealth effect
Based on nominal wealth nominal wealth
Purchasing power'purchasing power situation
include
physical objects held
Bank savings
Influence
Assumption: Price P rises
nominal value of money unchanged
Purchasing power declines
real value of money decreases
consumption decline
Y total income aggregate income decreased
Rising prices lead to falling GDP
Interest rate effect Interst rate effect
money demand
transaction demand transaction demand
buy breakfast
Related to income Y
Precautionary demand Precautionary demand
Set aside 6 months of living needs for financial management
related to Y
Speculative demand Speculative demand
Negatively related to the interest rate r
money supply
central bank
Influence
Assumption: Price P rises
Money supply remains unchanged
domestic domestic
Money demand rises
interest rates rise
Increase in demand for money
Raising deposit interest rates can absorb more private capital and reduce demand for currency
But the cost of accessing capital has also risen
Raising the loan interest rate can increase the cost of loans. If fewer people take loans, it will reduce the supply of money.
Decline in currency liquidity
When the demand for currency decreases and the supply decreases, the currency circulating in the market will be greatly reduced, thereby stabilizing prices.
Consumption demand C decreases
Especially for large expenditures
electronic product
real estate
Speculative demand declines
Investment I falls
Total revenue Y falls
Y=GDP is positively related to I
foreign foreign
Attract foreign capital to invest
Convert foreign currency to local currency
Demand for local currency rises
Appreciation of local currency
foreign currency depreciation
Foreign demand for domestic goods D declines
Domestic demand for foreign goods D rises
Exports
Import M rises
Net exports NX = X-M decrease
Rising prices lead to falling GDP
C I NX both decreased
Real exchange rate effect Real exchange rate effect
P rises
real exchange rate rises
Exports fall
Imports rise
Decline in (foreign) demand for domestic goods and services
Shift in the aggregate demand curve
movement along
Changes in the price level cause the point to move on the line
shift
Analysis idea 1: Changes in any factors in Y=C I G NX will cause shift
Analysis idea 2: Monetary policy (MS changes) & fiscal policy (G&T changes)
Influencing factors: (When the red factor increases, the AD curve shifts to the left)
stock price stock price
housing price housing price
consumer confidence consumer confidence
business confidence business
capital utilization capcity utilization
Government spendingG government spending
taxes taxes
Bank excess deposit reserves bank reserves (singlely refers to the excess part)
statutory reserve requirement
central bank decision
excess bank reserve
Bank’s discretion
loan 70
Excess 20
Excessive increase means that the central bank adopts expansionary monetary policy and lowers the reserve ratio.
Because the money lent will never be returned, the excess amount can only be increased by the central bank reducing it.
Influence
Reserve ratio rises
The market supply of money MS rises
The interest rate r falls
I rise
Y rises
FC/DC exchange rate
international economics global growth
IS curve
Influencing factors
Fiscal policy
NX
LM curve
= Money supply MS/P price level
Real money supply increases
LM right shift
The AD curve is composed of the intersection points of the two curves IS AD.
The movement of the IS LM curve must cause the movement of the AD curve
The relationship between reactant price level P and Y
Aggregate Supply
Related concepts of aggregate supply
Very short-term supply curve VSRAS curve
1-2 months
No discussion, only extreme situations will occur
short-run supply curve SRAS curve
Basic assumption: wages are sticky
P rises
wage remains unchanged
Decreased purchasing power
real wage falls
Enterprise production costs drop
Output rises
Long-run supply curve LRAS curve
perfect inelastic
Y* potential GDP
Maximum output under rational utilization of resources
The natural rate of unemployment, full employment, is not equal to the unemployment rate of 0
real GDP< potential GDP
Resource utilization is low and unemployment is high
On the contrary, there is over-utilization of resources and the unemployment rate is low.
real GDP> potential GDP
Resource utilization is low and unemployment is high
On the contrary, there is over-utilization of resources and the unemployment rate is low.
