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    (Original post by Philosopher-of-sorts)
    No. No he isn't. Read Hayek before saying that.

    I'm not even sure yet whether I agree with Hayek, and I'm going to read the modern arguments in regards to monetary theory before deciding definitively, but having read him I can happily say he makes a lot more sense than most libertarians like Paul do.
    Agreed. I should have said similar to that of Hayek. Take the monopoly control of government in regard to money.

    Hayek wanted competing money I think.

    Ron Paul just wants to stop the FED printing money.

    Either way both want less government.
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    (Original post by MagicNMedicine)
    Yes it is because unemployment is high and people are fearing that the economy is going to get worse or at least, not get better for a long time.

    Investment is in a bad position as well because the banking sector is not lending because it also fears that the economy is going to get worse or at least not get better for a long time.

    So what is your solution to this conundrum other than cutting G?
    I never said anything about cutting G. I just think it should be taken out of the GDP figures.
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    (Original post by Guru Jason)
    are you sure you have the full equation, i remember there should be a tax symbol. people who earn wages pay tax thus... whatever it was
    Tax comes in when you look at consumption. The equation you have probably seen in undergrad textbooks goes something like this:

    Y = C (Y-T) + I (Y,r) + G + X (Y*,E) - M (Y, E)

    Ie Income is made up of:

    Consumption...which depends on overall income and taxation. You can think of (Y-T) as disposable income, what is left after tax is taken out. Disposable income is either saved or consumed (how much of each depends on the marginal propensity to consume). Anything that is saved is taken out of the economy, but it does contribute to the supply of loanable funds, so it may come back in through investment.

    Investment...which depends on overall income and real interest rates. The higher income is, the higher investment will be, the higher real interest rates are, the lower investment will be. It also depends on expectations of future income and interest rates as most investment decisions are long term projects so you have to look into the future to see what your income streams will be and what interest repayments you will be repaying.

    Government expenditure...direct expenditure, a common mistake here is people think it includes benefit payments, it doesn't, those are transfers, which are included in the measure for T which is actually "taxation net of transfer payments"

    Exports...which depends on Y*, foreign income, and E, the exchange rate. Obviously the richer the rest of the world is (or more specifically the richer your main trade partners are) the more you are able to export. Our main trade partners are in Europe and North America ie countries who are affected just as much and in some cases more by the global downturn as us. The lower the value of your currency against another currency the more you are likely to be able to export to them as it makes your goods cheaper and more competitive.

    Imports...which depends on income, and the exchange rate. The richer a country is the more it can import. The stronger its currency the more it can import because imported goods are cheaper. Remember that imports are a subtraction from aggregate demand.
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    (Original post by Philosopher-of-sorts)
    This coming from one who appears to believe he has an understanding of monetary theory.

    The flow of money is what a huge amount of Hayek's contribution to monetary theory was in relation to, and he was the first monetary theorist to assign real importance to where credit enters the economy and the effect that has on the trade cycle.
    But should getting money to flow around the economy be a goal. I think not because it is a result of trade. It is not trade itself.

    Anyway I dont really think I know very much about monetary theory because it is so complicated.
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    (Original post by turn and fall)
    Nothing of value has been produced though.

    If a private individual was to buy the hole then a good has been produced.


    If you are too include all government spending then you might think that GDP is healthy. However if you consider that the government spending may have been completely futile then the GDP figures are misleading. Or atleast have little relation to the GENUINE wealth of an economy.
    What you're basically saying then is that the multiplier on government spending is 0? Really?
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    (Original post by turn and fall)
    But should getting money to flow around the economy be a goal. I think not because it is a result of trade. It is not trade itself.

    Anyway I dont really think I know very much about monetary theory because it is so complicated.
    Money supports transactions. If there is not enough money to support the transactions then the transactions won't happen and there won't be any trade in the first place.

