What Is Micro and Macro Economics?

Difference Between Macro and Micro Economics

First Published: ADawnJournal.com May 16, 2010

In our day-to-day lives, the news will often mention the concept of microeconomics and macroeconomics. These two schools of economics are not as complicated as some people believe, but the concepts are extremely important for the economy of the planet. So, why not learn about microeconomics and macroeconomics? Here are some things for you to learn about these interesting economic policies. Before we start, here are some main ingredients of Micro and Macro Economics – Microeconomics: The Law of Supply, The Law of Demand, Opportunity Cost etc. Macroeconomics: Monetary policy, Fiscal Policy, Gross Domestic Product, Consumer Price Index, Unemployment, Inflation etc .

Microeconomics

Microeconomics is a branch of economics in which there is the study of how the individual parts of the economy, made up of households and firms, make decisions in order to allocate a limited amount of resources. These decisions are usually done in markets where goods and services are being bought and sold.  Microeconomics examines how all these decisions on the individual part have an impact on the supply and demand of goods, which in turn determine price and which itself determines the supply and demand of these goods and services.

Microeconomics is in contrast of macroeconomics, which looks at the total of economic activity rather than the individual parts of the economy. Microeconomics is not just about how individual parts affect the economy, but it is also about the effects of economic policies like taxation on the economy. Microeconomics also has the goal of analyzing market mechanisms in order to establish prices among goods and services and to allocate limited resources through alternative uses. Market failure is also analyzed through microeconomics, which is when markets do not produce efficient results, which allows microeconomics to describe the conditions that are needed to create the concept of perfect competition. Some places of study for microeconomics include:

·   General equilibrium

·   Asymmetric information

·   Uncertainty choices

·   Game theory

·   Elasticity of products

Under microeconomics, there are four categories in which a firm’s profit may be considered since it is assumed that all firms are following a decision making process that is rational and will produce the maximum profit output.

1.   When a firm has an average total cost that is less than the price of each additional product, then the firm is said to be making an economic profit. In this, the economic profit is equal to the quantity of the output when it is multiplied by the difference between the total cost and the price.

2.   When the firm’s economic profit is equal to zero, which occurs when the average total cost equals the price of the product or service, then the firm is making a normal profit.

3.   If the price is between the average total cost and the average variable cost, then the firm is in loss-minimizing condition. The firm produces, but if the firm stops producing then its loss would be larger. Firms continue production to offset the variable cost.

4.   When the price is below the average variable cost, the firm is in the shutdown condition. Losses are therefore minimized by not producing anything. The reason for this is that production would not generate any returns that would be large enough to offset the fixed costs and a portion of the variable cost.

Macroeconomics

In contrast to microeconomics, macroeconomics deals with the performance, behaviour, decision-making and structure of the entire economy. This can be the national economy, the regional economy, or even the world economy. Typically, macroeconomics will look at GDP, unemployment rates and price indexes to determine how the economy is functioning. Macroeconomists will create models as well that look at the relationships between:

1.   National income

2.   Output

3.   Consumption

4.   Inflation

5.   Unemployment

6.   Savings

7.   International trade

8.   International finance

9.   Investments

Macroeconomics, by definition, is very broad in its scope and study, but there are two areas where macroeconomists will research. These are the attempt to understand the causes and consequences of short-run fluctuations within a business cycle and the attempt to understand the determinants of the increases in national income.

Macroeconomics will help prevent depressions and recessions by allowing governments to make adjustments through changes within the macroeconomic policies. These policies are typically the fiscal policy and monetary policy of the country.

Within macroeconomics, there are two primary schools of thought; Keynesian tradition and neoclassical tradition.

·   Keynesian economics is a theory that was essentially created by the economist John Maynard Keynes. Through this policy, it is believed that fluctuations within the business cycle can be reduced through fiscal policies where the government spends less or more, and the monetary policy. Early Keynesian economist supporters wanted the regular use of policy to stabilize the economy of capitalist countries. Currently, in what is called Post-Keynesian Economics, there is emphasize on the importance of demand in the long run, and the role of uncertainty, preference and liquidity of the economy.

·   Neoclassical tradition challenges Keynesian tradition to ground the theory of macroeconomics in microeconomics. With this type of macroeconomics, the main policy difference is the increased focus that is put on monetary policy, like the money supply of the country and the interest rates. It was during the 1970s that this school of thought emerged.