Shift in the aggregate supply curve
movement along
The vertical coordinate causes
shift
other factors
LR changes, SR must change
labor quantity supply
natural resource supply
Labor quality supply
physical capital supply
technology and productivity
Factor growth pushes the LR SR curve to the right
SR changes, LR does not necessarily change
expectation of future prices expectation of future prices
real estate
subsidy 'subsidy
exchange rate
Affect the cost of imported raw materials
Appreciation of local currency
Foreign raw material costs fall
Factor growth pushes the SR curve to the right
nominal wages nominal wages
corporate taxes business taxes
raw material cost input prices
Factor growth pushes the SR curve to the left
macroeconomic equilibrium
Long-Run Equilibrium Real output
Excess supply Recessionary gap Excess supply Recessionary gap
Prices are above the equilibrium level
Insufficient aggregate demand
actual output real output< potential output output capacity
Excess demand inflationary gap Excess demand inflationary gap
Prices are below the equilibrium level
Actual output real output>potential output output capacity is sustainable during the non-production period
AD-AS model
AD
Inflation Inflation-adjustment to an increase in AD
Reason: Excess of aggregate demand AD AD moves right AD0-AD1
Phenomenon: P rises real output>potential output
government does not interfere
P rises
wage rises
cost rises
AS left and right (SRAS)
1-2-3
P rises output back to potential output
Government Intervention: Tightening Aggregate Demand
contractionary monetary policy
contractionary fiscal policy
economic depression Recession-adjustment to a decrease in AD
Reason: Insufficient aggregate demand AD shifts left
Phenomenon: P decreases real GDP<potential GDP
1→2
Government intervention: expansionary, stimulating the economy, AD rises, AD1→AD0, returns to long-term equilibrium
The government does not intervene: P falls, wages fall, production costs fall, more production, AS shifts to the right AS0→AS1 1-2-3 P falls, output returns to potential GDP
AS
Stagflation
stagnation: economic stagnation real output<potential output
Rise: Inflation P rises
Reason: sudden increase in production costs, leftward shift of AS curve, leftward shift of SRAS
eg: oil crisis
Phenomenon: P rises real output<potential output
The government does not intervene: P rises, Y falls, unemployment rises, wage falls, cost falls, SRAS shifts right and returns to the original equilibrium point
Government intervention:
P rises, contractionary policy, aggregate demand shifts to the left AD' P falls, Y falls further
Y falls, expansionary policy AD shifts to the right, output returns to potential GDP, P rises
Tendency 1: No intervention, longer time
Tendency 2: Sacrificing prices to protect output
Decrease in input prices Decrease in input prices
Reason: Cost decrease SRAS shifts right
Phenomenon: Prices fall, output increases, LRAS shifts to the right
Economic growth and its sustainability
Sources of economic growth?
Measuring sustainable growth?
Production Function
Y=A x f（L,K）
Popular Science Douglas Production Function
Output shows constant returns to scale.
