INTRODUCTION MACROECONOMICS ESSENTIALS
ARIZONA STATE UNIVERSITY
ECN 211 - MACROECONOMIC PRINCIPLES
WEEK 1
This chapter aims to explain:
•
Differences between macroeconomic analysis and macroeconomic analysis
•
Various macroeconomic problems
•
Variety models activities economic activity in society
MICRO AND MACRO ECONOMIC ANALYSIS:
Micro and macroeconomics are part of the economic theory while what is meant by
economic theory is the science that analyzes the needs between economic variables, the
economic variables in question can be both micro and macro. To understand the position of
micro and macro economic analysis in economics can be seen in Figure 1.1 below.
Descriptive economics is a part of economics that describes the state or economic
activities that really occur in a particular place or country. Economic theory basically seeks to
explain the relationship between economic variables both micro and macro variables. Applied
economics involves economic policy issues that need to be applied in a particular region or
country.
Economic theory is basically divided into microeconomic theory and macroeconomic
theory. Both microeconomics and macroeconomic theory study economic problems. However,
the economic problems studied differ in their point of view.
Microeconomics studies the economic activities of individual economic units, namely
individuals as consumers. Individuals as owners of factors of production, as well as
individuals as producers. Microeconomic analysis consists of: price theory, producer theory
and distribution theory. Price theory, among others, discusses the process of price formation
by the interaction between supply and demand for goods and services in a market, factors that
affect changes in demand and supply, the relationship between demand and supply prices;
market forms; and so on. Production theory, among others, analyzes the problem of
production costs; the most profitable production level for producers that must be chosen by
producers so that the goal of achieving maximum profit is achieved. Meanwhile, distribution
theory discusses the factors that determine the level of effort to distribute goods labor; the rate
of interest payable on the use of capital; and the rate of profit earned by entrepreneurs.
Microeconomic theory was first developed by classical economists in the 18th and 19th
centuries, such as adam smith, david recardo, which was further developed by marshall and
plgou. In order to develop the theory of classical economists (micro) based on certain basic
assumptions, among others.
•
Every economic subject always acts economically rational, that is, consumers always
try to achieve maximum satisfaction from every good and service consumed.
Meanwhile, producers always try to obtain maximum profits.
•
Every economic subject has complete information on everything that happens in the
market.
•
High degree of mobility. This allows economic subjects to quickly adjust to changes in
the market.
Based on these assumptions, classical economists believe that economic activity will
develop efficiently, economic growth will increase, and full employment will be achieved.
If in microeconomics analyze the activities and economic problems of individual
economic units, then in macroeconomics analyze it from the opposite approach. This means
that what is studied in macroeconomics are total variables such as national income,
consumption, public savings, total investment, and so on.
Macroeconomics analyzes the overall state of economic activity. Macroeconomics does
not discuss the activities of a producer, a consumer or an owner of a factor of production, but
the overall actions of consumers, entrepreneurs, governments, financial institutions, and other
countries and how these actions affect the economy as a whole.
This macroeconomic theory was born marked by the release of a book entitled the
general theory of employment. Interest and money in 1937 written by JM Keynes, an
economist at Cambridge University in England. The book is also seen as a very important
milestone in the history of western economic thought.
In the book, Keynes presents a theory that shows that budgeting can occur and even for
an unlimited period of time. Eventually, many economists accepted Keynes' opinion, and this
group was called Keynesian economists, which is now accepted as the correct theory and
practiced in many countries.
ECONOMIC PROBLEMS MACRO
Basically, economics is studied because it has uses. Economics is useful because it can
provide clues about what policies can be taken to overcome certain economic problems.
Macroeconomics which is one of the branches of science economics can help solve
macroeconomic policy problems.
Macroeconomic policy issues include issues related to the management and control of
the economy in general. The task of macroeconomic control is to ensure that the economy can
work and grow in a balanced manner, avoiding circumstances that can disturb the general
balance.
