18. Macroeconomics Flashcards
What is macroeconomics?
National and international branch of economics
What topics are covered by macroeconomics?
- Measuring size of a country’s economy
- How to grow the economy
- Unemployment rates and what affects it
- Cause of inflation and methods to control it
- What determines currency exchange rates
- How imports compare to exports
What are five government policies that influence business?
- Overall economic policy
- Industry policy
- Environmental and infrastructure policy
- Social policy
- Foreign policy
What affect does overall economic policy have on businesses?
- Demand
- Taxation
- Cost of finance (interest rates)
What affect does industry policy have on businesses?
- Regulation
- Planning
- Grants
- Tariffs/quotas
- Free trade
What affect does environmental and infrastructure policy have on businesses?
- Planning
- Costs (eg carbon and pollution taxes)
- Transport costs
- Efficiency
What affect does foreign policy have on businesses?
- EU compliance
- World trade organisation
- Foreign trade
- Banned exports and imports
What is national income?
A measure of the size of a country’s economy. More specifically:
The total value of a country’s final output of all new goods and services produced in a year
What does the word final mean when defining national income?
The only then last sale is counted to avoid duplication.
Eg if company a sells to company B, and company B sells to the consumer, then only company B’s sale is included in the national income.
What is consumption/expenditure and income regarding national income?
Consumption/expenditure is the amount spent by the customer.
Income is the amount received by seller.
What must consumption and income be?
Equivalent
What are the two main measures of national income?
- Gross domestic product (GDP)
- Gross national product (GNP)
What does GDP stand for?
Gross Domestic Product
What does GNP stand for?
Gross National Product
What does GDP represent?
Total value of income or production taking place in a country
What does GNP represent?
Same as GDP but takes into account income earned from abroad and profits earned in a country being sent to foreign investors.
What is the net property income from abroad?
The difference between income earned abroad and profits remitted to overseas investors.
How do you calculate GDP?
GDP =
Household spending
+ Capital investment spending
+ Government spending
+ Exports of goods and services
- Imports of goods and services
How do you calculate GNP?
GNP =
GDP
+ Net profit income from abroad
What is the circular flow of income?
Household provide:
- Labour
- Land
- Capital
(Three are known as factors of production)
In exchange, firms provide:
- Wages
- Rent
- Interest
Firms also produce goods and provide services. In exchange households pay for these.
What are the leakages from the circular flow of income?
Injections
- Government spending
- Exports
- Investments
and
Withdrawals
- Taxation
- Savings
- Imports
What is the effect of injections and withdrawals?
Injections increase circular flow of income, while withdrawals decrease it.
What is aggregate demand?
Total demand in the economy for goods and services
What is aggregate supply?
Total supply of goods and services in the economy
How does aggregate demand change when prices decrease?
Aggregate demand goes up
How does aggregate supply change as prices increase?
Aggregate supply goes up
What is the term used when aggregate supply and demand are equal?
Equilibrium
How can you stimulate demand?
- Decrease tax (more to spend)
- Increase government expenditure (government borrowing and spending)
- Decrease interest rates (cheaper for consumers to borrow and spend)
What limits aggregate supply?
When everyone is in employment, so no further goods can be made
What happens if demand is lower than what could be met by the maximum demand (full employment)?
Unemployment
What is the increase in aggregate demand to achieve full employment called?
The deflationary gap
What is the deflationary gap?
The increase in aggregate demand to achieve full employment
What is the inflationary gap?
The amount aggregate demand would need to decrease to achieve full match full employment
What is the aggregate demand curve?
The line showing what prices occur at certain levels of demand.
What does a rightward shift of the aggregate demand curve represent?
Economy growth
What do leftward shifts of the aggregate demand curve represent?
Contraction of the economy
What is a negative effect of a fast growth of the economy?
Inflation
Can suck in imports to meet demand
What is a negative effect of a fast decline of the economy?
Mass unemployment
What are rightward shifts of the aggregate demand curve caused by?
- Increase in disposable income
- Consumers saving less
- Increased government spending
- More relaxed monetary policy (printing more money)
- Change in net exports (weakening exchange rates cause foreign buyers to increase, increasing demand)
What is the term used to describe consumers choosing to save less?
Lower marginal propensity to save
What are leftward shifts of the aggregate demand curve caused by?
- Decrease in disposable income
- Consumers saving more (higher marginal propensity to save)
- Decreased government spending
- Stricter monetary policy (printing less money)
- Change in net exports (exchange rate strengthening decreases foreign buyers, decreasing demand)
What causes inflation?
