Chap 6 Flashcards
what is the aim of macroeconomics ?
To achieve high economic growth
To reduce unemployment (ways towards full employment)
To attain stable prices
To reduce budget deficit and balance of payment (BoP) deficit
To ensure fair distribution of income
in short: full employment , price stability , economic growth and fair distribution of income among citizens
what is the national income accounting
its an accounting record of the level of economic activities of an economy. It is a measure of an aggregate output , income and expenditure in an economy
what is the national income accounting
its an accounting record of the level of economic activities of an economy. It is a measure of an aggregate output , income and expenditure in an economy
what are the 2 approaches to measure the national income accounting?
- gross domestic product
- gross national product
what is Gross Domestic Product (GDP)
its the total value of currently produced final goods and services that produced within a country’s boundary during a given period of time.
- intermediate goods are not included
- it measures current production only
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what is gross national product ? GNP
its the total value of final goods and services currently produced by domestically owned factors of production in a given period if time, usually one year, irrespective of their geographical locations.
what is net factor income
its the income earned from abroad - income paid abroad.
If NFI >0, then GNP > GDP
If NFI<0, then GNP < GDP
If NFI =0, then GNP =GDP
what are the 3 approaches to measuring GDP and GNP?
- product value added approach
- expenditure approach
- income approach
what is the product approach ?
GDP can be calculated by adding the market value of goods and services currently produced by each sector of the economy. but only values of final goods so that there wont be any double counting, by including intermediate goods which can be components of a final product.
1. taking only final value
2. taking the sum at each production stage
what is the expenditure approach?
GDP is measured by adding all expenditures on final goods and services produced in the country by all sectors of the economy.
GDP = C+G+I+Nx (X-M)
consumption, government purchases, investments, net exports.
what is the income approach?
GDP is calculated by adding all the incomes accruing to all factors of production used in producing the national output. minus subsidies and transfers
what are the limitations of GDP measurement ?
- Definition of a nation: its hard to find a limit to what is nation cz there is also the income of the nationals abroad.
- Stages of economic activities: its difficult to determine whether the income should be calculated at the stage of production, distribution or consumption. the objection needs to be clear.
- Transfer payments
- Underground economy ; black market , there is the value of goods in the illegal market
- Inadequate data·
- Non-monetized sector: self consumption or exchanged for other goods
- Valuation of depreciation: reduction in value over time or wear and tear.
- Changes in price levels: money’s value keeps on changing
- No focus on quality: its difficult to account for quality of goods
what is Nominal GDP?
the value of all final goods and services produced in a given year when valued at the prices of that year
it refers to GDP that is not adjusted for inflation.
if prices of a product doubles then the GDP also doubles.
(PX x Qx) + (Py x Qy)
what is real GDP?
its the value of final goods and services produced in a given year when valued at the prices of a reference base year.
Q x the P of the same product but of the base years.
what’s the GDP deflator ?
its a measure of inflation. its the ratio of nominal GDP in a given year to real GDP of that year. it reflects whats happening to the prices.
(nominal / real ) x 100. we can compare it to the base year and see how much it has increased.
what is the consumer price index?
it measure the average changes in prices paid by consumers for a representative basket of good and services. compares the cost of something in the current and base year.
CPI= (cost of current / cost of base year) X 100
what are the key differences between GDP deflator and CPI?
GDP:
1. measures all
2. only domestically produced goods
3. includes variable weight of basket
CPI:
1. measures only consumer bought
2. includes imported goods
3. fixed weight of goods
what is business cycle
it refers to the recurrent ups and downs (fluctuation) in the level of economic activity. the fluctuations are short term and they vary in duration and intensity.
what are the 4 phases in the business cycle?
- boom or peak : phase in which the economy is producing the highest level of output. its very unsustainable
- recession: economic performance starts to decline, unemployment problem rises
- depression : the lowest point and there is an excessive amount of unemployment
- recovery: economy starts to grow and recover
what are the 2 macroeconomics problems?
- Unemployment
- inflation
about unemployment problems
it refers to the people who are in a specific age, are part of the labor force without a job and are actively searching for one
what are the types of unemployment?
- frictional: season, voluntary switch , entrance to labor force or re-entrance
- structural : mismatch between skills or locations of job seekers and the requirements or locations of the vacancies
- Cyclical : results due to absence of vacancies, there arent a lot of demand
what is inflation?
its the sustainable increase in the general or average price levels commodities. its measured by a price index
1. the increase is sustainable
2. it must general for everything
what are the causes of inflation?
- demand pull inflation : a rapid increase in demand for goods and services then supply
- cost push : decline in supply
what are the economic effects of inflation?
- reduces purchasing power of money
- the nominal rate for loans will increase
- reduces investment
- redistributes wealth among individuals (debtor)
- hurts those with fixed incomes and pension
- its associated w variability of prices which makes firms change their price list
what is budget deficit ?
its when the public saving which is whatever is left from the tax revenue is negative. when the gov spends more than it collects in taxes in becomes a deficit.
what is gov debt
its the accumulation of what the gov borrowed from internal and external borrowing because there is a budget deficit
what is a trade deficit ?
the balance between savings+investments and trade balance is negative
we are net borrowers and the exports are less than the imports
what is a trade surplus ?
the balance between savings + investments and trade balance is positive
we are net lenders and we export more than we import.
what is a balanced trade?
its when the balance between S-I and trade balance is 0
imports = exports
what are the 2 macroeconomic policy instruments ?
- Monetary policy
- Fiscal policy
what is monetary policy about?
its the adoption of a suitable policy regarding the control of money supply and the management of credit, which will help control inflation. its often administered by a central bank. its a flexible policy tool that can applied during recession and boom
what is fiscal policy ?
it involves the use of government spending , taxation , and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand , output and employment.
it can have both short and long term influences. fiscal decisions have effect on households and businesses. Its mainly used to achieve internal and external balance
what are the major functions of fiscal policy
- Allocation: determine how funds will be allocated
- distribution: they are mainly through progressive taxation and targeted budget subsidy
- stabilization : for the purpose of budgeting is to provide stable economic growth
- development : financing various projects and carrying them out using budgeting finance.