A: Total factor productivity TFP (technology) K: Amount of available capital L: labor force size Y: Total GDP output
three deformations
1. growth in potential GDP
Economic growth rate = technology growth rate, capital growth rate, labor force growth rate
2. potential growth rate
Y growth rate = L labor force size growth rate y labor force productivity growth rate
3. growth in per-capita potential GDP
Per capita economic growth rate = technical growth rate Capital growth rate per unit labor force
Take the logarithm of both sides and find the limit
4. GDP growth rate = TFP growth rate a Capital growth rate (1-a) Labor force growth rate = Labor force productivity growth rate Labor force growth rate
Influencing factors
1. technology technology
2. labor supply labor
3. Labor qualityHuman capital
4. physical capital stock physical capital stock
5. natural resources nature resources
6. Government infrastructure construction Public infrastructure
Belong to A
7. other factors
negative effect
environmental pollution
climate change
Understand business cycles
business cycle business cycle
Economic cycle stages and their characteristics
recurrent
expansions
contraction period
turning point
peaks
troughs troughs
four stages
recovery (pre-expansion) recovery
real GDP<potential GDP
The trend is up
Prosperity (late stage of expansion) Expansion
real GDP>potential GDP
The trend is up
Recession (pre-recession) Slowdown
real GDP>potential GDP
The trend is down
Depression (late recession) Contraction
real GDP<potential GDP
The trend is down
Serious enough to be called a recession
Indicator changes
inventory to sales ratio inventory to sales ratio
recovery (pre-expansion) recovery
increased sales
Inventory is cheap
Destocking ratio drops
Prosperity (late stage of expansion) Expansion
Sales increased significantly
Keep inventory as close as possible to catch up with sales
ratio stable
Recession (pre-recession) Slowdown
Sales dropped sharply
Production decline
Inventories rise
Ratio rises
Depression (late recession) Contraction
sales drop
Production drops significantly
Inventory decline
Ratio returns to normal
unemployment unemployment
capital spending capital spending
recovery (pre-expansion) recovery
Pay more attention to efficiency
Tend to buy light capital
Prosperity (late stage of expansion) Expansion
Purchase more heavy assets
Recession (pre-recession) Slowdown
Have healthy and stable cash flow
Interest rates gradually rise
There are new orders but costs are rising
Depression (late recession) Contraction
selling capital
Reduce orders
Classification
Classical cycle Classical cycle
The expansion phase lasts longer
Recessions are shorter
growth cycle
The peak of the growth cycle is earlier than the classical cycle
Growth rate cycle
growth rate fluctuations
business cycle theory
keynesian
It is believed that changes in aggregate demand AD cause economic cycles
Advocates that the government should intervene in the economy to regulate AD and maintain normal levels
The government is an active role
monetarist
From quantity theory of money
MxV=YxP (MV=PY)
constant
V circulation times Velocity
Y total output real output
M money supply Ms
Believes that the central bank’s irregular money supply leads to economic cycles
Advocate that the central bank should not issue currency indiscriminately
classicism classical
neoclassical school neoclasscial
Originated from Adam Smith
What are the causes of economic cycles?
external real shocks external real shocks
technological progress
natural disaster
Advocate that the government should not interfere in the economy
Austrian School Austrian
a branch of classicism
What are the causes of economic cycles?
Government intervention causes economic cycles (easy monetary policy)
lower interest rates
excessive credit
Advocate that the government should not interfere in the economy
credit cycle credit cycle
The cost to the private sector of obtaining funds (loans)
personal
buy a house
enterprise
invest
recession stage
Banks tighten credit, investment restricted
Fixed assets depreciate, defaults increase, and the economy becomes more fragile
Entering a vicious cycle
Credit management is needed to break the situation
application
Easy credit leads to
Asset and Real Estate Bubbles
Help investors understand the current stage of real estate
Help assess the current economic situation
Predicting how governments will make decisions
Economic indicators Economic indicators
leading economic indicators leading economic indicators
for prediction
Layout in advance
Invest in advance
e.g.
1. average weekly hours,manufacturing
The longer it lasts, the better the economy will be
2. average weekly initial claims for unemployment insurance
Decline. Fewer unemployed people. Economy is improving.
3. New order quantity manufactures' new orders for consumer goods and materials
Some people are buying and the economy is improving
4. ISM new order index new order index
The more orders there are, the better the economy is
ISM the institute of supply management(ISM)
5. Manufactures' new orders for non-defense capital goods
The more orders there are, the better the economy is
6. average consumer expectations for business conditions
Expected good
Increase consumption, increase investment
survey based
7. building permits for new private housing units
increase for the better
8. stock index
S&P stock index S&P 500 index
CSI 300
9. credit availability leading credit index
Loose and easier to obtain, used for investment and consumption, and the economy will improve in the future
10. The difference between the 10-year Treasury bond yield and the short-term federal funds rate
term spread = r long - r short
rising for the better
coincident economic indicators coincident economic indicators
industrial production index industrial production index
Real personal income Real personal income
Manufacturing and trade sales Manufacturing and trade sales
lagging economic indicators lagging ecnonmic indicators
for verification
e.g.
duration of unemployment duration of unemployment
When the economy is good, it is shorter.
capital spending
inventory to sales ratio inventory to sales ratio
Change in employee wages change in unit labor costs
There is a lag in wage changes
inflation inflation
Many services are relatively stable
personal loan interest rate average prime lending rate
The economy is loose and credit interest rates are lower
Market feedback has a cycle
consumer debt ratio ratio of consumer instrument debt to income
When the economy is good and income is high, the debt ratio will be low.
