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1.0 Flashcards

1
Q

Gross domestic product (GDP)

A

Measurement of the total value of final goods and services within an economy in a given time period

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2
Q

Real GDP

A

Nominal GDP adjusted for inflation

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3
Q

Macroeconomics indicators to evaluate how the economy is doing and make cross country comparisons

A
  1. Real GDP and the growth rate of real GDP
  2. Unemployment rate
    3.Inflation rate
  3. Current account balance
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4
Q

Unemployment

A

The percentage of the labour force which is out of work but is able to work and actively seeking employment

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5
Q

Inflation

A

Inflation rate measures the rate of change in the average price level

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6
Q

Why is inflation important ?

A
  1. It reduces the inflation power of savings and creates uncertainty
  2. Indication of how the productive capacity of the economy is keeping up with the aggregate demand
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7
Q

Current account of GDP

A

Balance of payments is a summary of all economic transactions between a country and the rest of the world
Measure the net flow of goods and services as well as investment, income and transfer payments into a country

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8
Q

Why is current account balance important?

A
  1. It shows the international competitiveness of a country
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9
Q

Injections to the circular flow of income

A

1)investment
2) Government spending
3) exports

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10
Q

What is investment ? (I)

A

The total spending on new capital goods (factories, machinery) done by firms

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11
Q

What is government spending ?(G)

A

The total spending on goods and services by the (central and local) government

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12
Q

What are exports?(X)

A

The total spending on goods and services in the domestic economy by foreign buyers ( household, firms and governments)

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13
Q

Injection definition

A

Spending which does not come from households

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14
Q

Definition of leakages

A

Spending done by household which does not flow back to firms

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15
Q

Leakages in the circular flow

A

1)savings
2)taxation
3)imports

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16
Q

Definition of savings (S)

A

The part of income which is not spent by households

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17
Q

Definition of taxation (T)

A

The total flow of income to government; total tax revenue taken from firms and households

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18
Q

What is imports? (M)

A

The total spending by domestic buyers ( household, firms and governments) on goods and services produced in foreign (external) economies

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19
Q

Equilibrium

A

Macroeconomic equilibrium is when injections = withdrawals (leakages)
If injections is > withdrawals there will be a rise in national income, budget surplus
If injections is < withdrawals then there will be a fall in national income, budget deficit

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20
Q

Gross value added

A

GDP is measure using market prices which includes the value of indirect taxes (such as VAT). Indirect taxes however are not part of the output of an economy therefore a more accurate measure is used

GVA = GDP - (indirect taxes + subsidies)

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21
Q

Gross national income (GNI)

A

GNI is GDP plus other net factor incomes (rent, interest and dividends) from a abroad

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22
Q

Net national income

A

GNI - depreciation = net national income

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23
Q

Measuring GDP - EXPENDITURE METHOD

A

C+I+G+X-M
Consumer spending plus investment plus government spending + net exports