- Demand pull
- Cost push
- Import cost inflation
- Expectation
- Increase in money supply
What is demand pull?
Prices are pulled upwards due to:
- Lots of money in economy
- People willing to spend more
- Increasing demand
What is cost push?
A cost of production increases (eg wages) causing the cost of the product to increase.
What is expectation in relation to inflation?
- People expecting inflation
- Creates higher wage demands
- Higher wage demands push up prices of products due to cost push
How does increase in money supply cause inflation?
Causes demand pull
What types of unemployment are there?
- Real wage unemployment
- Frictional unem
- Seasonal unemployment
- Structural unemployment
- Technological unemployment
- Cyclical unemployment
What is real wage unemployment?
- People paid too much
- Employers can’t afford to keep employees
- Self correcting as when too many people are unemployed, they will accept lower wage
What is Frictional unemployment?
- Temporary unemployment due to move from one job to another
- Will always occur to some extent
- Not too important as it’s temporary
What is seasonal unemployment?
When unemployment patterns in certain sectors line up with seasons.
Eg less building and agriculture jobs during winter
What is structural unemployment?
- When the structure of an industry changes
- Eg UK closing most coal mines
- More permanent
What is technological unemployment?
Caused by technological advances
What is cyclical unemployment?
- Long term cycle of employment and unemployment
- Correspond with rise and fall of economy
What are the two main policies governments have to control or regulate their economy?
- Fiscal policy
- Monetary policy
What is fiscal policy?
Where the state gets it’s money and where it spends it.
What is monetary policy?
How the state manages the supply of money in the economy. Main methods include:
- Interest rates
- Credit controls (how much institutions, usually banks, are allowed to lend)
What is international payments disequilibrium?
When imports and exports don’t match.
When importing, you have to convert local currency to foreign currency to pay. When exporting, the buyer converts their currency to your currency. A difference in imports and exports would cause a net sale of the local currency, or a net purchase of the foreign currency
What factors other than imports and exports contribute to international payments disequilibrium?
- Interest and dividends received from or paid to other countries.
- Capital movements (foreign investor buying shares of UK company)
What is a trade deficit?
When a company imports more than it exports.
What is a trade surplus?
When a country exports more than it imports.
What does a net sale of currency A against B do to their values?
The value of currency A goes down compared to currency B
How might government deal with international payments disequilibrium?
- Interest rates
- Exchange rates
- Import quotas (max import limit)
- Import tariffs (tax on imports)
- Procedural methods (stringent safety and testing rules for imports)
What causes economic growth?
Rise in national income: GDP rises
- Increasing capital goods/physical capital (infrastructure, equipment that improves efficiency)
- Human capital (increasing skill level of workforce)
- Technology (New tech stimulates households to buy)
- Natural resources (eg finding mineral deposits)
What are some benefits of economic growth?
- Reduced poverty
- Better housing
- Better medical facilities
- Better education
- Better public services
What are some drawbacks of economic growth?
- Increased inflation
- Pollution
- Current account deficit (goods demanded by richer people may stimulate imports if home country cant match demand)
What are some functions of taxation?
- Raises government revenue
- Discourage undesirable activities (eg smoking)
- Making products match social cost (eg taxing carbon emissions)
- Redistribute income and wealth
- Protect home industries from foreign competition (import tax)
- Stabalise national income (if economy fallsz might need to tax more to avoid borrowing more)
What are the three types of taxation?
- Regressive
- Proportional
- Progressive
What is regressive tax?
When a higher % of a poor person’s salary is taxed than a rich person.
Eg with VAT, everyone pays 20%, but that is a higher cost for a poor person than a rich person compared to their salaries.
What is proportional tax?
Takes the same proportion of income tax from all levels of income.
What is progressive tax?
Takes a higher proportion of income as income rises.
This is more effective at redistributing wealth.
What is direct tax?
Paid directly by a person to the revenue authority (eg income tax)
What is indirect tax?
Collected by the revenue authority from an intermediary (eg VAT or CIS)
What is a fixed sum tax?
Where a fixed amount is taxed per unit sold. (Eg wine is taxed the same sum regardless of cost)
What is ad valorem tax?
Tax charged as a fixed percentage of the price of the good. (Eg VAT is 20%)
What’s it called when tax is charged as a fixed percentage?
Ad valorem tax