There are three short-term macroeconomic problems that must be addressed at all
times. The three problems in question are:
Inflation problem
Inflation is one of the economic problems that is always experienced by, almost all
countries talk about inflation is always associated with rising prices, because the price is an
important indicator of inflation. What is meant by inflation is a situation where there is a
tendency for prices to rise in general and continuously thus if in society there is an increase in
one or a few people (and is temporary), then such conditions are not considered as inflation
therefore such conditions are not considered as a problem and no special policies are needed
to overcome it. Although inflation does not automatically lower living standards, it is still a
problem, for three reasons:
•
Inflation can lead to income redistribution among members of the society.
•
Inflation can cause a decrease in economic efficiency
•
Inflation can cause changes in outputs and opportunities into society.
Unemployment Problem
Unemployment occurs because the number of workers exceeds the level of available
employment opportunities. In developing countries, the growth rate of the labor force is quite
high, so it is not balanced with the available job opportunities if this fact occurs, then the
unemployment rate is quite high. Not all residents included in the labor force are residents of
child and youth age. The population in the working age / labor force is the population in the
age between 15 years and 59 years based on the level of full employment or theoretically the
economy is considered to reach the level of full employment opportunities if the available
labor is fully used in practice what is meant by the level of full employment opportunities has
a slightly different meaning. In order to determine whether the economy has reached full
employment or not, the measure is not the use of 100% labor, but the use of labor that is
slightly lower than that. In the United States, for example, full employment is considered to
have been achieved when the unemployment rate is at most around 4%. In our country,
efforts to reduce the unemployment rate are made through controlling the population growth
rate. The family planning program is one of the alternatives to reduce the population growth
rate. This is because economic development has no meaning if it is accompanied by a high
level of unemployment population growth is too high.
The main factor that causes unemployment is the lack of aggregate expenditure by
entrepreneurs who produce goods and services with the intention of making a profit. Such
profits can only be made if entrepreneurs can sell the goods they produce. The greater the
demand, the more goods and services they produce. The increase in production will increase
the use of labor. Thus, there is a close relationship between the level of national income
achieved and the use of labor performed. The higher the national income, the more the use of
labor in the economy.
Lack of aggregate demand is an important factor that causes unemployment. In
addition, other factors that give rise to unemployment are: (1) unemployment due to a desire
to find another job; (2) employers using modern equipment; (3) a mismatch between the actual
skills of workers and the skills required in existing industries.
One important factor that determines the prosperity of a society is its income level.
Community income reaches a maximun if the income level of full employment can be
realized. Unemployment can reduce community income. And this condition can certainly
reduce the level of community prosperity that has been achieved.
Edwars distinguishes five forms of unemployment, namely:
•
Open unemployment
Included in this open unemployment are both voluntary (those who do not want to work
because they expect a better job) and involuntary (those who want to work but cannot
find a job).
•
Underemployment
Included in the unemployed are those who work for less time (days, weeks. seasonally)
than they can work.
•
Those who are not classified as openly unemployed and underemployed. Included in
this unemployment are
▪
Unemployment which not kentara (diquised unemployment). For example, farmers who
work in the fields
for a full day, even though the work does not actually require a full day.
▪
Retire early; this phenomenon is done in order to
provide opportunities for those who are young and unemployed.
•
Weak labor force
These are those who may be working full-time, but whose intensity is weak due to
malnutrition or illness.
•
Unproductive labor
These are those who are able to work productively, but whose resources are inadequate.
In realization, there is a very close relationship between the high level of
unemployment, widespread poverty, and unequal income distribution. For the most
part, those who do not have permanent jobs or only work part-time are always among
the very poor and marginalized. However, it is wrong to assume that everyone who is
unemployed is poor, while those who are fully employed are rich. The issue of rich and
poor is related to many influencing factors and depends also on the human being
himself.
