4. THE MACROECONOMY Flashcards
National income
Total monetary value of all goods & services produced by a country within a given time period
Represents economic activity & living standards
Goods must not be counted twice
Considers net property income from abroad & depreciation
GDP
Total ouput produced in a country
Types of GDP
Nominal GDP & real GDP
Nominal GDP
GDP at current market prices
Real GDP
GDP adjusted for inflation
GNI
GDP + income earned from abroad
Uses of GDP
Measures economic activity within country’s bonrders
not accounting for income earned from abroad
GNI significance
Reflects total income of a country
NNI
GNI - depreciation
Significance NNI
Accounts for loss of value in capital goods over time, giving more accurate measure of sustainable income
Market prices
Prices at which goods and services are sold, including taxes and subsidies
Basic prices
Prices excluding indirect taxes and subsidies
Adjustment process
Subtract indirect tax
Add subsidies
Adjustment reflects the real cost of production in an economy
Gross values
Measure of value of goods & services
Include depreciation of capital (e.g machinery, buildings)
Net values
Subtract depreciation from gross value to show the true value of an economy’s productive capacity
Closed economy
No international trade
Flow of income between households, firms & gov
Open economy
Includes international trade, w/ income flowing between households, firms, gov, foreign economies
Injections in economy
Additions to country’s income flow
Investments
Government spending
Exports
Leakages in economy
Withdrawals from country’s income flow
Savings
Taxes
Imports
AD definition
Total demand for goods & services in an economy at diff price levels within certain period
Formula AD
C + I + G + (X-M)
Components of AD
C (Consumption)
Spending by households on goods and services.
I (Investment)
Spending by firms on capital goods (factories, equipment)
G (Government spending) Government expenditure on public goods and services
(X - M)
Net Exports (Exports - Imports), representing the trade balance
Causes of shift in AD curve
Increase in AD
Rise in consumer confidence
Gov spending
Business investment
Decrease in AD
Fall in any of the above
Determinants of AS
Short run
- changes in input cost
- labour productivity
- wage rates
- capital utilisation
Long run
- technological advancemnets
- labour growth
AS definition
The total supply of goods and services that firms are willing to produce at different price levels
Causes of a shift in the AS curve
SRAS: Changes in input prices (e.g., wages, raw materials), supply shocks.
LRAS: Changes in resources (e.g., labor force, capital), technological progress
Movement along AD/AS
Caused by a change in the price level
Shift in AD/AS
Caused by changes in factors other than price level (e.g., government policies, external factors)
Effects of shifts in the AD curve
Rightward: Increases output and price level (inflationary pressure)
Leftward: Decreases output and price level (recessionary pressure)
Effects of shifts in AS curve
Rightward (increased productivity)
Decreases price level, increases output
Leftward (supply shocks)
Increases price level, decreases output
Economic growth
Increase in an economy’s output over time, measured by increase in real GDP
Measurement of economic growth
Real GDP growth- adjusted for inflation to reflect actual increases in the economy’s output
Causes of economic growth
Increase in capital
Technological progress
Improvements in labour
Increased trade
Positive consequences of economic growth
Higher living standards
Lower unemployment
Greater gov revenue
Negative consequences of economic growth
Environmental degradation
Inequality
Inflationary pressure
Unemployment
The condition where individuals who are willing and able to work cannot find employment
Frictional unemployment
Temporary unemployment due to people moving between jobs
Structural unemployment
Mismatch of skills and jobs, often due to technological change
Cyclical unemployment
Due to economic downturns (e.g., recession)
Seasonal unemployment
Due to changes in demand during different times of the year
Negative consequences of unemployment
Lower living standards
Reduced gov tax revenue
Social costs
Increased poverty & inequality
Inflation deflation disinflation
Inflation: A general increase in the price level of goods and services.
Deflation: A decrease in the general price level.
Disinflation: A decrease in the rate of inflation
Consumer price index
A measure of the average change in prices paid by consumers for goods and services
Demand-pull inflation
When demand > supply
firms struggle to meet increased demand, imbalance cause price to rise
Cost-push inflation
When cost of production increases, firms must increase price to maintain profits
Positive consequences of inflation
Can reduce real debt
Signal economic growth
Negative consequences of inflation
Reduced purchasing power
Uncertainty
Income redistribution
Higher interest rates
