3: The Macroeconomic enviroment Flashcards
What are the different measures of National Income?
GDP: Value of goods and services produced WITHIN an economy.
GNP: GDP + Net property income.
National Income: GNP - Depreciation
Problems with the assumption that increase in National Income is a measure of increase in living standards?
Not all valuable goods are bought at market value.
No distinction between consumer and capital goods.
Economic growth may be caused by population increases & not measure environments & living standards impact.
Could be due to inflation.
What is full employment national income? Why is it caused? And what happens after it?
When Aggregate supply becomes vertical and cannot increase any further. This is due to the country using all of its resources and being unable to supply further.
Any further increases in demand will lead to inflation.
What are the injections vs withdrawals within the Circular flow of income?
Injections: Investments, Government spending, Exports.
Withdrawals: Savings, Taxation, Imports.
What stimulates aggregate demand?
Injections.
How to calculate change in national income using the Multiplier?
1/(1-MPC) x Injection.
What factors can affect levels of exports?
Competitiveness of domestic industries.
Income in foreign countries.
Rate of economic growth in foreign countries.
Exchange rates.
What stimulates aggregate supply?
Increased injections in technology & capex, or incentives for firms to employ workers. (supply-side policies)
Demand management vs Supply side polices: Which leads to price rises/falls.
Demand Management leads to increased prices (Inflation) (causes shortages which leads to price rises)
Supply side policies lead to price falls. (Causes surplus’s which leads to reduction in prices)
How do we calculate consumer spending?
C = A + BY
A = Autonomous consumption (Consumption regardless of income)
B = Marginal Propensity to Consume. (Proportion of income people will spend on consumption)
Y = National Income.
How to calculate national income?
Consumption + Injections = Income.
How to calculate National Income (Y) with given consumption equation & Injections?
Step 1: Expand ( A + MPC * Y) + Injections = Y
Step 2: Add Autonomous Spending & Injections & bring (MPCY) to the other side of equation.
A + Injections = Y - (MPCY)
Step 3: Simplify equation: A+Injections = ((1-MPC)*Y))
Step 4: Solve for Y: A+Injections / (1-MPC) = Y
What are the economic objectives of society?
Economic growth: Increases in National Income per head.
Low inflation
Low unemployment
Balance between exports and imports (Balance of trade): Imbalance puts pressure on currency.
What are the problems of high inflation?
Interference with price mechanism: Rising prices from inflation rather than high demand.
Redistrubution of income & wealth: Borrows gain as value of repayments fall, Savers suffer as purchasing power is reduced.
Adverse impact on balance of payments: Exports become relatively more expensive while imports become cheaper.
3 tools to help governments achieve economic objectives?
Fiscal policy: Government spending & Taxation.
Monetary policy: Interest & Exchange rates & money supply.
Supply side policies: Capex.
Responses to trade cycle?
Boom: Reduced spending (Budget surplus), Increased taxation, increased interest rates.
Downward phases: Increased spending (Budget deficit), Tax cuts, Reduced interest rates.
What are inflationary / deflationary gaps?
Inflationary: Where level of planned AD is above level needed to assure full employment.
Deflationary: Level of AD is below the level needed to assure full employment.
What are the causes of inflation?
Demand pull inflation: Inflationary gaps.
Cost push: When cost of production increases even though they are not in short supply. (Can be caused by trade unions & Import costs)
Expectations of inflation can actually bring inflation. (Increased wage demands)
Supply of money: The general price level of goods and services is proportional to the money supply in an economy
What could be observed when a countries rate of economic growth slows?
An increase in inventory levels: As demand begins to drop, more goods will be held as inventory.
What is likely to occur at a depression phase of the trade cycle?
An economy will be stuck at low levels of national income, giving rise to a deflationary gap.
What is stagflation?
When economic growth is low/negative and inflation is high.
How to calculate index numbers fixed & chain base?
Fixed = New year / Original year.
Chain base = New year / Last year
How to calculate a deflated base amount? & % change between two?
Current value x (Base index number / Current index number)
(Delated value - Original value) / original value = % Change.
Differences between base weighted index vs current weighted index?
Base uses base quantities and varying prices.
Current uses current quantities and varying prices.