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24
Q

National income - income method

A
  • income from self employment
    -rental income
    -gross trading profits
    -other incomes
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25
National income - output method
-primary sector output -secondary sector output -tertiary sector output -minus stock appreciation (increase in value of existing stocks)
26
GDP deflator
GDP deflator = (nominal GDP/real GDP) x 100
27
Accuracy of national income statistics
1) often inaccuracies 2) the hidden economy: self employed people may understate income to avoid taxes, illegal activities 3) home produced goods and services are not accounted for 4) the value of public sector is hard to determine. Output of things such as healthcare, education are hard to determine
28
What is aggregate demand ?
The total spending on domestically produced goods and services in an economy over a given period of time
29
What is aggregate demand composed of ?
Consumption (C) Investment (I) Government expenditure (G) Net exports (X-M)
30
What is consumption?
The total spending by households on goods and services over a given period of time
31
What is investment?
Total spending done by firms on capital goods over a given period of time
32
What is government expenditure ?
total spending by government on goods and services over a given period of time
33
What is net exports ?
Total export revenue minus total expenditure on imports
34
What is Disposable income
This is income minus direct taxes
35
What is discretionary income ?
This is disposable income minus all payments required to meet essential bills (rent, mortgages, heating water, transportation costs)
36
What is average propensity to consume?
The ratio of consumption to (disposable) income APC = C/Y
37
What is marginal propensity to consume?
Measure the change in consumption resulting from a change in (disposable income) Delta C/delta Y
38
What is autonomous consumption ?
This is consumption when income is 0
39
What is marginal propensity to save MPS?
(Assuming that there are no withdrawals, taxes and savings) The fraction of additional income that is saved is called MPS where MPS = DELTA S/DELTA Y
40
MPC and MPS
MPC+ MPS = 1 (if there are no other withdrawals, such as taxes or imports )
41
What is the multiplier effect
A number by which an initial injection is magnified
42
Calculating multiplier
Multiplier= final change in national income/ initial change in national income =1/(1-MPC)
43
Taxes and imports added to multiplier
MPC + MPW = 1
44
MPT
Delta T/Delta Y
45
MPM
Marginal propensity to import Delta M/ delta Y
46
MPW
Marginal propensity to withdraw =MPS + MPT + MPM = (1-MPC)
47
Second equation of multiplier
1/MPW
48
Determinants of consumption
Wealth Consumer confidence Rate of interest Inflationary expectations Age composition of households
49
Effect of wealth on consumption
This is the value of stock of assets of a household has at a given period of time. If wealth increases, consumption increases
50
Effect of consumer confidence on consumption
Consumer confidence rises during an economic boom and falls in a recession
51
Effect of rate of interest on consumption
Higher interest rates means there is less disposable income for households to consume. An increase in interest also rewards saving over consumption. Thus an increase in interest rates leads to fall in consumption
52
Effect of inflationary expectations on consumption
If consumers expect price levels to fall they will bring forward their purchases. Inflationary expectation lead to higher consumption and lower saving.
53
Effect of age composition of households on consumption
Young/old people are likely to spend a higher proportion of their income. Young people are likely to to be taking on debt to fund mortgages/education. The old are running down their stock of savings. An economy with a large proportion of young/old people will tend to see higher consumption.
54
What is investment ?
The addition to the physical capital stock of the economy which can be used to produce other goods and services
55
What is net investment ?
Net investment = gross investment - depreciation
56
Effect of interest in investment
Firms finance investment by borrowing or by using retained profits. If interest rate goes up borrowing becomes more expensive.
57
Effect of interest in investment
Firms finance investment by borrowing or by using retained profits. If interest rate goes up borrowing becomes more expensive. Investment is negatively related to rate of interest.
58
Effect of real disposable income on investment
If consumers are spending more on goods and services firms will have to increase their investment so that they can have the capital equipment to make more goods and services .
59
Effect of business expectations and confidence on investment
If firms expect their sales to increase they will tend to invest more in capital goods If there is low confidence in the economy investment will fall.
60
Retained profits affect on investment
This is profit which is kept by firms and not distributed by shareholders. If retained profits is high investment will be high
61
Corporation tax affect on investment
If corporation tax goes up, firms are left with less retained profits and therefore they are able to invest less
62
Effect of government on investment
The government can provide an environment conductive to investment (lower corporation tax, fewer regulations to starting business, loan guarantees)
63
Effect of the world economy on investment
If there is a recession in foreign countries (trading partners), there will be a decline in the exports to that country. Thus export firms might reduce their investment causing lower revenue for other firms and an unwillingness to invest.
64
What is the accelerator effect
The accelerator effect is when an increase in the rate of growth of real GDP can lead to larger than proportional increase in investment.
65
What is induced capital
New capital to produce goods and services
66
Replacement capital
Replacement of worn out capital
67
Calculating accelerator
a delta Y = delta K a = delta k/delta Y = k k = marginal capital output ratio
68
Factors influencing government spending
Political considerations and policy objectives Previous commitment to spending Overall economic activity and the amount of tax revenue The amount a government is prepared to borrow
69
Factors influencing net exports
Real disposable income in the domestic economy Real disposable income in foreign economy The price level in domestic economy Relative inflation rate in the tow countries The exchange rate Trade poly and protectionism
70
What is aggregate supply?
Is the total output of goods and services that firms in an economy are willing in able to supply at a given price level, in a given period of time
71
What does short run mean
Short run is the period of time when the price of factor inputs are fixed
72
What is long run ?
This is when the price of factor inputs are variable
73
Evaluation of the accelerator
The willingness of firms to invest also depends on confidence in future demand Even if firm decide to increase investment firms producing the capital goods may not respond quick enough Firms may delay the replacement of machine that are not entirely worn out Firms may have spare capacity which allows them to meet demand without increasing investment
74
Shifts of the SRAS curve
1. Changes in labour costs 2. Change to costs of raw materials and components (domestic or imports- e.g. price of oil, natural gas) 3. Changes in other production costs 4. Short run stocks to production
75
What does lung run show
In the long run firms run into capacity constraints. There is only so much land labour etc. therefore the long run shows the potential or full capacity of output in the economy.
76
Why is the supply curve upward sloping
A fall in the price level will lead to a decrease in firms’ profits. They will seek to reduce costs by reducing production. This is a contraction in aggregate supply. Vise versa
77
Neoclassical school of thought
Price and wages are fully flexible in the long run
78
Determinants of the position of the LRAS curve
Shifts to the right 1. Change in workforce 2. Technological process 3. Improvement in education and skill increase worker productivity 4. Government policy towards businesses 5. Increased geographical and occupational mobility of labour 6. Policies which encourage more competition amongst firms is likely to lead to an increase in the efficiency
79
The new Keynesian LRAS curve
Markets take a long time to clear and that wages are sticky downwards Thus unemployments can persist for many years
80
Straight line of Keynesian graph
At this point the economy has lots of spare capacity FOP are not fully utilised. An increase in output ( resulting in an increase in AD). Real GDP will lead to a more factor of production being employed without factor price being forced up. This leads to an increase in real GDP with no change in price level.
81
Increasing new Keynesian part of graph
As output increases, firms are now competing for scarce resources. This puts an upward pressure on the factor prices and begins to force up the average price level of the economy
82
Upward part of new Keynesian
Full capacity When FOP are fully utilised it is no longer possible to increase real GDP output. The economy reaches the full employment level of output which is independent of price level. Any pressure to increase wages will cause the price level to increase with no increase in real GDP output
83
Positive output gap
If real GDP is above the full employment level of output, we say there is an inflationary gap or positive out put gap
84
Negative output gap
If real GDP is below the full employment level of output we say there is a deflationary gap or a negative output gap

Macroeconomics (5 decks)

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