Chapter 9 Flashcards
Economics =
The allocation of scarce resources
Micro economics
- Individuals and firms
- Demand, supply, markets
- Firms, employers, employees, individuals
Macro economics:
- the whole economy
- inflation, unemployment, economic growth
- government
Macro economics is made up of:
Production
Consumption
Income
Circular Flow of Money
- Housholds spend income with businesses
- businesses provide income to households
- households provide labour to businesses
- businesses provide goods and services to households
Aggregate Demand
Is the total size of the economy = the total spending of all households in a period of time
Withdrawals in the circular flow on money:
(Make the economy smaller)
- savings
- profits
- taxes
- imports
Money being taken out of the economic flow of funds
Injections into the circular flow of funds (makes the economy bigger)
- Borrowing
- government spending
- exports
Grow the economy:
- increase injections (eg government spending)
- reduce withdrawals (eg savings)
Slow economic growth
- reduce injections
- increase withdrawals (eg increase taxation)
Saving
Is a withdrawal
Any amount or money that is not being spent
6 factors affecting savings:
- interest rate
- job security
- availability of credit (eg. access to credit cards)
- contractual saving (eg. Pension scheme)
- tax relief
- inflation
2 Types of investments
This is an injection:
1. Capital items
2. Increase in inventory
5 factors affecting investments:
- new or replacement investment
- expected future returns
- business confidence
- interest rates (low interest rates means saving is not interesting, so will encourage investment)
- government policy
Net investment =
New investment - replacement investment
Factors that help grow the economy:
- encourage borrowing
- reduce interest rates
- reduce government regulation on borrowing
- make it easier for banks to lend
Slowing economic growth:
- increase interest rates, to encourage people to save
- make borrowing more difficult, high rates
Savings - factors affecting saving
- type of withdrawal
Factors:
- interest rates
- income
- job security - confidence
- availability of credit
- contractual saving
- tax relief
- inflation
Inflation
When you can buy fewer goods than before.
Real value of your money
It means that inflation causes prices to go up.
So you can buy less with your money.
Investment - examples
- it’s an injection
Examples:
- increase in inventory or capital items
Factors affecting investment:
- Government policy
- new or replacement investment
- expected future returns
- business confidence
- interest rates
Net investment =
New investment - replacement investment
Grow the economy:
- Increase injections
- encourage borrowing
- discourage savings
- encourage spending
- reduce interest rates
Slow economic growth
- increase withdrawals
- discourage investments
- discourage borrowing
- increase interest rates
- encourage savings
Monetary policy =
One approach to managing an economy by a government:
- increase or reduce interest rates
- make lending easier or harder
- buying and selling currencies to change FX rates.
- imposing or removing trade barriers
If interest rates increase:
- decreased investment
- borrowing more expensive and decreases
- attraction of foreign funds
- effects on the exchange rate
- inflow of foreign funds, leads to increased demand for the currency
- lead to decreased inflation rate
- decrease in asset value
- affect on sales; sales for which the consumer needs to borrow will fall
Import leads to the payment:
- leaving the country
- withdrawal
Export leads to payment:
- coming into the economy
- it’s an injection
Balance of payments:
- Imports and exports go through this.
= difference between the value of imports and exports
3 types of accounts on balance of payment:
- current account
- capital account
- financial account
What’s included on the current account of the balance of payment:
- visible trade: goods
- invisible trade: services, overseas income, transfer of money from abroad
What’s included on the Capital Account on the Balance of Payments:
- buying and selling of fixed assets (for example buying machinery abroad)
What’s included on the Financial Account on the Balance of Payment:
- overseas investment (buying shares overseas, setting up a factory abroad)
- Reserve assets (gold and foreign currencies held by the government)
- A balancing item
Balancing item on the balance of payments:
Current account + capital account + financial account = ZERO
When exports > imports
Surplus on the balance of payments
When imports > exports
Outflow if funds; deficit on the balance of payments
Imbalance in the current account of the balance of payments:
- import penetration
- export performance
Reasons for import penetration:
- exchange rate makes overseas products appear cheaper
- imports are more competitive on price
- imports being more competitive on non-price factors
Reasons for export performance:
- the exchange rate
- price and non-price competitiveness against exports
- willingness and ability of domestic producers to export
How does a government manage the Imbalance in the current account on the balance of payments
- do nothing
- actively affect exchange rates
- introduce trade barriers
When a government does nothing to change the imbalance on the current account on the balance of payments:
- exports are smaller, imports are bigger
- more payments leaving the country
- demand for the currency falls
- price of the currency falls
- imports will start to appear dearer
- exports start to appear cheaper
Leads to an Equilibrium
How governments affect the exchange rate of their currency:
- buying foreign currency:
For example: - China bought lots of USD to keep their own currency cheap, this increased their exports, which lead to money coming into the country and growing the economy.
Examples of trade barriers:
- High tariffs to import goods
- introduce quotas
Narrow money =
M0 - notes and coins in use and amounts within accounts held at the central bank
Broad money =
M4 - Notes and coins within circulations and all private sector bank accounts
Consumption =
The amount of goods and services demanded in the economy
Factors affecting consumption =
- income
- previous or future pay; some people start consuming more when they know their income is going to increase.
- windfall gains or losses (winnings, gifts, inheritance v. Fraud and burglary)
- Government policy, like monetary policy and fiscal policy
MPC =
Marginal Propensity to Consume =
Change in consumption / change in income
Wealth =
Market value of all assets - any money owed
