Economic Variables, Policies, and National Accounts

Economic Variables and Their Cycles

Variables can be classified according to their movement in relation to the economic cycle:

• Pro-cyclical variables: Tend to increase during economic expansions and decrease during contractions.
• Counter-cyclical variables: Tend to increase during downturns and decrease during expansions.
• Acyclical variables: Do not move in line with the economic cycle.

Understanding the Demand Curve

The demand curve can shift due to several factors *other* than price changes. These include:

• Changes in consumer tastes and preferences.
• Changes in consumer income or purchasing power.
• Changes in the price of related goods.

The demand curve shifts to the right when income rises (for normal goods).

• Normal Good: Quantity demanded increases as income rises.
• Inferior Good: Quantity demanded *decreases* as income rises.
• Staple Goods: When income increases, the quantity demanded increases, but in a smaller proportion.
• Luxury Goods: When income increases, the quantity demanded increases in a *greater* proportion.
• Substitute Goods: If the price of one good rises, the quantity demanded of its substitute increases.
• Complementary Goods: If the price of one good rises, the quantity demanded of its complement *decreases*.

Shifting the Supply Curve

Factors affecting supply include:

1. Prices of production factors (land, labor, capital).
2. Available technology.
3. Weather (particularly in agriculture).

Movements along the demand curve occur due to changes in the price of the good itself. Displacements of the demand curve are due to changes in factors other than the price of the good (e.g., income, tastes).

Macroeconomic Policy

Policymakers use two main tools to influence the economy:

• Monetary Policy: Controlled by the Central Bank (BC). Instruments include variations in the money supply, interest rate fluctuations, and controls on the banking system.
• Fiscal Policy: Controlled by Congress (initiated by the executive branch). Instruments include taxes and public spending (the budget).

Monetary and fiscal policies are stabilizing tools designed to moderate economic fluctuations, specifically targeting growth rate, inflation, and unemployment.

National Accounts and Macroeconomics

National accounts aim to determine the total output of the economy, the price level, interest rates, and other key variables. They help us understand how these variables are determined.

Gross Domestic Product (GDP)

GDP is the value of all goods and services produced within a country’s borders in a given period, regardless of who owns the factors of production.

Gross National Product (GNP)

• GNP is the basic measure of economic activity.
• Nominal GNP measures the value of production using current prices.
• Real GNP measures output using the prices of a base year.

GNP is the value of assets at market prices. The market price of many goods includes indirect taxes (e.g., sales tax). Therefore, the market price is not the same as the price the seller receives.

• GDP: Measures the income of factors of production *within* a nation’s borders.
• GNP: Measures the income of residents of the economy, regardless of whether the income comes from domestic or foreign production.

Per Capita GNP

GNP per capita (GNP per person) is often used to measure a country’s economic development. A higher GNP per capita suggests increased economic welfare.

Economic Cycles

Economic cycles are fluctuations in the economic activity of nations. They consist of expansions occurring across many economic activities, followed by recessions, contractions, and recoveries. This sequence is recurrent but not periodic. Business cycles typically vary in duration from one to twelve years.