When the economy goes down and there is no money to repay debt, debt levels will remain high for a long time.
Debt outstanding outstanding commercial and industrial loans outstanding loans
unemployment
Types of unemployment
underemployed
is labor force
Not unemployed
discouraged worker discouraged worker
Not part of the labor force
However, as the economic cycle changes, they may enter the labor market at any time and become unemployed.
voluntarily unemployed voluntarily unemployed
Accompany the baby
Not unemployed
Not part of the labor force
Frictional unemployment Frictional unemployment
Unemployment while I look for another employer
structural unemployment structure unemployment
e.g.
Accounting computerization
Bank teller
highway toll collector
Changes in industrial structure
Unavoidable
cyclical unemployment cyclical unemployment
because of economic cycle
Related concepts and calculations of unemployment rate
W working age population
Labor force L Labor force People willing to work
Unemployed populationU labor unemployed
Unemployment rate unemployment rate= U/L
Natural unemployment rate: the unemployment rate at full employment/the unemployment rate that does not cause inflation
Calculation of labor force participation rate
labor force participation rate= L/W
inflation
Inflation, deflation and deflation
inflation inflation
1. feature
1. Rising several times in a row
Continuous
2. Almost all products are changing
2. type
1. Hyperinflation: relatively rapid rise
=(P1-P0)/P0>0
Metrics in Finance: Prices Doubled in Three Years
More than 26%
More than 10% of life is considered malignant
2. cost-push inflation cost-push inflation
reason
cost changes
labor force
raw materials
occurrence process
cost increases, SRAS moves left, Y decreases
Facing stagflation
Give up the price level to stimulate output
adopt expansionary policies
Stimulates the AD curve to shift to the right and the price level to further rise
stagflation
Refers to the phenomenon that when the price level rises, output falls.
3. demand-pull inflation demand-pull inflation
reason
demand changes
GDP=C I G (X-M)
Monetary policy and economic policy changes
Investigation combined with AD curve movement
deflation deflation
(P1-P0)/P0<0
disinflation disinflation
downward trend in inflation rate
Measuring Inflation: The Structure of Price Indexes
Price Index Calculation
consumer price index CPI consumer price index
Measure price by a basket of goods and services
Difference GDPdeflator
Counts all goods and services produced during the period
The CPI of different countries is not comparable
reason
1. Different countries have different baskets
China does not include housing
The United States includes housing, etc.
2. Goods and services in the basket have different weights
China Transportation 13%
U.S. transportation 16.8%
3. Data collection methods are different
But it can be year-on-year or month-on-month
CPI calculation:
1.
L pull index
Q Last base period
biased
1. New goods
The base period does not include new products
Solution: introduce new goods
2. Quality change
Does not take into account quality changes
leads to overestimation of inflation
Solution: hedonic pricing
3. substitution
Substitution bias
Instinct to buy substitutes for items that have increased in price
2.
P Pascal index
Q Present current period
3.
Fisher index
Optimized for substitution bias
producer price index PPI producer price index
Before CPI changes
In some countries it is called WPI wholesale price index
core inflation
Eliminate goods and services that are highly affected by supply and demand
include
food
pork
energy
causes of inflation
Normal economic expansion is benign
If the CPI is negative for two consecutive quarters, it means that the economy may be in recession.
