4.2.2 Flashcards
What is National Income
National Income is used to measure the size of the economy. It gives an indication as to how the economy is preforming and informs economic policy. Most common measure of National Income is GDP.
3 Ways to measure GDP
Income Measure
Output Measure
Expenditure
Nominal and Real National Incomes
Nominal- Actual income in current prices.
Real Income- NI adjusted for inflation- consistent prices
What is the Circular Flow of Income
The Circular flow of income is a basic way of understanding the interdependence between different economic agents in an economy.
We can use the Circular flow to measure national income and hence the size of the economy.
What are the Factors of production and incomes for each
Factors of production- Land Labour Capital Enterprise
Factors of Incomes- Rent Wages Interest Profit
In a free market economy the factors of production are owned by individuals who hire these facts to firms in return for factor income.
Define the two economic agents and their relationship
Households and Firms. Households own factors of Production and loan these to firms and receive factor incomes in return. Assumes that all incomes are spent which means economy is in equilibrium.
Three methods to measure the Circular Flow of Income
Income Method- Measuring factor Incomes
Expenditure Method- Measuring consumer expenditure
Output method- Goods and Services being sold to households.
These all measure same flow of income and hence are the same.
Injections and Leakages
Withdrawals- Money not passed on in the circular flow
Injections- Money that originates outside the circular flow
Govt Sector: Taxation and Govt Spending
Financial Sector: Savings and Investment
External Sector: Imports and Exports
Definition of Investment
Spending on capital goods including plant and manufacturing infrastructure
What is Equilibrium in the circular flow of income?
When injections = Leakages
Demand side economic shocks
Demand side shocks see large impact on the economy. Covid, GFS, BREXIT, Market collapse
Meaning of disequilibrium in the circular flow of income in terms of economic growth of decline
When Injections > Leakages the economy will grow
When Injections < Withdrawals the economy will shrink
AD definion
The total planned expenditure on real output produced within an economy in a given time period
AD=GDP (Expenditure Method)
Demand for individual goods (micro markets) feeds into total aggregate demand
What causes shift in the AD curve and changes along the AD curve
Contractions or Extensions along the AD curve are caused by changes in the Price Level
A shift in the AD curve is caused by a change in the size of an economy
What is an AD curve
Shows the total demand in an economy at different price levels
Components of AD
Consumption- Spending by households on domestically produced goods and services
Investment- Spending on capital goods and stock in the economy
Net Govt Spending
Net Exports
Factors affecting Consumption
Disposable Income: the main source of income is wages and disposable income is income after taxes. Higher disposable income increases consumption.
Falling U/P- more people in work means that there is higher incomes
Real Wage Growth- An increase in nominal wages are in excess to inflation
Govt Policies: Lower Taxes increases incomes
Consumer confidence- more confident consumers are increases consumption
What factors determine savings
Disposable income
Interest rates
Consumer confidence
Wealth effect
Levels of dept
changes in the welfare system
age
taxation of savings
What are savings and what is the saving ratio
Savings ratio- the % of disposable income that is saved in an economy
Savings ratio= savings//disposbale income X 100
Factors influencing borrowing
- disposable income
- Intrest rates
- consumer confidence
- wealth effect
- levels of dept
- age
What is the accelerator theory on Invst
Increase in NI leads to a greater than proportional increase in investment
What factors determine net exports
Domestic economic activity
Economic activity in export markets
Costs of procution
inflation
exchange rates
Multipler Eq
Multipler = Change NI // Change in injection
Multipler effect
a change in AD leads to a greater than proportional change in NI
Marginal Propensity to consume
The Fraction of an increase in disposable income that people plan to spend. MPC= Change Consumption // Change in Income
Define AS
Aggregate Supply- the level of real national output that firms are prepared to supply at different price levels
Difference between Short Run and Long Run Aggregate Supply
Short run- One factor of production is fixed
Long run- All Factors of production can be varied
What does the SRAS curve show
The real relationship between the price level and the real levels of supply with a positive relationship. As the economy moves towards full capacity the curve becomes steeper which reflects the fact that in the short run factors of production are fixed
Costs of production that impact all firms
- Raw Materials
- Commodities
- Energy Costs
- Interest Rates
- Subsidies
- Indirect taxes
- Business rates
- Productivity
Main determinate of SR AS
Price Level- firms aim to maximise their profit so a higher price level means a higher profit so there is an extension along the SRAS Curve.
definition of commodities with example
Commodities are unprocessed or partially processed goods and are often used an inputs in the production of other goods and services. Commodities are price elastic. Oil and Steel are commodities.