There is one more underused form of macroeconomics school of thoughts is monetarism, which was created by Milton Friedman which says that inflation is always a monetary phenomenon. It does not include the concept of fiscal policy as it is the belief of supporters of monetarism that fiscal policy crowds out the private sector. Monetarism does not combat inflation or deflation through active demand management.

Macroeconomics and microeconomics help to influence the economy of countries around the world and many economists are not only divided between the two concepts, but the schools of thoughts within each. However, whether you understand macroeconomics and microeconomics, or you have trouble with the concept, both policies have a big impact on our lives and the economy of countries like the United States.

While there are many things to understand within economics, but if you have to choose two things to research and learn about it should be macroeconomics and microeconomics.

Malaysia Travel Blog: KUL Airport to Hotel Hilton

Kuala Lumpur Travel Blog: Part 2

DoubleTree by Hilton Hotel Kuala Lumpur

Airport immigration was smooth and fast; the immigration officer did not ask a single question. Once I was out, it was time to arrange my taxi.

I researched before going from the airport to the hotel and I decided to take a coupon taxi. The process is fairly simple. I went to the taxi counter located right before the airport exit. At the counter, they asked for my address and what type of taxi I needed (luxury, budget, etc.). Once I paid for my budget taxi, they gave me a coupon and asked me to go to the transportation hub-specific gate to get the taxi.

Somehow, I ended up waiting at the wrong gate for the taxi. One nice lady helped me and pointed out the right gate. Once I was there, an attendant asked me to wait while he sent a cab from the queue.

I didn’t have to pay or even tip the taxi driver anymore. I still gave him a good tip, though.

The drive was about an hour long and it was raining a lot. Still, I noticed right away that Kuala Lumpur was very green. It’s hard not to notice. It looked like Malaysia cares about the environment and wants to decorate the whole city by nature’s way – lots of green trees everywhere as much as possible.

And they succeed. To maintain the greeneries everywhere, the city definitely had to continue ongoing maintenance for these trees.

The closer I was reaching my destination in downtown Kuala Lumpur, the roadside scenes were changing to citylike with lots of skyscrapers and highways. But still, the presence of green was everywhere, even in the heart of downtown.

How To Avoid Extra Costs On Your Mortgage

Extra Costs Can Drain Your Funds

First Published: ADawnJournal.com May 18, 2010

The number one priority expenditure for most families in Canada and further afield is a place to live. There are other things that need to be addressed as a matter of importance, too, and it is not limited to the family home. But without the family home, nothing else really matters. If you don’t have a home to keep you warm, safe and comfortable, then you can have as many cars as you like – none of them will be as satisfactory and as central to your life as your home. Taking your mortgage seriously is therefore an essential matter. As much as you may want to cut loose a little bit when the monthly pay check comes in, it is important to remember that some figures need subtracting before the fun can begin.

The monthly mortgage payment is the first number most people will subtract from their paycheque they are making their month ahead calculations. It is one payment that cannot be missed and should not be compromised. If the situation you find yourself in precludes making a full payment to the mortgage, it is essential to call the lender and seeing if you can work out a payment holiday or, if necessary, a restructuring of the loan. Not bothering to keep the bank aware of how the situation is progressing will only see you receiving angry letters, late payment fees and, eventually, being at risk of losing your house. If you have any way of avoiding it, you should make sure that you do not miss payments – even if it means making reduced payments on other lines of credit. This loan is secured on your home.

Avoiding extra costs on your mortgage is partly a matter of common sense and partly a matter of being able to see where problems will occur before they really begin to cause concern. Seeing a debt advisor to talk through your options and make out a financial management plan is one way in which you may even be able to avoid making reduced payments to the highest of all high priority debts.

Strangely, though, there are some loans (mortgages included) that add on extra fees not only for the late payment or partial payment (or even non-payment) of the monthly debt repayment, but will charge you an early payment surcharge if you pay the loan off in full ahead of time. If this is something you can see yourself doing, then it is worth asking the bank if they have such a policy. Look through the terms and conditions on your loan agreement as well, to see if there are any strange circumstances in which they will add fees to the balance of your mortgage. The less you have to pay on a mortgage, the more money you will have to truly enjoy. For this reason it makes sense to avoid any unnecessary and stupid expense and to find ways of cutting off problems before they can cost you money.