Monetary policy and fiscal policy
basic terminology
Money multiplier Money requirement
=1/reserve requirement
reciprocal of deposit reserves
ideal magnification
maximum value
monetary policy monetary policy
currency
functions of money
means of payment
measurement tool
storage means
Reflect asset value
money creation process money creation process
central bank
When absorbing a deposit from one unit, there must be a statutory reserve requirement.
eg 10%
currency definition
supply and demand for money
Fisher effect
Quantity Theory of Money MxV=PxY (MV=PY)
constant
V circulation times Velocity
Y total output real output
M money supply Ms
Changes in Ms only lead to changes in P, proportional to
Reflects monetary neutrality
Money supply does not affect real economic variables
Variables that only affect monetary properties, such as prices
Reflects the relationship between nominal interest rates and real interest rates
The nominal interest rate includes the current output of GDP and includes prices.
The real interest rate excludes prices
formula
Nominal interest rate Rnom= real interest rate Rreal E[I] expected inflation rate
Expected inflation rate = real inflation rate RP
Risk premium for inflation uncertainty RP = risk premium for inflation uncertainty
More accurate
1 Rnom=(1 Rreal)(1 inflation)
Rreal is generally considered to remain unchanged
The central bank adjusts nominal interest rates
classification of money classification of money
Narrow money Narrow money
Can be consumed directly in life
banknotes
coin
Bank current account deposit balance
Broad money Broad money
On the basis of narrow currency, some bank deposits with liquidity and purchasing power are added.
M1
currency in hand
travel check
Current account deposit
Corresponding to narrow currency
M2
Based on M1
Time deposits of less than 100,000 US dollars time deposits
Highly liquid assets
Retail investors’ public fund balances
corresponds to broad money
central bank
functions of central bank
Affects the money supply and credit easing
issue currency
Many countries in the EU and Hong Kong do not have central banks. Only the EU has one.
It is not only the central bank that can issue currency. For example, banks such as HSBC in Hong Kong
role of central banks
government bank
bank of bank
commercial bank bank
lender of last resort
Supervise banks
The role you least want to take on
Responsible for foreign exchange reserves and gold reserves
monetary policy makers
Central Bank Targets and the Costs of Inflation
control inflation
maintain currency stability
maintain full employment
sustainable economic growth
Moderate long-term interest rates
Worried about unexpected inflation
central bank effectiveness
independence
Not subject to government interference
operational independence operational independence
target independence
credible
transparency transparent
Policy is predictable
Interest rate levels, etc.
monetary policy tools
1. policy rate policy rate
The market interest rate fixed by the central bank
The European Central Bank ECB is called refinancing rate
low interest rates
Low financing costs release liquidity
expansionary monetary policy expansionary
Judgment basis: Increase money supply MS expansion
high interest rate
High financing costs and tight liquidity
contractionary monetary policy contractionary
Judgment basis: Reduce money supply MS contraction
2. Deposit reserve ratio reserve requirements (commonly used in my country)
A RRR cut means lowering the deposit reserve ratio (the statutory part)
Low deposit reserves
expansionary monetary policy
High deposit reserves
tight monetary policy
3. open market operations open market operations
Central banks buy and sell government bonds on the open market
Bonds are repurchased from the market and funds flow back into the market
expansionary monetary policy
Sell bonds to the market and funds flow to the central bank
contractionary fiscal policy
monetary transmission mechanism
Objectives and forms of monetary policy
interest rate target
Inflation target (most commonly used)
exchange rate target
implementation of monetary policy
The benchmark of monetary policy: neutral interset rate
Neutral rate=Rreal target inflation
Police rate = Real real inflation
Rnom = Rreal Expected inflation
judge
Policy interest rate > neutral interest rate → real inflation > target inflation
Economic overheating, contractionary policy contractionary
Impact of falling interest rates
domestic
Asset price p rises
Personal wealth rises
Reduce deposits
increase spending
Consumption rises
wealth effect
AD aggregate demand rises
Y total output rises
foreign
Foreign capital divestment
Currency depreciation
Exports rise
Imports fall
Y total output rises
limitation of monetary policy limitation of monetary policy
1. Bond market defends itself
By r short-term impact r long-term goals may not be achieved
The government wants to stimulate the economy
current economic downturn
Long-term bonds have lower yields
expected future inflation
Future inflation will reduce returns
Leading to an increase in the supply of long-term bonds and a decrease in demand
Long-term bond prices fall P discounted future cash flows
cft cash flow remains unchanged
r long-term rise
Unable to achieve goals
2. liquidity trap
Prerequisite: The interest rate is as low as 0
Refers to the central bank's interest rate falling again and again to a relatively low level.
