04/18/23 Lecturer: Chhay Kongkea, Ph.D. Intermediate Macroeconomics 1

Chapter AppendixChapter Appendix

Economy System & International TradeEconomy System & International Trade

International BusinessInternational Business

Lectured by: Chhay Kongkea, Ph.D.Ph.D. Degree in Economics, Majoring in Agricultural EconomicsFrom Department of Agricultural Economics,Graduate School, Chonnam National University,Gwangju City, South Korea.

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Four Market ArenasFour Market Arenas

TIpSarTMnij nig esvakmµ (Market For Goods & Services)

TIpSarRbPBFnFan (Resources

Markets / Inputs Market)

TIpSarhirBaØvtßú (Financial

Market / Money Markets)

TIpSarbþÚrR)ak; (Foreign

Exchange Rate Market)

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Markets For Goods and ServicesMarkets For Goods and Services

Goods and Services Market

Household, Firms and Governmentpurchasepurchase Goods and Services

Firms supplysupply Goods and Services

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Market for Factors of ProductionMarket for Factors of Production

Market for Factor of Production

Firms and Governmentdemanddemand labor

Households supplysupply Inputs

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Financial MarketsFinancial Markets

Financial Markets

Households, Firms and Governmentdemand demand funds

Households supplysupply funds

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Foreign Exchange Rate MarketsForeign Exchange Rate Markets

• The exchange rate between two countries is the price at which residents of these countries trade with each other.

• In the market for foreign-currency exchange, U.S. dollars are traded for foreign currencies.

• US$ 1 = Cambodian Real 4100

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RbB½n§énesdækic© (Economic Systems)

RbB½n§énesdækic© (Economic Systems) esdækic©Epnkar

(Planning Economy)

esdækic©EbbsgÁmniym (Socialism)

esdækic©kumúµúynIsniym (Communism)

esdækic©EbbhVasIusniym (Fascism)

esdækic©cMruH (Mixed Economy)

esdækic©TIpSaresrI (Free Market Economy)

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Households BusinessFirms

Resources

Income

Goods and Services

Expenditures

Solid Lines - Flow of MoneyDashed lines - Flow of Goods and Services

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Demand Description Supply Description Income Description

Consumption Agricultural Production Wage

Private Investment

Government Expenditure

Excess of Exports over Imports

Net Income Transfers Abroad

Industrial Production

Production of Services

Government Production

Interest

Rent

Profit

GDPGross Domestic Product (GDP)Gross Domestic Product (GDP)

Gross National Product (GNP)

+

+

+

+

+

+

+

+

+

+

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Production Function and Theories of Growth

Output = A f(Labor, Capital, Land)

The Standard theory of Growth-Classical Growth Model

Saving Investment Increasing in Capital Growth

Tax Income in hand Investment Saving Y

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The Flow-of-Funds through Financial Markets

Financial Markets

Household Saving SH = Y*-T-C

Government Saving SG = T-GForeign Saving SF = -NX

Investment Demand I

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Consumption Function: C = C0 + cY

Co = Autonomous Consumption/Expenditure

cY = Induced Consumption/Expenditure

c = Marginal Propensity to Consume (MPC)

Y = Income

Investment Function: I = I0 + mY

Io = Autonomous Investment

mY = Induced Investment

m = Coefficient

Y = Income

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AD = Y = C + I + G + NX

AD = aggregate demand

C = consumption

I = investment

G = government spending

NX = net exports , (NX=exports – imports)

YD = C + S

YD = disposable income

S = savings

YD = Y + TR – TA

Y = national income

TR = government transfer payments

TA = government taxes

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1. Substitute given equations into equation for AD:

YD = YD

C + S = Y + TR – TA

C = Y + TR – TA - S

AD = C + I + G + NX

= (Y + TR - TA - S) + I + G + NX

2. Apply equilibrium condition:

Y = AD

3. Substitute solution for AD from Step 1:

Y = Y + TR - TA - S + I + G + NX

Simplify equation:

G + TR - TA = S - I - NX

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IS re la tio n : Y C Y T I Y i G( ) ( , )

L M rela tio n : M

PY L i( )

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Low

Productivity

Low

Per Capita

Income

Low Levels of

Investment in

Physical and

Human Capital

Low Level

of Saving

Rapid

Population

Growth

Low Level

of Demand

Figure. The Vicious Circle of PovertyLow per capita incomes make it extremely difficult for poor nations to save and invest, a condition that perpetuates low productivity and low incomes. Furthermore, rapid population growth may quickly absorb increases in per capita real income and thereby may negate the possibility of breaking out of the poverty circle.

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