    Imagine the economy is growing at 3% per year, but the money supply is fixed and doesn't grow. What happens to transactions?
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    (Original post by MagicNMedicine)
    Money supports transactions. If there is not enough money to support the transactions then the transactions won't happen and there won't be any trade in the first place.

    Imagine the economy is growing at 3% per year, but the money supply is fixed and doesn't grow. What happens to transactions?
    Rate of transactions increases? -> Inflation?


    Anyway the question was not to do with monetary theory but the methodology of the Keynesian model.
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    (Original post by turn and fall)
    But should getting money to flow around the economy be a goal. I think not because it is a result of trade. It is not trade itself.

    Anyway I dont really think I know very much about monetary theory because it is so complicated.
    I'll explain a bit...
    The AD curve is the demand in the economy. Now, if we think of things clearly, in what we call the 'static model' of the economy, there can be no increase in effective demand without an increase in production (no one can suddenly demand more, without first creating more).

    This only changes when money enters the system. Here, where the money supply can change, there can suddenly be an 'increase on only one side of the equation' as such--e.g. an increase in demand for consumer goods without a corresponding increase in demand for producer goods (causing inflation or preventing deflation) or an increase in demand for producer goods without a corresponding increase in demand for consumer goods (something Hayek believes is one of the roots of the trade cycle). Now eventually this additional demand on one side will feed through the entire economy, and the equilibrium between these two types of demand will be found again. The only way to prevent this return to equilibrium (which in the case of the trade cyle Hayek blames for the destruction of capital which was misallocated) is for the money supply to be continually increased, so as to maintain the proportion of production relative to consumer goods.

    This is where the government comes in. If the government deficit spends, they are maintaining the growth of the money supply (via credit) allowing the misallocations to persist and preventing the continued loss of jobs that comes from the undoing of those misallocations. The question (in economic terms, at least) isn't whether the spending is productive in itself, but whether by maintaining the new supply of money-credit, thus maintaining (and perhaps increasing) a misallocation, it is setting the scene for worse damage in the future.

    That's just a very brief and probably slightly inaccurate portrayal of the monetary theory of Hayek et al, but as you can see it's all to do with the flow of money and the supply of credit.
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    (Original post by MagicNMedicine)
    Tax comes in when you look at consumption. The equation you have probably seen in undergrad textbooks goes something like this:

    Y = C (Y-T) + I (Y,r) + G + X (Y*,E) - M (Y, E)

    Ie Income is made up of:

    Consumption...which depends on overall income and taxation. You can think of (Y-T) as disposable income, what is left after tax is taken out. Disposable income is either saved or consumed (how much of each depends on the marginal propensity to consume). Anything that is saved is taken out of the economy, but it does contribute to the supply of loanable funds, so it may come back in through investment.

    Investment...which depends on overall income and real interest rates. The higher income is, the higher investment will be, the higher real interest rates are, the lower investment will be. It also depends on expectations of future income and interest rates as most investment decisions are long term projects so you have to look into the future to see what your income streams will be and what interest repayments you will be repaying.

    Government expenditure...direct expenditure, a common mistake here is people think it includes benefit payments, it doesn't, those are transfers, which are included in the measure for T which is actually "taxation net of transfer payments"

    Exports...which depends on Y*, foreign income, and E, the exchange rate. Obviously the richer the rest of the world is (or more specifically the richer your main trade partners are) the more you are able to export. Our main trade partners are in Europe and North America ie countries who are affected just as much and in some cases more by the global downturn as us. The lower the value of your currency against another currency the more you are likely to be able to export to them as it makes your goods cheaper and more competitive.

    Imports...which depends on income, and the exchange rate. The richer a country is the more it can import. The stronger its currency the more it can import because imported goods are cheaper. Remember that imports are a subtraction from aggregate demand.
    suppose i should revise it, will probably come up in end of year exams... marketing and accounting is so much easier lol
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    (Original post by Philosopher-of-sorts)
    I'll explain a bit...
    The AD curve is the demand in the economy. Now, if we think of things clearly, in what we call the 'static model' of the economy, there can be no increase in effective demand without an increase in production (no one can suddenly demand more, without first creating more).

