1.1 Intro/Wellbeing/Inflation Flashcards
What is the Austrian School of thought?
Hayek - power of free markets
- Free markets, private property, property rights and individual choices
- Market economy nothing but voluntary cooperation of free individuals. Prices reflect preferences
- Market intervention is interference with indiviudal freedom
- Better to leave it to the market/free will
Skeptic towards central authority - strong belief in individual freedom and benefits of efconomic freedom
- Appreciate market economy not perfect, but attempts at fixing things will make it worse
What is Marxist economics? How does it contrast with Austrian?
Society dominated by class struggle, exploitation of one class by another - people just seen as a resource and there is nothing natural about a market economy
- Reflects power structure - workers produce things for market, but market forces control workers, making them subject to specific groups interest
- Value produced by workers < income earned
Contrasts with austrian:
- Market economy grows naturally out of freedom in Austrian school
- Nothing ideal or perfect about the market economy
What is Keynesian economics?
Challenged the concept that free markets ensure e.g. full employment
Differs from austrian and marxism - market may not work well and so needs fixing, but remaining natural
E.g. unemploymnet over time is the result of demand deficiencies and so fiscal policy should be used to boost demand
- Note this implies loss of freedom (against Austrian school)
What is monetarism?
Milton Friedman:
Money neutrality:
- Increase money supply increases price level but not real variables - output, consumption and relative prices
- Monetary policy controls money supply and inflation
Belief that a certain level of unemployment is natural
- MOnetarists view fiscal policy as error prone due to timing issues and other problems such as corruption
Hard/soft monetarists:
- Hard believe fiscal policy does more harm than good, bringing them closer to austrian school
- Hayek strongly opposed monetary policy and central banks controllig money supply
GDP and how its measured
Total income of everyone in the country - equivalent of total expenditure on everything
- Market value of all final goods and services over given time period
Income = expenditure - all transactions have a buyer and a seller
Market prices reflect value of goods, so we can compare two items against
Measured:
-All items produced in economy and legally sold in markets
- Includes market value of housing services - rental housing, owner occupied housing
Excludes:
- Goods sold illicitly e.g. drugs
- Produced/consumed at home e.g. grandparents taking care of grandchildren
Final value of intermediate goods included in price, intermediate goods excluded to avoid double counting - except if good isnt sold but added to inventory - counts as a final good
What are the components of GDP?
Y = C + I + G + NX
Y = total income
Consumption - doesnt include housing (investment)
Investment: - capital and structures, household purchases, inventory accumulation
Government expenditure:
- Consumption expenditure, gross investment, spending on goods/services
- Doesnt include transfer payments
NX = net exports
What are some stats for the components of GDP?
C roughly 66%
Investment - swings over business cycle, roughly 15%
Government expenditure roughly 20%
Net exports volatile - roughly 4%
2021 GDP was £2.27BN
What is GNP and NNP
GNP is the GDP + incomes earned abroad and excludes what foreigners earn in the UK
GNP = GDP + Net factor income from abroad
NNP: GDP minus depreication of capital
What is the difference between real and nominal GDP?
Nominal GDP - production of goods and services valued at current prices
Real GDP - production of goods and services valued at constant prices of a given base year - quantities unchanged, but prices fixed
- In this base year nominal GDP = real GDP
What is the GDP deflator?
A.k.a. index value
GDP deflator = nominal GDP/real GDP x 100
- Always 100 for the base year, which real GDP calculated w.r.t.
- Measures current level of prices relative to the level of prices in the base year, accounting for inflation
What is the inflation meesure - what are historical patterns?
Inflation:
- Rise in economy overall price level
- Inflation rate is percentage change in some measure of price level from one period to the next
Inflation year 2 = Index 2 - Index 1 / Index 1 x 100
Historical patterns:
- Real GDP grows over time - averages 3% per year from 1964-2008, and just over 2% over a longer time span
- Substantially lower for last 14 years - growth not steady, interrupted by businesses cycles
Is Real GDP the best measure?
- Shows total income and expenditure
- Larger the real GDP needed to improve standard of living
- Measures ability to obtain many inputs into a worthwhile life