The central bank is unwilling to put funds into the market
The private sector is also unwilling to invest in consumption
Commercial banks are reluctant to lend
Private sector money demand is infinite
perfect elastic state perfect elastic
3. failure of control
measure
Quantitative easing QE quantitative easing
Three rounds of QE in the United States in 2007 and 2008
first round
The money was given to the commercial bank. The commercial bank failed.
second round
Buy LT bond long-term bond and sell ST short-term bond (operation twist)
LT demand rises P long rises r long falls
ST supply rises P long falls r long falls
third round
Buy MBS financial derivatives
To address the shortcomings of traditional monetary policy
Can be used during any economic downturn
Monetary policy challenges facing developing countries
Lack of liquidity in bond markets
Policy credibility is low
government intervention
Affects independence
Economic growth rate changes greatly
Financial Innovation
fiscal policy fiscal policy
definition
The government affects the economy through spending and taxation
The subject is the government
government spending and revenue
Income T Expenditure G
T-G>0
fiscal surplus
T-G<0
fiscal deficit
T-G=0
financial balance
Objectives and Forms of Fiscal Policy
Affects the level of economic activity
Affects aggregate demand AD
redistribution of wealth
Resource reallocation
South-to-North Water Diversion Project, etc.
fiscal policy tools
Types of Fiscal Policy Tools
Spending tools Spending tools
1. transfer payment transfer payment
Government subsidies are given to us in the form of cash
Not included in GDP
pension unemployment benefit
automatic stabilizer
2. recurring expenses
short term employment
buy and sell
3. non-recurrent expenditure capital spending
Infrastructure construction, etc.
G rising expansionary policy G decline, tightening policy
revenue tools revenue tools
1. direct tax
related to income
2. indirect taxes
Price and volume tax
eg value added tax
Taxes related to price and quantity
judge
tax rises
compactness
tax decrease
Expansion
Advantages and Disadvantages of Fiscal Policy Tools
simplicity simple
efficiency effectiveness
fairness fairness
Horizontal
Same income and same tax
portrait
Income is different. The higher the income, the more taxes you pay.
sufficiency sufficient
fiscal multiplier calculation fiscal multiplier
For every 1 unit increase in government expenditure G, how many units will Y's total revenue increase?
Y=C I G NX
C=a bY(1-t)
bMarginal propensity to consume (MPC)
How much does expenditure increase if disposable income increases by 1 unit?
fundamental propensity to consumption
MPC=C/Y（1-t）
The financial multiplier obtained after bringing in is 1/(1-b(1-t))
implementation of fiscal policy
fiscal deficit
Debate over the size of the fiscal deficit
Calculation of debt ratio
Debt as a share of GDP
Are you worried about the high ratio?
The academic community has yet to reach a conclusion
Disagreement
Higher taxes in the future
to avoid breach of contract
Print money
leading to high inflation
causing crowding out effect
Agree with the view
When I asked my parents to borrow money, I had no external debt.
Earn more income through future economic growth to pay off debt
Deficit forces tax reform
It’s nothing more than the difference between charging more taxes now and charging more taxes now
Ricardian Equivalence
Can promote employment
Views on government borrowing to stimulate the economy
Limitations of fiscal policy implementation
time lag effect time lag
something could go wrong
Establish policies in advance. Expectations may be wrong.
recognition lag
Understanding time lag
action lag
action delay
impact lag
Affect time lag
crowding-out effect crowding-out effect
The government stimulates the economy by increasing spending, but it crowds out the private sector's economic gains.