Balance of Payment Inequality Problem:
The balance of payments is a balance sheet that contains an overview of all transactions
that occur between residents of a country and residents of other countries over a certain
period of time, usually one year.
Transactions contained in the balance of payments concern goods and services, in the
form of exports and imports, foreign transactions such as the granting or receiving of credit to
or from other countries, investment abroad and unilateral transactions such as transfer
payments from people living abroad not equal to the amount of revenue earned from abroad,
the difference can be a surplus or deficit in the balance of payments. Imbalance in A country's
balance of payments can be considered a problem if the imbalance is large enough. If this is
the case, then government policy is needed to address it.
At the microeconomic level, the balance of payments relates to aggregate international
activity and provides clues as to whether the economy is in equilibrium or not.
While the balance of payments must always be in a state of accounting balance, it does
not always have to be in a state of economic balance. This is because the sum of autonomous
credit transactions d o e s not always equal autonomous debits. Autonomous transactions a r e
carried out for the items themselves in response to different economic, social and even
political stimuli. Such transactions are carried out to create income and improve economic
welfare. Items included in autonomous transactions are exports and imports of goods and
services, foreign investment, government aid, military aid, and certain groups of capital
flows. All these are recorded in the balance of payments account as credits or debits
according to the flows they reflect. Accommodating transactions are carried out to
compensate for autonomous transactions and essentially reflect the financial counterparts of
these transactions. These accommodating transactions essentially consist of short-term capital
flows that are recorded as credits or debits according to the flows they reflect.
In the era of economic globalization that occurs at this time the dependence of economic
development between countries is in the world is getting bigger. The balance of payments
will provide information on the value of exports and imports, service transactions and others.
Every country will try to maintain the stability of the balance of payments, namely a
situation where the flow of money out of the country as a result of imports of goods and
services and the flow. Capital outflow is balanced with the flow of money coming in from the
export of goods and services and the inflow of foreign capital. This balance in the balance of
payments tends to realize the stability of the balance of payments, another effort that every
country usually makes is to promote the development of exports of goods and services and
increase inflows.
In macroeconomic theory it is always pointed out that if a country imports excessively i.e.
imports are always higher than exports, several problems will arise. Various problems will
arise are:
1. Excessive imports tend to lower the value of the domestic currency.
2. This condition means that imported goods are more expensive and inflation will haunt
spending on domestically produced goods and this situation can reduce economic
activity and growth.
3. The macroeconomic problems above are, in principleb short term.
Long-term macroeconomic problems concerning the issue of economic growth in each
period of a society will increase its ability to produce goods and services. This is due to the
increase in the applicable factors of production. In each period the number of workers will
increase because there are groups of people who will enter the labor force past investments
will add to capital goods and the capacity to produce in the present. In addition, investment is
usually followed by technological developments in the means of production, and this will
further accelerate economic growth in accordance with the development of the country's
production capacity.
The lack of an education budget in a country makes the country's ability to develop
technology limited. This is exacerbated by the existence of human resources that are still very
low in education. As a result of these conditions, actual economic growth is often much lower
than the potential growth that can be achieved.
ACTIVITIES MODELS ECONOMY IN SOCIETY:
Economic activity in society at a macro level can be divided into three models,
namely the model of economic activity three sectors, three-sector economic activity model, and
four-sector economic activity model (open economy model). Each economic model consists
of several macroeconomic indicators that are interconnected with each other.
In more detail, the above models of economic activity can be described as follows:
Two-Sector Economy Model
To make it easier to observe the operation of the national economy, the society of an
economy is divided into several sectors, namely the household sector, the corporate sector, the
government sector, and the foreign sector. In the first discussion is a very simple economy
(two-sector economy). What is meant by a simple economy (two-sector economy) is an
economy that only consists of the corporate sector requires factors of production originating
from the household sector, while the household sector as the owner of factors of production
(such as nature / land, capital, labor and interpreneurs). Requires consumer goods and
services produced by corporate households. An overview of the flow of activities of a simple
economy.
