EC122

• Demand for goods equation: Z ≡ C + I + G + X − M
• Assumption: we are in a closed economy: X=M=0
• Consumption increases with disposable income
• What are the main components of the demand for domestically produced goods?
• Government spending is also an exogenous variable. It is chosen by the government
• Investment is an exogenous variable. It depends on variables not included in the model
• Consumption is an endogenous variable because it depends on another variable of the model (Y)
• Here is what we shall look at in this lecture:
• Parameter c1

  Called the marginal propensity to consume, gives the effect of an additional dollar of disposable income on consumption
• Parameter c0

  Represents what people would consume if their disposable income were equal to zero
• Disposable income

  YD = Y − T
• Read further on all these topics: The Goods Market, Composition of GDP, Demand for goods, Equilibrium output, Investment and Saving, Fiscal policy
• Intuition of the multiplier

  An increase in autonomous spending leads to an increase in demand and therefore an increase in output
• In his 2024 budget address to the National Assembly, the Finance Minister Honourable Dr. Situmbeko Musokotwane, announced that Zambia’s 2024 fiscal deficit was projected to stand at 5.8 percent of GDP, which would be below the target of 7.7 percent. He attributed the lower budget deficit outturn to the Government’s commitment to fiscal discipline
• Research Question: Explain how taxes and government expenditure have impacted Zambia’s budget deficits from 2020 – 2023
• Fiscal policies

  Choice of taxes and government expenditure
• To get the equilibrium output

  Rewrite the equilibrium equation
• Autonomous spending


  Implies that it does not depend on output
• Equilibrium in the goods market

  Demand for goods: C = Supply of goods Y
• Main components of demand for domestically produced goods


  • Consumption C
  • Investment I
  • Government spending G
  • Exports X
  • Imports M
• Multiplier

  Any increase in autonomous spending will lead to an increase in output higher than the initial increase in autonomous spending
• Taxes and government expenditure are fiscal policy tools that can impact a country’s budget deficit
• Relying on just one macroeconomic indicator to measure the economic performance of the Zambian economy can be misleading
• Economic indicators can interact with and influence each other
• To truly understand the economic performance of Zambia, it is essential to look at a range of indicators, including GDP, inflation, employment rates, trade balances, and more
• Relying on a single indicator can lead to a narrow focus on short-term economic performance, neglecting long-term sustainability and development goals
• Taxes and government expenditure

  Have impacted Zambia's budget deficit from 2020 to 2023
• A balance of payments deficit


  Can stimulate economic growth in Zambia in the short term run
• Budget Deficit Analysis in Zambia

  Highlights the importance of fiscal discipline, the impact of revenue shortfalls and inefficiencies in spending management on budget deficits
• Stimulating economic growth in Zambia in the short term run

  1. Importation of capital goods like machinery and technology can increase productive capacity

  2. Foreign Direct Investment (FDI) can create jobs, enhance skills of the local workforce through technology transfer, and lead to the development of new sectors in the economy
• A balance of payments deficit means that Zambia is spending more on foreign trade than it is earning, and it is borrowing capital from foreign sources to finance the deficit
• Tax Revenue Trends in Zambia


  Saw changes in tax policy and rates aimed at increasing income streams, limited by tax compliance issues despite efforts to improve collection techniques
• GDP alone cannot provide a comprehensive view of the overall economic health
• Reasons why relying on a single indicator is not sufficient
• Government Expenditure Trends in Zambia

  Allocations to vital areas increased, but inefficiencies in spending management and execution issues exacerbated fiscal deficits
• Elias: 'hello uh welcome to this uh online session of business economics 2 i am your host elias uh we start this course with unit 1 where we simply look at the macroeconomic environment and then we will build this throughout and determine the objectives as well as the business activities let me take you through uh the outline uh of what we'll cover in this unit so we are looking at the macroeconomic environment where i will first start by looking at the macroeconomic objectives and these are the ones that we are going to present in this session then we will have the secular flow of income in the next session as well as determining the level of economic activities and the last session will look at the business cycle now for further readings you can read essential essential economics for business uh by specifically looking at chapter 10 and economics for business in chapter 16 and these two books were shared with you so please make sure you follow through these chapters and be with me in this course okay so let's start with the macroeconomic environment key to note here is that for every business to be successful the business owners must look at several factors that affect business they should look at the uh the business environment in general they should look at even the international market how will other players respond this means that they should not only look at their own market or just look at their own decisions but even other external factors that may affect the business for example if the economy is booming that is if there is an increased output in a given economy then individual businesses are likely to be more profitable than if the economy is in recession now a recession is a a situation where they there is deteriorating economic activities and we see high unemployment levels with low inflation and so on businesses should also understand the forces that affect the whole business climate for example one of these forces what that will look at is the confidence of consumers as well as other businesses now this is key because for every business to be successful you will have to ensure that you understand how confident your consumers are with your product or what is the confidence that your fellow competitors have over your product if they look at your product is it something that can they that they can easily override and then become big businesses when you went in first this should always be considered as a key fundamental force that can bring your business up or even destroy your business another key ingredient of the macroeconomic environment government policy and the actions of the central bank now when we look at we are looking at the government policies we are looking at the effect of taxation and the government expenditure and when we look at the forces of the central bank we are looking at the interest rates as well as the money supply government raises tax and if this happens as an example this will impact directly on business profitability and on business confidence if consumers are receiving lower disposable income that is the income after the removal of taxes it means that their expenditure will be affected higher taxes means reduced expenditure on the side of the consumer and therefore this is gonna going to distort the business environment the macroeconomic environment also looks at the effect of domestic macroeconomic policies it also includes the activities happening in the international macroeconomic markets this includes the international trend the exchange rate market and so on all these affect the macroeconomic environment now with the international uh environment which shows how countries and firms can gain from trade and why despite this we see that governments sometimes may choose to restrict trade for various reasons and one of them being to protect the domestic industries which may not be able to stand the international competition it should also be noted that the business environment the macroeconomic environment also includes the flow of finances across international exchanges and the exchange rate determinations and how changes in exchange rates affect businesses if for example you wanted to order goods from china and then you find that the exchange rate yeah assuming that you're buying your goods in dollars your exchange rate has uh gone up meaning that kocha has depreciated it means then that you will have to pay more quarters to get the given amount of dollars for you to be able to do your business as such it means then that imports have become expensive for you and therefore this has an impact on the business environment because it is likely to reduce your volumes of inputs finally the macroeconomic environment also looks at attempts by governments worldwide to coordinate their macroeconomic policies with this then we can say that there are several microeconomic variables that governments seek to control and through and through the macroeconomic environment will influence all aspects of businesses including their markets their costs and their potential profitability there are six main elements that we use to influence the macroeconomic environment these areas include the economic growth of a given nation the levels of unemployment in a given nation the inflation rate we also have the balance of a payment the financial well-being of the given nation as well as the financial stability'
• Elements used to influence the macroeconomic environment

  • Economic growth of a given nation
  • Levels of unemployment in a given nation
  • Inflation rate
  • Balance of payments
  • Financial well-being of the given nation
  • Financial stability
• Inflation affecting interest rates

  Central bank interventions in money markets to affect interest rates
• Real interest rates


  Approximately equal to nominal interest rates minus inflation
• Government's policy on inflation

  Aims to keep inflation low and stable to aid economic decision making