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Macroeconomics > 2.1 Measures of Economic performance > Flashcards

2.1 Measures of Economic performance Flashcards

1
Q

What two components make up the circular flow of income?

A

Firms and households

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2
Q

How does the circular flow of income work

A

Firms produce goods and services (making up national output)
The households produce the labor, land and capital that firms use to produce the national output the money paid into the households is called national income
Households spend their income that firms create (known as national expenditure) and the flow repeats

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3
Q

What can affect the circular flow of income?

A

Injections and withdrawals (Leakages)

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4
Q

What are examples of injections into the circular flow of income?

A

Exports
investment
government spending

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5
Q

What are examples of withdrawals of the circular flow of income?

A

Taxes
Imports
savings

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6
Q

What happens when injections are greater than withdrawals?

A

Firms increase output which will lead to increased income and expenditure

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7
Q

What happens when withdrawals are greater than injections?

A

Firms will reduce output leading to decreased spending and incomes

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8
Q

What does the circular flow of income suggest?

A

As households keep spending, and firms keep producing then national output and income will not change

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9
Q

When an injection is made into the circular flow, how big is the income gained from it?

A

The change in national income will be greater than the initial injection - known as the multiplier effect.

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10
Q

What is the multiplier effect?

A

When the fiscal multiplier effect occurs when an initial injection into the economy causes a bigger final increase in national income.

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11
Q

What is the multiplier effect?

A

When the fiscal multiplier effect occurs when an initial injection into the economy causes a bigger final increase in national income.

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12
Q

How do you calculate the multiplier effect?

A

Multiplier = Change in real GDP / Change in injections

or 1 / MPW

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13
Q

What factors affect the size of the multiplier?

A
  • if people spend a high % of any extra income (a high mpc), then there will be a big multiplier effect. However, if any extra money is withdrawn from the circular flow the multiplier effect will be
    very small.
  • Marginal Propensity to Consume (mpc). This is a persons willingness to spend money – if a worker saved all his money there wouldn’t be an increase in GDP
  • Marginal Propensity to Withdraw (mpw). This is when money is withdrawn from the circular flow it includes mpt + mpm + mps
  • The Marginal Propensity to Tax (mpt)
  • The Marginal Propensity to Import (mpm)
  • The Marginal Propensity to save (mps)
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14
Q

what is the definition of wealth?

A

The value of all asset owned by an individual or firms in an economy - it can either be physical money or assets.

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15
Q

What is aggregate demand?

A

Aggregate demand is the total demand for goods and services produced within the economy over a period of time.

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16
Q

What is the equation for aggregate demand?

A

C + I + G + (X - M)

Consumption + investment + government spending + (exports - Imports)

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17
Q

How does a rise in price affect AD?

A

Causes a contraction in AD

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18
Q

How does a fall in price affect AD?

A

Causes an expansion of demand

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19
Q

What does an outward shift in demand mean?

A

National output has increased

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20
Q

What does an inward shift in demand mean?

A

National output has been reduced

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21
Q

What factors lead to a fall in AD?

A 
Fall in exports 
a cut in government spending 
Higher interest rates 
Decline in household wealth 
Increase in taxation
reduced consumer spending
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22
Q

What can lead to an increase in AD?

A 
Depreciation of exchange rate 
Cuts in taxation 
Increase in house prices 
Lower interest rates 
increased consumer confidence 
Increased value of exports 
increased government spending
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23
Q

What are the monetary policies that can be used to alter AD?

A

Interest rates
Supply of money
changes in the exchange rate

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24
Q

What are types of fiscal policy that can be used to alter AD?

