01 Macroeconomics Bird's Eye View of the Economy

Question 1

Main actors in economy

Answer 1

Households (consumers), firms (producers), the NZ Government, the RBNZ

Question 2

What do households do?

Answer 2

1) Buy and consumer outputs produced by firms
2) Provide the “factors of production” that firms use to produce output (households can be workers who provide labour, landlords who provide land, shareholders who provide capital)

Question 3

What do firms do?

Answer 3

1) Produce and sell outputs (physical goods and services) to households
2) Pay households for the “factors of production” they provide (firms pay wages to workers, rent to landlords, dividends to shareholders)

Question 4

Market

Answer 4

Where households and firms meet and transact

Question 5

Examples of Markets for Factors of Production

Answer 5

The job market, the commercial property market, the credit market, the stock exchange etc.

Question 6

Scarcity and examples of scarcity

Answer 6

Limitation on resources (time, income, resources), we can never have all that we want

Question 7

Trade-offs

Answer 7

Something that one must give up in order to obtain something else

Question 8

What does the government do?

Answer 8

1) Create the legal environment in which transactions between households and firms take place
2) Decide what services to provide, and fund them

Question 9

Sources of Government Funds

Answer 9

1) Taxes paid by households and firms (higher taxes reduce private consumption and savings)
2) Borrowing: by issuing government bonds (creates liabilities for future, and requires higher future taxes)

Question 10

Fiscal policy

Answer 10

Decisions that determine the government’s budget, including the amount and composition of government expenditures and government revenues (decisions on the amount of taxes collected)

Question 11

Monetary policy

Answer 11

Conducted by central bank, which focuses on the determination of the nation’s money supply and thereby controlling the nation’s interest and exchange rates.

Question 12

Normative Economics

Answer 12

How people should behave (what is desirable, involves the values of the person doing the analysis)

Question 13

Positive Economics

Answer 13

How people will behave (the economic consequences of a particular event)

Question 14

Economic Growth

Answer 14

The steady increase in the quantity and quality of goods and services the economy can produce

Question 15

Standard of Living

Answer 15

Indicates how much the average person produces and the degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable (regularly measured as Real GDP per capita, measured by output per person)

Question 16

Expansion

Answer 16

A period of rapid economic growth during which jobs are easier to find, more people get raises and promotions, and most businesses thrive

Question 17

Inflation

Answer 17

The inflation rate is the rate at which prices in general are increasing over time.

Question 18

Unemployment rate

Answer 18

The unemployment rate is computed as the number of unemployed divided with the labor force (percentage of the labour force that is out of work, the fraction of people who would like to be employed but can’t find work)

Question 19

Recession (contraction)

Answer 19

A period in which the economy is growing at a rate significantly below normal.

Question 20

Trade Deficit

Answer 20

Occurs when exports are less than imports

Question 21

Trade Surplus

Answer 21

Occurs when exports exceed imports

Question 22

Trade imbalance

Answer 22

Occurs when the quantity of a country’s exports differs significantly from the quantity of imports

Question 23

Average labour productivity

Answer 23

Measured by output per employed worker (e.g. ($1,000 billion/30 million = $33,333)