Economic depression G rises
G-T deficit
Looking to the central bank for loans squeezes out loans from the private sector
cost r rises
C I dropped
Y drops
Factors that caused Y to rise less than expected
supply shortage
limits to deficits limits to deficits
Multiple targets Multiple
Inflation and unemployment cannot be taken into account at the same time
to prioritize
Ricardian equivalent ricardian equivalent
In the case of economic depression, it is difficult to achieve the goal through expansionary fiscal policy (less taxation) to stimulate consumption.
recession
expansion
to stimulate consumption
T decrease, pay less tax
G-T deficit rises
Tax will rise in the future
S savings increase
C consumption decreases
contrary to the goal
combination of monetary and fiscal policy interaction
Monetary Policy
Main impact on interest rates r
Affects private sector spending C and I
Fiscal policy
G and T that mainly affect government departments
Affect government spending
specific combination
Government fiscal policy dominates but G has a lower limit
Affect output output
International Economics
International trade and capital flows
international trade
trade restrictions
For import companies
tariffs taiffs
Quotas Quotas
Limit import quantity
welfare effect
minimum domestic content minimum domestic content
Ensure that a certain proportion is supplied domestically
There is a minimum ratio limit
eg: military
Protect domestic companies
For export companies
export subsidies exports subsidies
production costs reduced
Voluntary export restriction voluntary export retraint (ver resource export agreement)
The biggest loss in national welfare
capital restrictions
To reduce the vola'tility of domestic asset prices reduce the vola'tility of domestic asset prices
maintain a fixed exchange rate system
impossible triangle
maintain an independent monetary policy
Maintain the free flow of capital
fixed exchange rate system
It is impossible to achieve all three at the same time
Keep national interest rates at a relatively low level
Protect certain businesses from foreign interference
Related terms
absolute advantage
Look at production costs
Whose cost is lower and who has the absolute advantage?
Comparative Advantage
Look at opportunity cost
What other products are given up by producing this product?
Comparative Advantage
law
Export products with comparative advantages
Importing products with no comparative advantage
Country A's opportunity cost of producing Y is 2X. Country B's is 3X, so A produces Y.
Country B's cost of producing X is 1/3Y. Country A's is 1/2Y, so B produces X.
Ricardian model Ricardian model
The reason for comparative advantage is labor force
Different labor productivity labor productivity
The essential reason is technology caused by technological progress.
Heckscher-ohlin model Heckscher-ohlin model
The two factors of resources and labor lead to different comparative advantages of different countries.
Also known as factor-proportions theory
in conclusion
The side with abundant resources will benefit from international trade.
Advantages
Carry out labor-intensive production
Labor demand rises
Supply remains unchanged
wages rise
cause
Comparative advantage is the reason for international trade
Types of trade protection policies
Cooperation between countries or economies
balance of payments
balance of payments account
Balance of payments BOP account balance of payments
Record transactions between countries
Use double-entry accounting
category
current account current account
1. Buy and sell goods and services
Just the right to use
2. investment income income receipt
dividend dividend
receipt
payment pay -
interset interest
receipt
payment pay -
3. unilateral transfer unilateral transfer
donation
receive
Pay donation -
Account deficits usually arise from three reasons:
low personal savings
High personal investment
government deficit
capital account capital account
Non-financial assets
intangible assets
Patent ownership
transfer of ownership
financial account financial account
government assets
reserve foreign exchange reserves
foreign assets
monetary assets
stock
bond
capital account
distinguish
patent
transfer of ownership
capital account
Just the right to use
current account
invest
Buy stocks/bonds
Bought by foreigners
financial account
Dividend/interest payment
current account
in conclusion
Current capital finance=0
net balance
Whatever is borrowed must be given out. Debits and loans must be equal.
inspection
Which transaction belongs to xx account
Which account does a given transaction belong to?