RRSP or Registered Retirement Savings Plan

Understanding Your RRSP

First Published: ADawnJournal.com May 22, 2010

Retirement is approaching for the Baby Boomers and that has many thinking about their RRSPs. Many Baby Boomers have been contributing to their RRSP for many years now, but how many actually know what is going on with their RRSP? Do you know about contribution limits? Do you know when you need to start taking money out of it, or what RRSP even stands for? Well, now that you are approaching the age of retirement, its time to learn more about the world of the RRSP.

RRSP, or Registered Retirement Savings Plan, is an account that provides you with tax benefits for saving for your retirement. Only available in Canada, it was created as part of the Income Tax Act that was created to give you the ability to shelter your financial property from income taxes. The ways that you can reduce your taxes with an RRSP come down to three options:

1.   RRSP contributions are deducted from your income before your income tax calculation is due.

2.   Income that you earn with your RRSP is not taxed until you withdraw money from the plan, which gives your account the ability to grow faster than if you were making contributions outside the plan that are subject to taxation.

3.   You can withdraw from an RRSP in tax years when you are in a lower-income tax bracket due to unemployment or other circumstances.

You can hold a variety of financial properties within an RRSP, in many more options than other retirement plans of other countries. Some of the financial properties include a savings account, guaranteed investment certificates, bonds, mortgage loans, mutual funds, shares, labor-sponsored funds and income trusts.

The Types of RRSP

There are three main types of RRSPs that you can choose from depending on your life circumstances.

1.   Individual RRSP: This is an RRSP that is meant only for one person, who is the account holder of that RRSP. Only the account holder can contribute money towards the RRSP.

2.   Spousal RRSP: With this type of RRSP, the higher earner, who is the spousal contributor, can contribute in the name of their spouse. The spouse is the account holder and the spousal RRSP is the way that an RRSP is turned into split income for retirement. When investment properties are divided between the spouses, each spouse gets half of the income. This creates a lower tax rate than if one spouse earned all of the income. If there is $300,000 in the RRSP and one person has it, the tax rate is higher than if two spouses have $150,000 each from it.

3.   Group RRSP: With this RRSP, an employer has employees making contributions through deductions from their pay checks. The employee can then decide the size of the contribution each year and the employer will deduct a certain amount accordingly for them. This is then deposited into the individual account and invested as the employee wants.

While the Group RRSP is held in only one account structure, Individual RRSP and Spousal RRSP accounts can be held in one of three account structures.

1.   Client-Hold Accounts: This is when the account holder uses their RRSP to purchase an investment with a certain investment company. Each time an individual uses money from the RRSP to purchase an investment from a different company, a separate client-held account is then opened. For example, if you buy investments from Fund Company 1 as well as Fund Company 2, you will have two separate RRSP accounts held with those two companies. You do not generally have annual fees with this type of account but it is harder to keep track of your RRSP in this structure.

2.   Nominee Accounts: These accounts have the individual account holder nominating a nominee for their account and this is typically one of the major banks in Canada. This nominee will hold the different investments in a single account for the account holder. So, if you have investments with Fund Company 1 and Fund Company 2, it will be held within a single RRSP account with the nominee. The benefit here is that it is easier to keep track of your RRSP investments, but you do incur annual fees.

3.   Intermediary Accounts: These accounts serve the same function as nominee accounts and the reason someone would choose this over a nominee account depends mostly on the investment advisor the person deals with. If the investment advisor is not aligned with a major investment company or bank, they may not have the logistical ability to offer you nominee account options. The advisor will therefore approach a company to offer the investor identical benefits as those that come from a nominee account. The main benefit and disadvantage to this is the same as you would find with nominee account.

Contributing To RRSP

As with most investment retirement plans, there is a maximum amount of money that you can contribute in any given year. This amount is how much you can contribute without being taxed, as in the amount is completely tax deductable. Typically, it comes to 18 percent of your earned-income from the previous year minus a pension adjustment up to a certain maximum. That maximum does change over time.

Here is a brief rundown of just how much the maximum has changed over the past six years:

·   2004: $14,500

·   2005: $16,500

·   2006: $18,000

·   2007: $19,000

·   2008: $20,000

·   2009: $21,000

·   2010: $22,000

When you file a tax return, you will receive a Notice of Re-Assessment from the Canada Revenue Agency that indicates just what your new RRSP deduction limit is going to be.

This is where we come to the biggest advantage of the RRSP. With your RRSP, your contributions are completely deductable from your income. That deduction is based totally on your tax bracket and the amount of tax paid on the last dollar of earned income. So, if you are in a marginal tax bracket of 40 percent, then if you contribute $1,000, you will receive $400 back in your taxes.