The upper part of Figure 1.2 shows the flow of factors of production (such as land,
capital, labor, and interpreneurs) originating from the household sector and used by the firm
sector in production activities. Then the corporate sector provides a reward in the form of
money. This money is actually the income for the household sector.
The bottom part of Figure 1.2 shows the flow of goods and services produced by the
corporate sector and subsequently consumed by the household sector. In return, the
household sector gives money to the corporate sector for the purchase of goods and services
that are consumed by the household sector produced by the corporate sector. If all the income
earned by households is spent on goods and services produced by the corporate sector, then the
economy is in a state of balance, because the income side is equal to the expenditure side.
There is a possibility that the household sector does not spend all of its income on
consumption, but some of the income earned is kept as savings. If this is the case, then the
balance of the economy is disturbed because the part of income that is not spent will result in
the goods and services produced by the corporate sector being depleted.
Figure 1.3 below shows the equilibrium if the household sector keeps some of the income
earned as savings.
The part of income that is not spent by households (savings) is called leakage. For
the economy to remain in a state of balance. Then the part of income that is not spent
(savings) must be used in the economy.
Household savings are usually channeled to the corporate sector through the capital
market or banking sector and by companies used to finance their investment expenditures.
Corporate sector investment is a counterweight to the leakage of savings in the economy.
Three-Sector Economic Activity Model
What is meant by three-sector economic activity is economic activity consisting of the
household sector, the corporate sector, and the government sector, in order to obtain a
concrete picture of the three-sector economic activity model can be seen in Figure 1.4 below.
Figure 1.4 above shows part of the flow of economic activity in the presence of a
mixture of government hands are taxes (Tx), government transfers (Tr), and government
spending (G). with the mixture of government hands in the economic field this means that the
government intervenes in controlling economic activity, the government through
macroeconomic policy instructions can reduce the occurrence of these disturbances.
In a three-sector economy I, G and Tr are leaks from the circulating income stream,
while s and Tx are strangles. Thus, in a three-sector economy equilibrium also applies to the
situation of leakage of profit. In conclusion, it can be formulated that in a three-sector
economy that reaches equilibrium, the following conditions will exist: I + G + Tr = S + Tx
Government revenues, i.e. net taxes collected from the household sector, are used by
the government to finance government expenditures and activities. Policies regarding the
management of government spending are called fiscal policy.
Open economy activity model
In an open economy, economic activities are carried out by three sectors, namely
household economic activities, corporate economic activities, government economic
activities, and economic activities by foreign countries.
The use of factors of production by the corporate sector will realize a flow of income
to the household sector, in the form of wages and salaries, salaries, interest and profits. This
income is already reduced by corporate profits tax (flow 2), but not yet reduced by household
income tax (flow 3).
Households in the economy will use their income for the following transactions:
•
Purchase of goods and services produced by the corporate sector and outward
expenditure on domestically produced goods and services (flow 4).
•
Pay income tax to the government (stream 3)
•
Importing, which is buying goods produced by other countries (flow 5).
•
Saving students' earned income into financial institutions (Flow 6).
In an open economy, besides the outflow of money to pay for imports, there is also an
inflow of money obtained from other countries (Flow 8). Flow 8 is the capital investment
expenditure of the corporate sector. While flow 7 is government spending to the corporate
sector to buy goods for government administration and capital goods for government
investment.
Thus, economic activities in this society are carried out starting from the simplest
economic activities (two-sector economy). All economic activities are carried out in order to
achieve common goals, namely shared prosperity.
The relationship between the fundamentals of macroeconomic variables can be seen
in Figure 1.6 in the following section.
Description:
M : amount of money in circulation
L : liquidity preference
i : Rate of interest
r : Marginal Efficenci of Capital
C : Conumi
I : Investment
Y : Revenue
E : opportunity
The composition between the amount of money in circulation (supply of money) and
liquidity preference (demand for money) will lower the interest rate. In addition, the level of
interest rate is also determined by the policy of the authoritacmonoter at the in a country, in
this case it is the central bank policy of a country.
