Chapter 4 - Economic Principles Flashcards
What are the three main groups that interact with the economy?
- Consumers (maximize satisfaction/well-being)
- Firms (max profits)
- Governments
What is the Expenditure Approach of measuring GDP?
Looks at total spending on “final goods” and services:
GDP = C + G + I + (X - M)
What is the Income Approach to measuring GDP?
Looks at total income from producing goods & services:
- Wages for Labour
- Rent for land
- Interest for Capital goods
- Profits for entrepreneurs
What 3 factors can lead to GDP growth?
- Increases in population
- Increases in capital stock (equipment and education)
- Technological improvement
What leads to increased output per worker?
Higher savings (increased capital stock) and technology.
What phase has stable inflation, strong stock market activity, and increasing profits, inventories, and jobs?
Expansion
In what phase does demand outstrip supply, and has high inflation and interest rates?
Peak
What phase has declining economic activity, reduced production and falling employment?
Contraction
What phase has falling interest rates (along with a bond rally), falling inflation and stock price rally?
Trough
What phase has high but flat unemployment, and increasing production?
Recovery
Money supply, average work week hours and commodity prices are what type of infocator?
Leading
The inflation rate, business loans and interest, and private sector plant/equipment spending are what type of indicator?
Lagging
Personal income, GDP, industrial productions and retail sales are what type of indicators?
Coincident
Manufacturers’ new orders, stock prices and housing starts are what type of indicator?
Leading
What is a “soft landing” vs a recession?
Recession is major decline in GDP, while soft landing has significantly slowed growth (but not negative).
What is the “participation rate”?
The share of working-age population in the workforce.
What factors can cause the unemployment rate to rise?
Number of employed falls or number of people entering the workforce rose (or both).
What type of unemployment is part of a healty economy?
Frictional
What type of unemployment means workers cannot find jobs due to lack of skills?
Structural
What type of unemployment rises when the economy weakens and falls when the economy strengthens?
Cyclical
What 5 factors determine interest rates?
- Demand/Supply of capital
- Default risk of central Gov
- Foreign interest and exchange rates
- Central bank creditability
- Inflation
What are the 3 functions of money?
- Medium of exchange
- Unit of account (price)
- Store of value
What is the formula for inflation rate?
100 x (Current CPI - Previous CPI) / Previous CPI
What is the “output gap”?
Difference between real GDP and potential GDP.
What is potential GDP?
The maximum level of real GDP that the economy can maintain without increasing inflation.
What is a negative output gap? And how does it affect inflation?
When actual output is below potential output. There is “spare capacity”. Inflation falls or stays the same.
What is a positive output gap and how does it affect inflation?
Occurs when actual output is above potential, increasing inflation. (Scarce labour)
What is demand-pull inflation?
When there is a positive output gap there is strong consumer demand for goods which increases inflation.
What is cost-push inflation?
When the cost to produce output increases. (Such as higher inputs and wages).
What does the Phillips curve say about disinflation?
When unemployment is low, inflation is high.
When unemployment is high (or growth is slow) inflation is low.
What is the sacrifice ratio?
The extent to which GDP must be reduced in order to see a 1% decrease in inflation.
What is deflation vs disinflation?
Deflation occurs when change in CPI is negative year over year.
Disinflation is a slowing in the rate of inflation.
What are the two components of a country’s balance of payments?
Current account - exchange of goods and services between citizens and foreigners, plus foreign aid.
Capital & financial account - investment flow between citizens and foreigners.