Calculate balance
capital inflow
sell goods
Fund outflow -
Buy items -
international organization international organization
International Monetary Fund IMF
Maintain global financial order
Formulate international monetary and economic policies
Stabilize the currencies of various countries, monitor the foreign exchange market, record trade figures between countries, and debts between countries
Reserves Temporary Borrowing Services
Resolve trade imbalance
Since the IMF is not a bank, it does not lend money. However, the International Monetary Fund has reserves that countries can borrow to stabilize currencies for a short period of time; this is similar to overdrafting a current account. The loan must be repaid within 5 years
Provide forum
promote international trade
reduce poverty
Economic Growth
Maintain exchange rate stability
After 07-09
Improve the convenience of borrowing
Strengthen supervision
Resolve imbalances
Promote financial market development
Assessing financial market vulnerabilities
world bank world bank groups
Poverty alleviation
Help build basic economic infrastructure
Establish and maintain domestic financial markets and well-functioning financial sectors in developing countries
Mainly provides long-term loans
The World Bank works like an investment bank, issuing bonds to companies, individuals or governments and lending the proceeds to recipient countries.
world trade organization world trade organization WTO
resolve trade disputes
Ensure trade is smooth and predictable
Providing legal charitable funds through a transnational trading system
The only international organization that can manage transnational trade relations on an international scale
trading blocs trading blocs
free trade areas free trade areas
Shanghai Free-Trade Zone
Hainan Free Trade Zone
There are no barriers to import and export among members and no trade restrictions.
customs union customs union
UK and Ireland
On the basis of the free trade area, there are the same trade restrictions between non-member countries
common market common market
common market for east africa
common market of south america
On the basis of a customs union, there are no restrictions on labor and capital.
economic union economic union
European Union
One Belt, One Road
Use the same economic policies based on a common market
monetary union monetary union
Eurozone
Use the same currency single currency
exchange rate
basic concept
DC/FC
Direct quote method Direct quote
7cny/usd
CNY
DC: price currency price currency
Or called counter currency / quote currency
USD
FC: base currency base currency
Or become the standard currency
FC is the subject of research
Default mode
FC/DC
indirect quote indirect quote
sell side seller
The party providing the foreign currency
multinational bank
buy sidebuyer
The party who needs foreign currency
multinational
government
retail market
Foreign exchange market
Calculation of exchange rate currency exchange rate
exchange rate quotes
Nominal exchange rate and real exchange rate
nominal exchange rate
Contains inflation
real exchange rate
excluding prices
Convert
e.g.
currency appreciation and depreciation
Cross rate calculation
Spot exchange rate and forward exchange rate
spot rates spot exchange rate S
The exchange rate to be used immediately
forwrd rates forward exchange rate F
The exchange rate used for future transactions
Sign a forward contract
EG
F-S>0 forward premium (premium) forward premium F-S<0 forward discount forward discount F-S forward point (F-S)/S forward point as a percentage 4 decimal places or expanded by 1w times Exception: JPY forward point expanded 100 times
Interest rate parity theory interest rate parity (IRP)
in conclusion
High interest rate national currency Future currency depreciation Spot appreciation
inspection
Asking for F/S
Find F-S
Premium or discount?
arbitrage
Exchange rate system (system)
basic concept
dollarization
monetary union monetary union
A country does not have its own currency
Fixed exchange rate system (ideal exchange rate system)
currency board arrangement currency board arrangement
Fully pegged to a specific foreign currency at a fixed exchange rate
Adopted by Hong Kong
1 US dollar to 6.8 Hong Kong dollars
traditional fixed exchange rate system
conventional fixed peg arrangement
-1%
floating exchange rate system
target zone target zone
eg: -2%
Adjust the exchange rate slightly crawling peg
passive
Adjust regularly
active
Proactively adjust based on anticipated events
managed floating exchange rates
independently floating exchange rate system independently floating
International Trade and Exchange Rates
The impact of exchange rates on international trade
NX=X-M
>0
trade surplus trade surplus surplus
=0
trade balance trade balance
<0
trade deficit trade deficit deficit
How to improve trade deficit Conclusion
Only devaluation of the domestic currency can improve the country’s trade deficit
Elasticity method
Premise: Import and export commodities are relatively flexible
How to judge the elasticity size
Maher, that’s the condition
There is a certain hysteresis
J-curve
Absorption method