The comparison between the interest rate (i) and the marginal efficiency of capital
(MEC/r) determines whether or not an investment is made. If i>r, the investment will not be
made. Under such conditions people who have money will prefer risk. If i>r, then the
investment will be carried out, because the investment is still profitable when compared to
bank interest.
A change in the level of investment (I), through a change in the level of consumption
(C) results in a change in the level of income (Y) in a multiple manner if there is mining of
investment, through m i n i n g o f t h e l e v e l o f consumption results in mining
of the level of income in a multiple manner. This process of changes in the level of
investment through changes in consumption resulting in multiple changes is called the
multiplier process.
The multiplier process applies not only to additional investment but also to reduced
investment. Therefore, the multiplier can be likened to a double-edged sword, because on the
one hand the multiplier is beneficial to us (if there is additional investment). While on the
other hand it is detrimental to us (if there is a reduction in investment). If there is a reduction
in the amount of investment that occurs in a society, through a reduction in the amount of
consumption, the multiplier results in a reduction in income. A multiple reduction in income
means expanding the incidence of poverty in the society. If this is the case, it is the same as
expanding the occurrence of social problems, and will eventually destabilize the national
economy.
Changes in the level of national income will affect the level of employment
opportunities available at the community level. For example, if there is an increase in income,
it will increase employment opportunities in society. With rising incomes, the demand
(consumption) of the community will increase, which is an indicator that employment
opportunities will also increase.
NATIONAL INCOME:
This chapter aims to explain :
•
Knowledge of national income the importance of national income
•
Types of national income
•
How national income is calculated
•
Relationship between income concepts
•
Division of national income
DEFINITION AND IMPORTANCE OF NATIONAL INCOME :
Definition of National Income
National income, which is one of the macroeconomic indicators, is an important
variable for finding relationships among other variables in the macroeconomy.
Changes in the national income variable have an effect on other variables.
In all macroeconomic theories, the discussion of National Income is the most
interesting part t o be discussed. This is because the discussion of National Income is
considered the main pillar supporting Political Economy, meaning that it is towards National
Income that almost all policies in the economic field are focused.
The definition of National Income can be viewed from the following points of view:
•
From the definition of Gross National Product
The sum total of goods and services produced by a society in a given period of time, usually
one year. Goods here include both consumer goods and investment goods. The value of
production goods is expressed in money at prevailing market prices. Meanwhile, the goods
and services included to compile National Income are only goods that are final goods. This is
done to avoid double counting.
•
From the definition of Gross National Income
The overall income received by a society, in the sense of main power which generally has a
period of one year. Income here includes compensation for services whether there is a
production process directly participating in the production process.
- The income group received by people who directly participate in a production process
landowners will receive land rent. The owner of the labor will receive compensation in
the form of wages/salaries. The owner of the capital will get a reward in flower shape.
The entrepreneur/interprenuer will get a reward in the form of profit.
- The class of income earned by people who are not directly visible in the production
process, namely: People who have jobs freely, such as doctors, and lawyers. People who
work in an institution or organization such as civil servants, and ABRI.
Importance of National Income
The importance of knowing the amount of National Income, among others, is :
•
The National Income is a measuring tool for the high and low level of living or
prosperity of a nation. Quantitatively, the level of living or prosperity of a nation is
determined by the ratio between the amount of National Income and its population.
This concept is commonly known as per capita income. Although per capita income
itself does not yet describe the level of prosperity of all the people.
•
National Income is useful to know the structure of a country's economy. This can be
seen from the contribution of each sector of economic activity to the formation of
National Income.
•
National Income is useful for determining and then formulating policies that are
deemed necessary. From the agricultural sector, for example, various policies can be
formulated such as food procurement, industry, and transportation fertilizer, irrigation
and so on.
