Key Concepts in Macroeconomics: Policy, Trade, and Finance

Core National Economic Indicators

• GDP (Gross Domestic Product): Monetary value of all goods and services produced within a country in a given period.
• GNP (Gross National Product): Determines the total income produced by all nationals (e.g., Spanish) worldwide.
• NNP (Net National Product): A nation's total output less the amount required to maintain the value of its capital stock (depreciation).

Factors Influencing Consumption and the Multiplier

Consumption Determinants

• Disposable income (annual)
• Permanent income (Life-Cycle Hypothesis)
• Wealth effect

The Multiplier Effect

The total increase in expenditure (K increment) experienced by the whole economy resulting from an increase in investment.

Macroeconomic Policy Objectives

1. Economic and Sustainable Growth: Output steadily increases over time. (Measured by indicators like GDP and GNP growth.)
2. Full Employment: Achieved when approximately 98% of the workforce is employed.
3. Price Stability: Preventing high inflation.

Economic Policy Instruments and Types

Policy instruments are categorized as Direct or Indirect.

Types of Economic Policies

• Fiscal Policy
• Monetary Policy
• External (Trade) Policy
• Income Policy

Fiscal Policy Definition and Components

Fiscal policy involves public sector management through fundraising (taxation) and the application of public expenditure to achieve state objectives.

Key Fiscal Policy Mechanisms

• Discretionary Fiscal Policy: Actions requiring specific government decisions, such as:
  • Public works programs
  • Transfers
  • Employment and training plans
  • Modification of tax rates
• Automatic Stabilizers: Mechanisms built into the economy that automatically adjust to economic cycles, such as:
  • Proportional and progressive taxes
  • Social security contributions
  • Unemployment benefits

Money, Interest, and Financial Markets

The Nature of Money

Money is a generally accepted medium of exchange or payment/collection.

Forms of Fiat Money

• Physical Form: Bills or coins.
• Bank Money (Immaterial): Customer deposit accounts (checking, fixed term, or savings).

Functions of Money

• Instrument of Exchange (universal payment/collection)
• Measure of Value
• Reserve Instrument (savings)
• Instrument of Power

The Price of Money (Interest)

Interest is the payment for capital services received as a loan.

Factors Influencing Interest Rates

• Risk of the operation
• Liquidity
• Length of the loan

Equity Market Structure

The equity market facilitates the trading of stocks and securities.

• Primary Market (Issue): Channels savings directly into investment.
• Secondary Market (Negotiation): Functions like a perfectly competitive market for trading existing securities.

International Trade Dynamics

Protectionism

Protectionism is the set of actions intended to restrict foreign products from entering the domestic market to protect local industry.

Justifications for Protectionism

• Protection of strategic industries considered in the public interest.
• Promotion of industrialization.
• Development of emerging industries.
• Raising revenue (tariffs).

Benefits of Free Trade

• Increased efficiency of factors of production.
• Increase and promotion of competition.
• Greater variety and quantity of goods and services.
• Achieving economies of scale.