    This only changes when money enters the system. Here, where the money supply can change, there can suddenly be an 'increase on only one side of the equation' as such--e.g. an increase in demand for consumer goods without a corresponding increase in demand for producer goods (causing inflation or preventing deflation) or an increase in demand for producer goods without a corresponding increase in demand for consumer goods (something Hayek believes is one of the roots of the trade cycle). Now eventually this additional demand on one side will feed through the entire economy, and the equilibrium between these two types of demand will be found again. The only way to prevent this return to equilibrium (which in the case of the trade cyle Hayek blames for the destruction of capital which was misallocated) is for the money supply to be continually increased, so as to maintain the proportion of production relative to consumer goods.

    This is where the government comes in. If the government deficit spends, they are maintaining the growth of the money supply (via credit) allowing the misallocations to persist and preventing the continued loss of jobs that comes from the undoing of those misallocations. The question (in economic terms, at least) isn't whether the spending is productive in itself, but whether by maintaining the new supply of money-credit, thus maintaining (and perhaps increasing) a misallocation, it is setting the scene for worse damage in the future.

    That's just a very brief and probably slightly inaccurate portrayal of the monetary theory of Hayek et al, but as you can see it's all to do with the flow of money and the supply of credit.

    Cheers. Went to the library to get a Hayek book. Not one in my county
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    (Original post by turn and fall)
    Cheers. Went to the library to get a Hayek book. Not one in my county
    There are free .PDF and .ePub files of much of his work on the Mises Institute website.
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    (Original post by turn and fall)
    I agree money is flowing around the economy. But who cares about the flow of money. What matters is wealth.
    GTFO troll.

    I would strongly advise you to think about what you said just now.
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    (Original post by turn and fall)
    So government spending is converted into consumption. My point still stands.
    G as in Government Spending is money that has been injected into the economy to boost factors such as infrastructure, education, hospitals and other publicly run sectors including the army and police

    sure some of G is converted into C and even into I, however most of the spending is on non-monetary factors such as knowledge, innovation, security and protection which is why G is considered as a separate factor in Aggregate Demand

    Hope that help!
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    (Original post by viksta1000)
    G as in Government Spending is money that has been injected into the economy to boost factors such as infrastructure, education, hospitals and other publicly run sectors including the army and police

    sure some of G is converted into C and even into I, however most of the spending is on non-monetary factors such as knowledge, innovation, security and protection which is why G is considered as a separate factor in Aggregate Demand

    Hope that help!
    Except that's not true, because GDP does not measure "security", "knowledge" or "innovation".
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    (Original post by Bax-man)
    Except that's not true, because GDP does not measure "security", "knowledge" or "innovation".
    that's true, but they're factors that contribute to real GDP growth and are still injections into the economy
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    (Original post by viksta1000)
    that's true, but they're factors that contribute to real GDP growth and are still injections into the economy
    I fail to see your point. You are saying that because government spending tends to have outcomes that are more "public-oriented" (they tend to impact a wider group of people than purely the parties to direct exchange) that it is classified as a separate component of aggregate demand. If the benefits are unmeasurable (as you have admitted), why is there then any point measuring it using the GDP metric (which only records nominal prices of goods and services)? Moreover, all spending has effects on third parties - government spending is not exclusive in this regard.

    I'd like to point out there are perhaps other arguments for it being separate from the other components of aggregate demand, but I think the reason you give is incorrect. (Although, I'm generally opposed to using the AD/GDP metrics as anything other than a very rough indication, if at all, in economic discussion.)

    Finally, I'd just like to echo the points Philosopher-of-Sorts has made so far - I couldn't have expounded Hayek's theory any better if I tried.
 
 
 
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