AD and AS Flashcards
Give the equation for A.D.
AD=C+G+I+(X-M)
Consumer expenditure+government spending+Investment from firms+(exports-imports)
Define Aggregate Demand
The total demand for goods and services produced in an economy at a given price level in a given period of time
Define GDP
The total value of goods produced within an economy over a given time period
Define aggregate supply
Aggregate supply measures the volume of goods and services produced within the economy at a given price level
What determines the slope of the short run aggregate supply curve
The degree of spare (underutilised) capacity in the economy
What is a negative output gap
When you’re not running at full capacity, so there is room for GDP improvement
What is a positive output gap
When the economy approaches full capacity, so any increase in aggregate demand only results in inflation
What is the multiplier effect
The multiplier is the process in which an initial change in aggregate demand can have a much greater impact on real GDP than the original increase
Why does the multiplier effect occur
Because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending as one person spending is another ones income
How is economic growth measured
It is measured in terms of the rate of change of Real GDP
Name three advantages of economic growth
Better quality-of-life, employment effects, government finances improved, increased profits for firms leads to increased growth and business confidence.
Name three disadvantages of economic growth
Opportunity costs of using resources, inflation risk, environmental effects, worse income distribution, negative balance of payments
How is GDP calculated
What totalling up the output, income or expenditure of the country
Name the difficulties in measuring GDP and it’s reliability for using it as a measure of economic growth.
Informal economy (blackmarket), increasing population, pouncing income/expenditure in the circular flow of income twice, GDP does not account for inflation, GDP is largely calculated from tax revenue so things not declared for tax are not accounted for, GDP does not account for how income is distributed
name the three withdrawals from the circular flow of income
Taxes, savings, imports
Name the three injections into the circular flow of income
Grants/subsidies, loans, exports
Define unemployment
The unemployed are people who are registered as able, available and willing to work and are actively searching for work
Name five causes of unemployment
Frictional unemployment, structural unemployment, cyclical unemployment (demands deficient), real wage unemployment, hidden unemployment.
What is frictional unemployment
Transitional unemployment due to people moving between jobs e.g. redundant workers, workers entering the labour market for the first time
What is structural unemployment
Unemployment occurs when there is a long running decline in demand in an industry leading to a reduction in employment perhaps because of increasing international competition. This can cause a mismatch of workers skills and need for training
What is cyclical unemployment
Involuntary unemployment caused by lack of demand for goods and services. Can because the economic downturn causing firm closures and work layoffs and redundancies
What is real wage unemployment
Economists believe minimum wage risks creating unemployment in industries where international competition is severe from low labour cost nations
What is hidden unemployment
Not included in unemployment statistics, many become discouraged workers have stopped looking for work
What are the two methods of measuring unemployment
Claimant count and the Labour Force survey
What is the claimant count
A headcount of people who are claiming unemployment benefit
What is the labour force survey
People without a job but who have looked for work in the past month and are able to start work next two weeks. Measuring by taking a survey sample of households
Which method for measuring unemployment tends to be higher
The Labour Force survey
What is inflation
Sustained rise in the overall price level
Name some costs of inflation
Prices change (can cause confusion), value of savings/pensions decrease, inflationary noise (it gets hard to keep track of prices and understand what’s going on), fiscal drag (incomes can be pushed into higher tax brackets), loss of international competitiveness
Name some benefits of inflation
Encourages spending, encourages production, workers may like pay rises (psychological effect), easier to reduce real wage/interest rates, erodes value of debt
What is a current account deficit
When more money is leaving the country and entering it, as a result of sales of its exports, income and current transfers from abroad being less than imports and current transfers going abroad.
What are the two ways of measuring inflation
The consumer price index and the retail price index
What is demand pull inflation
Increases in the price level caused by increases in aggregate demand
What is cost push inflation
Increases in the price level caused by increases in the costs of production