•
National Income is useful for knowing and comparing the economic activities of the
community from year to year. This is related to the movement of the waves of
economic life (conjuncture).
TYPES OF NATIONAL INCOME :
The term National Income is a rather complex definition. The term National Income
contains five levels of income. The five levels of income in question are as follows:
Gross National Product:
GNP is the sum of the value of goods and services produced by a society within one
year based on prevailing market prices. In calculating the amount of GNP based on market
prices, care must be taken to avoid double accounting. In this GNP concept includes goods
and services produced by all the colors of a country, both those in the country and those
abroad.
Net National Product:
NNP is obtained from the sum of GNP after deducting capital goods for replacement.
The depreciation of production equipment used in the production process is generally
estimated, so it may be inaccurate and may cause errors even though it is relatively small.
Net National Income
Net National Income (NNI) is obtained from NNP after deducted by indirect taxes. What is
meant by indirect taxes are taxes whose burden can be shifted to other parties. For example,
sales tax on imports and so on.
Personal Income
Personal Income can be calculated from NNI minus :
•
Corporate Tax, which is a tax paid by every business entity to the government.
•
Undivided profit, which is the amount of profit that is retained within the company for
some specific purpose, for example for the purposes of expanding the company.
•
Pension contributions are contributions collected by each worker and each company with
the intention of being paid back after the worker reaches a certain age and no longer
works.
To this personal income we must add the transfers payment. What is meant by
patment transfers are payments in countries that are paid to certain people, and these
payments are not a reward for participation in the production process of the current year, but
as a reward for previous years, or payments to someone who actually comes from the income
of others.
The examples of transfers payment are:
•
Payments to retired people.
•
Veterans' benefits.
•
Social funds (payments to unemployed workers).
Disposable Income
Disposable Income is a type of income that is ready to be utilized. Disposable income
is obtained from personal income after deducting direct taxes. What is meant by direct tax is
a tax whose burden cannot be shifted to another party / directly borne by the taxpayer. For
example, income tax.
From the explanation concerning the types of national income above, it can then be
simplified as follows:
•
Gross National Product (GNP) consists of :
a. Wages + allowances (wages and supplement to employees).
b. Income company individual (net income of unincorporated enterprise).
c. Rental of houses, land (rent).
d. Interest.
e. Devident.
f. Undistributed corporate profits (net corporated profits).
g. Corporate taxes (indirect business taxes).
h. Indirect taxes.
i. Depreciation.
•
GNP (-) depreciation = NNP (NNP = a through h)
•
NNP (-) indirect taxes = NNI (NNI = a through g)
•
Personal Income = NNI (-) net coporated profit (-) business tax
(-) social security tax contribution (+) transfers payment
•
Disposable Income = Personal Income - Direct Taxes
HOW NATIONAL INCOME IS CALCULATED:
There are three ways used to calculate the amount of national income. The three
methods are as follows:
Production Method/Method:
The first method is done by adding up the value added realized by the various sectors in
the economy.
The use of this method in calculating national income, in addition to knowing the magnitude
of the contribution of various economic sectors in realizing national income, is also one way
to avoid double counting, namely by only calculating the value of net products realized at
various stages of the production process.
Based on the data in Table 2.1 above, the amount of added value realized by the four
activities is (IDR 50.00 + IDR 150.00 + IDR 400.00 + IDR 200.00) = IDR.
800,00. Thus, the amount of added value taken into account in calculating national income
for these goods is Rp. 800.00.
Expenditure Method/Method:
The calculation of National Income by way of expenditure is done by summing up the
value of finished goods produced in the economy. In calculating the value of national income
by way of expenditure it is important to distinguish as well as possible both among finished
goods and intermediate goods. This is done to avoid double counting of the value of goods
and services produced.
