2.2 Flashcards
What is MPS and APS and both formulas
MPS- proportion of income increased that is saved
MPS= Change in savings/ Change in income
APS- average propensity to save is the average amount saved out of income
APS= Total saving/ Total income
What is MPC formula
MPC= Change in consumption/ Change in income
Factors affecting consumption and saving
- Disposable income- money left to spend after tax is taken away amd any benefits are added on = able to spend more
- IR, if high then price of good is higher,
>high IR= as some ppl buy on credit= higher repayment= decreased consumption,
>high IR= Increased mortgage repayments= decreased consumption
>high IR= decrease value of shares = negative wealth effect - Consumer confidence, increase spending if ppl believe their pay will increase, or decrease if recession is coming
- Wealth effect- Increased house prices= increased confidence= increased spending or when shares rise= ppl can sell their shares as worth more= increase spending as their confident
What is AD and it’s components also define them
AD-total level of demand in the economy at any given price level at any given moment in time
Components making up AD
C+I+G+(X-M)
-Consumption- consumer spending on goods and services = 60% of AD
-Investment- spending by businesses on capital goods,working capital,buildings= 15-20% of AD
-Gov spending- spending on public/merit goods,wages of public sector and investment eg school and roads= 18-20% of AD
-Net exports= (X-M) Imports>Exports= minus figure as more money leaves than come sin = 5% of AD
What relationship does AD show?
Relationship between real GDP and price level
Why is AD downwards sloping
- Income effect = increased price(inflation) is not matched with increased incomes straight away= AD contracts as ppl may have less income to spend
- Substitution effect- Increaed price of uk goods= foreigners wont buy british exports and UK residents buy imports because theyre cheaper = decrease in net exports= AD contracts
- Real balance effect- inflation= saving not worth as much and so less security=ppl want to save more= increased savings= decrease spending= AD contracts
-IR effect= inflation= workers demand/firms pay more to workers = IR will rise because increased demand for money = increased IR= increased saving and decreased borrowing= decreased investment = AD contracts
Influences on gov expenditure
- Trade cycle- in a recession gov spending increases to increased demand to decrease unemployment. Gov spending also increases in recession as benefits for unemployed. In booms decrease spending to decrease inflation
- Fiscal policy- gov spending depends on priorities of gov eg some spending is fixed eg schools,pensions
- Age distribution of income= ageing population = increased spending on pensions,social care,ect, young = increase spending on education
Impact of a rise in gov spending depends on change is tax. If gov spending and tax rise by same amount,there may not be increase in demand as people have less disposable income to consumption falls.
What is net trade and factors effecting it
Net trade- Total exports- total imports
Factors affecting net trade RESDN
- Real income= increased income= increased imports as ppl demand more = net trade falls/ if incomes rise due to export led growt, net trade increased
- Exchange rates, SPICED as cost for foreigners is higher= increased imports, decreased export
- State of world economy- If Uk’s main export country is doing well then exports increase and net trade increases
- Degree of protectionism, high pro on uk exports = exports fall, if high on imports on foreign goods= imports fall. However countries can increase protectionism for uk goods and exports fall
- Non price factors- Quality, Design, Marketing
What is gross and net investment
Gross investment- investment to replace old machinery that has depreciated and to create/buy new ones
Net investment is Investments adjusted for depreciation, Gross- depreciation
5 Influeces of investment DEBIGCR
- Demand for exports= increased investment due to extra demand
- Economic growth= increased growth = increased confidence as there is demand= increased ROI
- Business confidence= high expectation for future= increased investment
- IR - high IR = increased cost of borrowing = decreased ROI = decreased investment
- Gov and regulation= tax breaks if firms invest or grants to increase investment. Increased regulation = decreased investment as costs increase and time taken to invest eg planning regulations
- Credit access- if an investment is high risk = little access to bank as firms may not pay money back
- Retained profit= high = increased investment