What are supply side shocks
Unexpected events which impact the supply side of the economy.
In the short run this usually means that an unexpected increase in the cost of production. COVID, Ukraine War
What is LRAS
Long Run aggregate supply reflects the normal productive capacity of an economy which is the maximum sustainable level an economy can produce at.
Key determinates of LRAS
- Quantity of FAP
- Quality of FOP
- Mobility of FOP
- Technology
- Investment
- Productivity
- Institutional structures of the economy
- Economic incentives
How does Factor Mobility impact LRAS
This is the ease for which factors of production can be used for other purposes. The more mobile factors of production the quicker resources can be allocated to maintain max output.
Occupational mobility- Between jobs
How does Ivtm Impact LRAS
Investment in the latest technology and Research and Development is capital investment and education and training is human capital.
How does productivity impact LRAS
Productivity is a measure of efficiency, rate of output, output per unit where investment in technology is key.
How do institutional structures impact LRAS
GOVT, Financial systems, Legal System enable the economy to function more efficiently
Supply side shocks and LRAS
Unexpected events which impact the supply side of the economy and so impact the productive capacity of an economy for example a natural disaster or hurricane
What is meant by short run macroeconomic equlibrium
The point where SRAS meets AD
What is meant by long run macroeconomic equilibrium
Where AD = SRAS = LRAS
Who is Adam Smith and what are the key ideas behind his theories
Key Ideas- Free Market economics, minimal govt intervention, invisible hand of markets
Capitalism- Factors of production should be owned by private individuals
Adam smiths ideas form the basis of classical economics
What are Classic AS Curves
Classic curves are liner- straight line of SRAS or LRAS
A straight SRAS indicated that cost of production is Constant in the short run and cost of production will increase at constant rates as output increases
LRAS- No trade off between output and inflation
Why do classical economists claim that demand management policies are inflammatory
If there is an increase in AD but productive capacity remains fixed then there will be upwards pressure which is called inflation on the LRAS curve.
Argument for Supply side policies
Increasing the productive capacity of the economy means the economy can now produce more. Economic growth without inflation. Classical economists argue that market based supply side policies are best.
Says Law
Supply creates its own demand- higher output leads to higher employment which leads to higher incomes which leads to increased AD.
The economy grows but the higher level of AD can be absorbed
Key principles of classical Economics
Elasticity of AS: LRAS is vertical or inelastic
Flexibility: prices and wages are flexible
Expectations are formed quickly
Govt Intervention is not neccicary and economy will always return to full employment
What was the Great Depression
A stock market crash in 1929 plunged the USA into the greatest and deepest economic crisis in history.
Classic economics was the prevailing ideology at the time but that meant that
- govt intervention wasn’t required
- Wages were too high and should just fall
- This didn’t happened and there was U/P and deflation
Who is Keynes and what are his ideas
Keynes wrote the general theory of employment internet and money in 1936
He introduced the AD equation and argued if the Great Depression had been intervened in then it would have ended sooner.
Keynesianism was widely adopted and lasted until the start of the Thatcher/ Reagan Era
What does a Kenyan AS curve look like
Keynes argued that elasticity varies along the as curve.
At low levels of output and employment AS is elastic and at full employment the AS becomes vertical
Why did Keynes argue that the economy could settle below full employment
Keynes argued that the economy could settle below full employment and would not self correct.
This is because wages would not fall because wages are stick downwards and people would not take a pay cut
Keynes said that the economy would return to full employment but in the long run Keynes said ‘we are all dead’
What did Keynes say about supply side policies
Keynesian economists do believe that supply side policies should be used once the economy reaches full capacity
They differ from classical economists on the type of market policies which should be used- interventionist rather than market based
What is Neo liberalism
Thatcher and Reagan economic ideas.
What does an all purpose AS curve look like
Reflects the consensus of both Keynes and Smith (Classic) disciplines
