2.2 2.3 Flashcards
What is the formula for aggregate demand + what the letters mean
AD = C+I+G+(X-M)
C= consumption
I= Investment
G= Governement spending
(X-M)= exports - imports
Explain how Disposable income influences consumer spending
Theres a direct relationship between real disposable income and consumer spending
Explain how Rate of savings influences consumer spending
Generally, as consumers save more, they spend less, and vice versa.
The savings ratio or average propensity to sabe (APS) gives an idea of the average extent of saving for all households in the economy.
It is calculated as the percentage of disposable income that is saved.
APC=consumption/disposable income x100
APS= savings/disposable income x 100
Explain how Intrest rates influence consumer spending
Increased intrest rates mean cost of borrowing to consumers increases as well as increasing opportunity cost of spending as higher intrest rates mean more money can be earned by leaving it in the bank.
Explain how consumer confidence influences consumer spending
If householders feel secure + confident in the economy they are more likely to spend money on big ticket items such as new cars.
Explain how wealth influences consumer spending
Increase in houseprices or share prices means househods feel wealthier, encouraging an increase in spending
Define Investment in economics
Spending on capital goods such as new factories + other buildings, plant+machinery, new tech and vehicles
Explain the difference between gross and net investment
In gross investment, the expenditure calculated doesn’t consider depreciation(a measure of the amount of value an asset loses from influential factors affecting its market value. ). On the other hand, in net investment, there is a consideration of depreciation while calculating the expenditure
Explain how the rate of economic growth influences investment
If there is an increase in real GDP, firms will need more capital in order to meet the increased demand. Therefore, an increase in GDP causes investment to rise, and an increase in investment causes GDP to rise. This is called virtuous circle.
Explain how business confidence + expectations influence investment
If a business expects to sell more (expect more profit and demand in the economy) in the future they are more likely to invest today. Similarly if a business confidence is high, eg if economic growth is likely to be sustained, then firms are likely to invest
Explain how animal spirits influence investment
Term ‘animal spirits’ was coined by John Maynards Keynes and describes the instincts and emotions that may determine whether or not firms decide to invest. Given the degree of uncertainty in which an economy operates many decisions abouth wether to invest are taken as a result of animal spirits
Explain how demand for exports influences investment
Significant + sustained increased demand for a countries goods from abroad is likely to stimulate investment. However, some firms are reluctant to export because of rules, regulations and other difficulties involved in international trade
Explain how intrest rates influence investment
If intrest rates rise, investment tends to fall because it costs more to borrow the money to invest. However, a rise in intrest rates may not deter investment if a business thinks it will still be profiable or if they’re funding investment from retained profit.
Explain how access to credit influences investment
Low intrest rates do not necessarily mean that loans are readily available. Banks may not be willing to take risks in their lending thus not lending business money to invest.
Explain how Gov regulations influences investment
If Gov relaxes planning restrictions, firms are more likely to invest in building projects.
Define the trade cycle +
Explain how Government spending might change at different stages of the trade cycle.
Trade cycle= describes how the economy tends to exhibit recurring trends in economic growth rates. Booms tend to be followed by economic slumps or slowdowns, which tend to be followed by recession, before the economy moves into the recovery phase, and then back into a boom.
During a downturn in economic growth, Gov expenditure increases as for example expenditure on welfare benefits is higher.
Gov spending in a recession as Gov spending increases on out-of-work benefits.
Gov spending is less in a boom, as govenment spending on welfare benefits decreases
Define the fiscal policy + how it influences Gov expenditure
Fiscal policy= The use of Gov expenditure + taxation to influence the level of economic activity
Gov may deliberately manipulate total spending in the economy by spending more itself. This is called discretionary fiscal policy.
Define Net Trade
The difference in VALUE between a country’s exports of goods and services and its imports:
Net Exports = Exports – Imports.
Explain how real income influences the trade balance
f incomes within an economy rise, theres a reduced incentive for domestic firms to export as they sell their goods +services in the domestic economy.
In addition, higher real income leads to an increased demand for imports, depending on the value of the marginal propensity to import.
Define how exchange rates influence the trade balance
If the exchange rate rises against other currencies, net exports are likely to fall as exports become less competetive + imports become more competetive in the domestic economy.
However, in the short run a strong exchange rate might increase the value of exports and decrease value of imports. The reason for this is that the demand for exports and imports is price inelastic in the short run as spending patterns dont adjust quickly to price changes.
Define how the state of world economy may influence the trade balance
The value of exports of a country is heavily dependent on growth rates around the world
Explain how the degree of protectionism may influence the trade balance
If there is high tarrifs (tax on imports) or other restrictions on trade, firms find it difficult to export to certain countries
Explain how non-price factors may influence the trade balance
Demand for exports + imports may be influenced by factors other than price .
These include:
Quality+design, reliability, after-sales service, transport costs
Define the trade balance
The difference between the VALUE of exports and imports.
Define SRAS
Short run aggregate supply (SRAS) is the relationship between planned national output (GDP) and the general price level. We assume that productivity and costs of production and the state of technology is constant in the short run when drawing SRAS.
Which way does the SRAS curve slope
The SRAS curve is upward sloping
The SRAS curve shows the positive relationship between the price level and output.
What causes shifts in SRAS?
Rise in wages - left
Fall in cost of materials - right
Fall in business tax - right
Rise in value of the pound - right
Rise in productivity - right
Whats the difference between classical and keynesian approach to economics
The Classical model stresses the importance of limiting government intervention and striving to keep markets free of potential barriers to their efficient operation. Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets.
What does the classical LRAS curve show + why
A vertical line (i.e it is perfectly inelastic). LRAS assuems that all resources are variable.
In the classical view, a shift in the AD curve has no impact on real output since the AS curve is perfectly inelastic in the long run if the economy is in equilibrium
What does the Keynesian LRAS curve show+ why
Horizontal line curving into a vertical line
Suggests that output can be increased without a significant increase in costs (that is, the AS curve isn’t vertical). In this case there’s spare capacity which implies that there’s unused resources in the economy. Therefore according to the Keynesian view, an economy can be in equilibrium and also have spare capacity and so unemployment + recession won’t disappear without gov intervention
Factors influencing SRAS (4)
Change in cost of raw materials
Change in exchange rates
Change in tax rates
Change in level of tariffs
Factors influencing LRAS
Technological advancements
Relative productivity changes
Education and skill changes
Changes in Gov regulations
Demographic changes and migration
Competition policy (if gov makes it easier to set up and run a new business from laws)
Changes in minimum wage
what is the fraction of each part of AD
C- 2/3
I=<1/5
G=1/5
X=<1/3
M=>1/3