You can contribute to your RRSP until the age of 71. At this point you must cash it out or mature it into a Registered Retirement Income Fund.

A last point on RRSP contributions is that if you contribute within the first 60 days of the tax year, you must report those contributions on the previous year’s tax return, but you may also deduct those contributions fro the previous year.

Withdrawing RRSPs

You can cash out any amount from your RRSP at any age, but when you withdraw money from your RRSP, that is counted as taxable income and you will pay taxes on it. As was already mentioned, once you hit the age of 71 you must cash out your RRSP or transfer it to a Registered Retirement Income Fund. Before 2007, the age was 69 but the rising number of Baby Boomers still working resulted in the RRSP age limit to change by two years.

RRSP Myths

Many RRSP investors say that if you want to retire in a nice style you need to start contributing to your RRSP when you are young. For example, if you begin to contribute to your RRSP when you are 22, and you put in $4,000 every year, with an eight percent annual rate of return, you will have $1.3 million when you retire. So, naturally the longer you have the better it seems for your retirement savings. However, there are some common problems with this concept, the first being that there are not too many 22-year-olds who are going to be able to afford to put $4,000 away, or want to, for something that is 43 years away. Most people do not start contributing into their RRSPs until they are in their 30s. The older you get, usually the more you can contribute. If you contribute $4,000 a year from the age of 22, you can reach $1.3 million, but you can also contribute an extra $4,000 fro the age of 42 to 65 to make up the same difference. Not to mention, the earlier you invest, the more you pay in commission and fees. If you do not start putting money into your RRSP until you are 42, you save on 20 years of annual fees that you would have paid into if you started at the age of 22.

Another common myth is that you should borrow if you do not have the funds to contribute to your RRSP. This is not a good thing to do. Borrowing to invest only makes sense if the annual rate of return is higher than the amount you will be paying in interest on the loan. If you are paying an interest rate of six percent and only getting an annual rate of return of four percent, then you are losing money, not making money.

The Equal-Weight ETFs from BMO

Market-Cap Weighted or Equal-Weighted ETFs?

First Published: ADawnJournal.com May 30, 2010

Buying exchange-traded funds in Canada got much easier thanks to BMO Financial Group and the release of eight different ETFs that are equal-weighted and three that are currency-hedged. These two different types of ETFs are part of a key strategy by the Bank of Montreal to help set itself apart from ETFs that are put out by iShares and Vanguard, which currently dominate the market.

The currency strategy uses hedging to hedge foreign funds back into the Canadian dollar and this has actually been used quite a bit by iShares and Criterion Investments, which focuses only on currency hedging. However, that is not what is putting the Bank of Montreal in the papers these days; equal-weighting is.

Critics of ETFs say that market-cap weighted funds created high concentrations of large-cap stocks that are often over-valued. When the large-cap stocks get more and more overvalued, there is a greater weighting on them in the fund and that creates a higher risk for investors who put their money into the ETF. However, according to BMO, equal-weighting prevents this and therefore makes investing safer for ETF investors. How it works is if the top 10 stocks on the TSX represent 40 percent of the market cap of the index, equal-weighting puts every stock at the same weight no matter how large or small the market cap. That means that if there are 50 stocks on an ETF, each stock has a two percent weight within the stock.

However, BMO is not the only ones who offer the equal-weighted ETFs. Claymore Investments also offer them and the company states that it helps investors avoid overweighting overvalued stocks and underweighting undervalued stocks. Critics of the ETF state that often happens, as we have said, with ETFs that are not equal-weighted.

Exchange-traded funds are often looked at as a safe investment for many investors because with these you are not trying to beat the market, but instead just mirror the index. Too many times investors want to beat the stock market and that leads many of them down a road to ruin. With exchange-traded funds, even those that are not equal-weighted, there is a much safer path to go down. No, you do not make as much with these funds but if you can diversify your portfolio with them you help the hedge your bets in case the market takes a downturn.

It is very important that you do not put all your eggs in one basket. Now, with the equal-weighted ETF from banks and companies like Bank of Montreal and Claymore Investments, it is possible to make the safe investment of an ETF even safer for investors. You can expect that in the coming years, many investors will be putting their money into the equal-weighted ETFs instead of risking it in mad-cap investments that could cost the investor everything they have