3.2.2 How the macroeconomy works: the circular fow of income, aggregate demand/aggregate supply analysis, and related concepts Flashcards
What data is used to measure the performance of an economy?
GDP (Gross domestic product) - measure of economic growth through national output which is all the goods and services produced by an economy
Define boom, recession/slump and depression
Boom - high economic growth
Recession/slump - negative economic growth for 2 consecutive quarters
Depression - sustained economic downturn for years
How is the change in GDP measured?
change in GDP / original GDP x 100 (%)
Define nominal GDP
Figure unadjusted for inflation - misleading as it presents GDP being higher than it is
What is real GDP per capita?
Indicates the standard of living in a country
Formula: total GDP / population
Define GNP and GNI
GNP - (product) Total output of the citizens of a country whether or not they’re a resident
GNI - (Income) GDP + net income from abroad - investments and assets owned abroad minus income earned by foreigners on investments domestically
Define real GDP
Value of GDP adjusted for inflation e.g. if the economy grew by 4% and inflation was 2%, real GDP is 2%
What is the circular flow of income concept?
National output = national income = national expenditure
Explain the circular flow of income
The economy is made up of firms and households
firms produce goods / services which makes up the national output
Households provide labor, land and capital that firms use to produce national output - money paid for these factors of production is the national income
Households spend the money they get from national income on goods/ services and the value of this spending is national expenditure
What is full employment income?
At full employment, national income, output and expenditure = full employment income
What is the difference between injections and withdrawals into the circular flow of income?
Injections: Exports, investments and gov spending
Withdrawals: Imports, savings, taxes
When is there an equilibrium in the economy through the circular flow of income?
when injections = withdrawals
What is the effect of changes in injections and withdrawals on national income?
injections > withdrawals - expenditure > output so firms will increase output so national output, income and expenditure increase
withdrawals > injections - output > expenditure so firms will reduce output so national output, income and expenditure will decrease
What is the multiplier effect?
Due to an injection, the actual change in national income > initial injection
Define wealth
Total value of all the assets owned by individuals or firms in an economy