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Economic

growth is defined as the increasing capacity of the economy to satisfy the wants of the members of society. Economic growth is enabled by increase in productivity, which lowers the inputs (labor, capital, material, energy, etc.) for a given amount of output. Lowered costs increase demand for goods and services. Economic growth is also the result in population growth and of the introduction of new products and services.

Non-inflationary Economic growth Growth of economic activity without any tendency to inflation of prices. This is sometimes taken as the ideal target for macroeconomic management. Inflationary Economic growth

Aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the GDP of a country when inventory levels are static.

The real balance effect.-Wealth Effect


When prices are low, the real value of their money is higher.

The foreign trade effect.

Prices Demand of Imports Demand of Local Goods Demand of Exports Net Exports

The interest rate effect.

Prices Supply of Money Constant Price of Money/Interest Demand of Goods

Aggregate Supply (AS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy..

Short run aggregate supply (SRAS) change the amount of labor used but not capital Resources are underused. Upward shifts in SRAS generally increase output (y) but don't increase price (P). The SRAS curve is nearly perfectly horizontal. i.e. wages don't change over the short run. Long run aggregate supply (LRAS) Over the long run, only capital, labor, and technology affect the LRAS The LRAS is shown as perfectly vertical, reflecting economists' belief that changes in aggregate demand (AD) have an only temporary change on the economy's total output. Medium run aggregate supply (MRAS) The MRAS curve is affected by capital, labor, technology, and wage rate.

Interest Rates Consumer Confidence. Asset Prices. Real Wages. Value of Exchange Rate. Banking Sector.

LRAS can be influenced by


Levels of infrastructure Human Capital. Development of Technology.

Other Factors that Can Affect Growth in the Short Term. Commodity Prices. Political Instability. Weather.

GDP Deflator

Real GDP 2009= (2009 Price of A x 2009 Qty of A) + (2009 Price of B x 2009 Qty of B) Real GDP 2010= (2009 Price of A x 2010 Qty of A) + (2009 Price of B x 2010 Qty of B)

Real GDP 2011= (2009 Price of A x 2011 Qty of A) + (2009 Price of B x 2011 Qty of B)

Nominal GDP = Real GDP x GDP Deflator Real GDP = Nominal GDP/ GDP Deflator

it is the price of basket of goods and services purchased by normal consumer relative to the price of same basket purchased in some base year
CPI = ( 5 x current price of apple) + ( 2 x current price of oranges ) / ( 5 x 2009 price of apple) + ( 2 x 2009 price of oranges )

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GDP deflator measures the prices of all goods. GDP deflator measures the prices of goods produced within the country. CPI assigns fixed weights to goods.

Real income is the income of individuals or nations after adjusting for inflation It is calculated by subtracting inflation from the nominal income. Real variables, such as real income, real GDP, and real interest rate are variables that are measured in physical units. while nominal variable such as nominal income, nominal GDP, and nominal interest rate are measured in monetary units. Real income is a more useful indicator of well being, since it is based on the amount of goods and services that can be purchased with the income.
Personal Income is an economic statistic that measures an individual's total annual gross earnings from wages, business enterprises and various investments. Calculated Also known as "disposable personal income" (DPI). Read more:

The production function relates the output of a firm to the amount of inputs, typically capital and labor.

The engineering and managerial problems of technical efficiency are assumed to be solved, so that analysis can focus on the problems of allocative efficiency
A decision frame in which one or more inputs are held constant may be used; for example, (physical) capital may be assumed to be fixed (constant) in the short run, and labour and possibly other inputs such as raw materials variable, while in the long run, the quantities of both capital and the other factors that may be chosen by the firm are variable. In the long run, the firm may even have a choice of technologies, represented by various possible production functions.

A consumption function emphasizes the relationship between consumption and income. In economics, the consumption function is a single mathematical function used to express consumer spending. It was developed by John Maynard Keynes and detailed most famously in his book The General Theory of Employment, Interest, and Money. The function is used to calculate the amount of total consumption in an economy. It is made up of autonomous consumption that is not influenced by current income and induced consumption that is influenced by the economy's income level. The simple consumption function is shown as the : C = c0 + c1Yd where C = total consumption, c0 = autonomous consumption c1 is the marginal propensity to consume (the induced consumption) Yd = disposable income (income after taxes and transfer payments, or Y T).

Restrictive Monetary policy :When monetary policy makers such as the take actions to reduce a nation's money supply, they are engaging in restrictive monetary policy. They usually take these actions to contain or reduce inflation in the economy. Expansionary Monetary policy refers to the actions that a government takes, whether through a central bank or other financial conduit, that increases the money supply in the economy.

National savings can be thought of as the amount of remaining money that is not consumed, or spent by government. In a simple model of a closed economy, anything that is not spent is assumed to be invested. National Savings = Y C G = I National savings should be split into private savings and public savings. (Y T C) + (T G) = I S = I(r) The interest rate plays the important role of creating an equilibrium between saving and investment.