A

Taxation changes
Government spending
Government borrowing

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25
How do external shocks affect AD?
They can change demand suddenly, reduce output and affect employment
26
What are examples of external shocks?
A fall in the exchange rate A recession in a key trading partners economy A slump in housing and construction Global financial events A large change in commodity prices like oil weather events war/conflict that affects global trade and supply
27
What is consumption?
Spending done by households on goods and services
28
What is the main component of AD?
Consumption - it makes up 65% of aggregate demand
29
What are the main factors affecting consumption?
Interest rates Consumer confidence wealth effects the level of employment
30
What is the wealth effect?
The effect on spending or incomes when asset prices change, e.g. when a consumers house is worth more, they will likely spend more as they have more finance to fall back on
31
How does the wealth effect affect consumption?
An increase in share prices or house prices mean that households are willing or able to spend more. If someone's house is worth more, consumers will become more confident in spending money as they know they have a large portion of income to 'fall back' on
32
What are the main factors affecting investment?
``` The rate of economic growth Confidence levels interest rates risk Access to credit Government decisions Government bureaucracy Levels of taxation (mainly corporation tax) ```
33
What is investment?
An increase in capital stock
34
What is gross investment?
The total amount of investment before the depreciation (worsening/weakening) of any assets is taken into account
35
What is net investment?
The increase in capital stock minus the depreciation of capital assets
36
What is net trade?
The value of imports minus exports, a component of aggregate demand
37
What are the factors affecting net exports / trade?
Changes in real income (rising income means less exporting as AD is high enough domestically for firms) Changes in the exchange rate ( Rising exchange rate makes imports cheaper and boosts AD in the short run but in the long run exports become less competitive and more expensive causing net exports to fall) Changes in the state of the world economy The degree of protectionism ( High tariffs, quotas or other restrictions on trade there will be less exporting) Non price factors like the quality of engineering, reliability, after sales service, tariffs and transport costs.
38
What is AS (aggregate supply)?
The quantity of goods and services that producers in an economy are willing to supply at a given price at a given time.
39
What is the short run aggregate supply (SRAS)?
The relationship between planned national output and the general price level
40
What does the SRAS show?
How much output the economy can generate at a given price level in the short term
41
What does a rise in the price level do to supply and why?
A rise in price leads to an expansion in supply due to the profit incentive It also increases the real GDP
42
What is in the Axis of a SRAS diagram?
Y axis = General price level | X axis = real GDP
43
What cause the 3 main shifts in SRAS?
Changes in resource / input prices Business taxes, subsidies, regulation and imported costs Supply shocks
44
What are some examples of external factors affecting AS?
``` conflicts in OPEC nations energy prices Minerals and metals prices Food prices Import tariffs / Quotas ```
45
What is the LRAS?
Long run aggregate supply is determined by all factors of production – size of the workforce, size of capital stock, levels of education and labour productivity. If there was an increase in investment or growth in the size of the labour force this would shift the LRAS curve to the right.
46
What does the LRAS curve look like?
A straight vertical line
47
What does an outward shift in the LRAS show?
It shows an increase in an economies productive potential
48
What is trend growth?
The estimated rate of growth of a countries productive potential
49
What are the key factors affecting LRAS?
High productivity of labour and capital assets Increased labour market participation (employment) Gains from innovation and enterprise Capital investment
50
What are the impacts of increased productivity?
Lower inflation as cost per unit decreases Greater economic growth as increased SRAS Lower unemployment with more growth BoP improved as exports become cheaper and more competitive Rise in spare capacity in the short term (not in long term) Higher investment in capital assets as businesses have greater profits Government spending should be able to decrease as productivity boosts
51
What does the Keynesian AS supply curve look like?
It is non linear, AS begins to increase exponentially
52
Why is the Keynesian LRAS supply curve non linear and why does it look how it does?
Because, when spare capacity in an economy is high, then the SRAS will be elastic, as a result, a rise in AD can be easily met by an increase in output without a change in prices (hence why the model starts out fairly flat. As output increases, the elasticity of the SRAS curve falls, the amount of spare capacity declines (due to diminishing returns, congestion in supply pf inputs and components as well as resource shortages as country enters full employment) As a result as the SRAS becomes more inelastic further increases in supply are all inflationary and drive up the general price level.
53
What are the key differences between the Keynesian view on the supply curve vs the classical view?
The Classical view is that Long Run Aggregate Supply (LRAS) is inelastic, it suggests that real GDP is determined by supply-side factors believing that increases in AD will have no impact on real GDP. Whereas, the Keynesian supply curve argues that the economy can be below full capacity in the long term and places greater importance on AD in helping save a country from a recession.
54
When does a macroeconomic equilibrium occur on a supply and demand diagram?
Equilibrium occurs when AD perfectly intersects with SRAS (planned output and demand are totally balanced
55
What happens when there is an increase in AD?
When AD increases the General Price Level increases, in turn boosting supply as suppliers produce more due to the profit incentive
56
What happens when there is an increase in aggregate supply?
Increase in aggregate supply means that the GPL will be lower and as a result when supply is expanded AD will also increase thanks to the lower prices.
57
What happens when there is a fall in aggregate supply?
When output declines the general price level decreases
58
What are the Macro effects of a fall in aggregate supply?
Higher inflation in short term - less supply means prices are higher as products are rarer Economic growth is lower as it is a negative external shock Unemployment rises as economy slows down BoP deteriorates as more imports need to occur Spare capacity in the economy will increase Business investment falls as the higher costs and lower demand mean less profit Government fiscal balance worsens as less revenue comes from tax and more JSA must be paid
59
What is the equation for the multiplier effect involving MPC?
Multiplier = 1 / 1 - MPC
60
What is the equation for the multiplier effect involving MPW?
Multiplier = 1 / MPW
61
What is the equation for MPW?
MPM + MPT + MPS = MPW
62
What does MPM stand for?
Marginal propensity to import
63
What does MPT stand for?
Marginal propensity to tax
64
What does MPS stand for?
Marginal propensity to save
65
What is an output gap?
The output gap is a measure of the difference between actual output (Y) and potential output (Yf).
66
What is the difference between gross and net income?
Gross income is the total income before any is deducted for tax Net income is the total income minus any deductibles
67
What is GNI?
includes the value of all goods and services produced by nationals – whether in the country or not (+Remittances)

Macroeconomics (7 decks)

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