•
Household Consumption Expenditure:
The value of expenditures made by households to purchase their various needs in a
given year is called household consumption expenditure. Not all transactions made by
households are classified as (household) consumption. Expenditure on buying a house is
classified as investment. Expenditures such as paying for insurance and sending money to
parents (or children in school) are not classified as consumption because they are not
expenditures on goods or services produced in the economy.
•
Government Expenditure:
Unlike households, which buy goods to fulfill their needs, the government buys goods
primarily for the benefit of society. Included in this expenditure are expenditures to provide
education and health facilities, salary expenditures for government employees and also
expenditures to develop infrastructure for the benefit of the community. Government
purchases of goods and services can be classified into two main groups, namely government
consumption and investment.
•
Private Sector Capital Formation:
Private sector capital formation will be more importantly expressed as investment.
What is meant by private sector capital formation is expenditure to buy capital goods that can
increase the production of goods and services in the future.
•
Net Export:
What is meant by net exports is the value of exports made by a country in a given year
minus the value of imports in the same period. A country's exports usually consist of goods
and services produced domestically. Therefore, their value must be calculated into national
income.
Revenue Method/Method:
Calculation of national income with this income method can be done by calculating
the total income of all citizens / communities derived from the use of factors of production.
The groups of people who have income are :
•
Workers' income, i.e. salaries and wages.
•
Income from individual business (sole proprietorship).
•
Income from rent.
•
Net Interest, which is the entire value of interest payments made less interest on
consumption loans and interest on government loans.
•
Income from company profits.
In developed countries, where tax administration is so advanced and orderly, awareness
of the importance of taxation is so high, the amount of community income can be known
through income tax. This
is
certainly unlikely to be applied in Indonesia. Taxpayer
awareness in our country is still very concerned, Indonesians are more likely to avoid tax
obligations, rather than consciously becoming good taxpayers.
RELATIONSHIP BETWEEN INCOME CONCEPTS:
Various types/concepts of income in principle have a close relationship with each
other. In order to obtain a clear picture of the relationship between the types or concepts of
income.
In Figure 2.1 above, it is clear the position and role of the three sectors involved in the
formation of GNP, namely consumer households (RTK). Corporate Households (RTP) and
Government Households (RTP).
This depreciation is money that is reserved and goes to the Business Household,
because it is the business that will use it to replace its capital equipment that has worn out and
shrunk. From NNI, indirect taxes are deducted and these indirect taxes flow into the
Government Household. Government taxes are used to finance various government activities
for the welfare of the community.
From the National Income minus undistributed profits and corporate profits tax, the
undistributed profits flow back into the business household to be used to finance the matters
as explained earlier. Meanwhile, the Company profit tax clearly flows to the government
household. But in this case the government does not merely receive tax payments but also
issues transfers, which can be seen in the figure as personal income.
Disposable income, or disposable income, must be reduced by personal taxes and then
flows to government households. This disposable income is used for consumption to fulfill
the necessities of life, while the rest is saved. These savings flow to business households for
utilized.
GNP is essentially the same as GNI as GNP, the products contained in it will
undoubtedly be bought by people. As GNI, even the income in it will be spent.
In GNP, the products in it itself are of various kinds, all of which will be bought by
people. Those who buy all products that become GNP consist of four types of goods, namely:
•
Consumers who buy contributing goods.
•
Investors who buy investment goods.
•
(governmentexpenditure) and
•
It is foreigners who buy our export goods.
In GNI, the income that is in it is spent on various needs. Here too, purchases are
obtained as in GNP, namely:
•
Consumption
•
Investment
•
Government spending and
•
Foreign trade.
Thus, whether you look at it as GNP or not, there are still four components that reflect
its use, namely consumption, investment, government spending and foreign trade.
GNP is usually used as a measure of a country's economic progress. Therefore, every
country will try to achieve an increase in the amount of GNP. GNP has the following
characteristics which is more comprehensive than the other indicators.
Based on Table 2.2. above, it is clear that even though both in 1992 and 1993 country
A was poorer than country B, but the economy of country A developed faster than country B,
the truth is that the GNP of country A although smaller, but more rapid other / growth than the
GNP of country B.
In principle, GNP can change every time / period, either because of changes in the
amount of outputs produced, or because of changes in the level of prices that occur in the
market.
The following section will explain the difference between GNP and GDP. In
principle, between GNP and GDP there is no difference in how to calculate what is different
is only what is counted, sure whether the production of foreigners in the country, as well as
whether national property abroad will be counted or not. In the sense that if what is counted
includes the income of our people abroad, but does not include the income of foreigners in
the country then This is related to GN. Meanwhile, if what is calculated includes the income
of foreigners in the country, but does not include the income of our people abroad, this is
related t o GNP.
If in a certain period the value of GDP is greater than GNP, then this fact shows us
that in that country there is quite a lot of foreign capital operating in the country. In addition,
this picture does not reflect the efforts to maximize the potential that exists in the country.
Prof. Sri Edi Swaso once gave the impression that the economy is sewing fees.
ENROLLMENT DISTRIBUTION:
Uneven income distribution and growing poverty are at the heart of economic
development problems. Unevenness in income distribution is only a small part of the broader
problem of inequality in developing countries.
A way to analyze the distribution of personal income is to construct a curve called the
Lorenz curve. The Lorenz curve was named after a statistician in the United States. In 1905
he developed a relationship between population groups and their share of income.
Figure 2.2 shows how to construct a Lorenz Curve. total income receipt is plotted on
the horizontal axis not in absolute numbers but in cumulative percentages. For example, the
20 point shows the poorest 20 percent of the product with the lowest income, and at the 20
point the poorest 20 percent of the product has the lowest income.
60 indicates the number of 100 percent products for which revenue was calculated.
The vertical axis shows the share of income received by each percentage of the
population, this number also cumulates to 100 percent, thus the two axes are equal in length
and finally make a square.
A diagonal line is then drawn through the margin point to the top right corner of the
square. Each point on the diagonal line indicates that the percentage of income received is
exactly the same as the percentage of income recipients. For example, the midpoint of the
diagonal shows exactly 50 percent of the population. Likewise, point 75 indicates that the
income distribution is perfectly uneven. Hence the line can also be referred to as the line of
perfect unevenness.
The Lorenz Curve shows the quantitative relationship between the percentage of the
population and the percentage of income they receive, for example, over the course of a year.
The farther the Lorenz Curve is from the diagonal line, the higher the degree of inequality,
indicating the most extreme state of perfect inequality, i.e. a state where all income is
received by only one person, will be indicated by the intersection of the Lorenz Curve with
the lower horizontal slope and the right vertical slope. Since no country experiences perfect
inequality in its income distribution, the Lorenz Curve for each country will lie to the right of
the diagonal curve, the higher the degree of inequality, the more curved the Lorenz Curve
will be and the closer it will be t o t h e lower right horizontal axis.
GINI COEFICIENT:
A quick measure of the degree of unevenness in income distribution in a country can
be obtained by calculating the area between the diagonal line and the Lorenz Curve compared
to the total area of the half of the square containing the Lorenz Curve.
T h e Gini coefficient is a measure of angregant inequality and its value lies between
o (perfect equity) and 1 (perfect inequality). Countries that experience high inequality, the
Gini coefficient ranges from 0.50-0.70 while inequality ranges from 0.36-0.49 and low
inequality ranges from 0.20- 0.35.
The temperature of a country that shows high inequality will be seen as a distant
reality between rich and poor, this reality needs to be addressed in order to achieve the
economic stability of the country. Various strategies / policies need to be carried out to
overcome it.
Various strategies / policies that can be carried out to overcome high inequality
include:
•
Development in agriculture.
•
Human resource development.
•
Increase the role of various non-governmental organizations (NGOs).
