Circular flow and quantitative elements Flashcards
what is the aim of any goods economy
to satisfy its populations wants and needs
welfare and prosperity of a country depend on what
the volume of production in it
final goods and services
all manufactured goods and services that satisfy human wants and needs
(have form utility)
capital goods and services
all goods and services not directly consumed. help manufacture other goods and other services
LEARN CIRCULAR FLOW PG 3 BOOK 2
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Definition of final consumption expenditure by households (C)
households constantly buy goods and services. they spend money trying to satisfy their unlimited needs and wants
total of expenditure in a given year is known as
consumption expenditure
importance of expenditure by households (5)
- consume goods and services but also provide factors of production
- the more they earn the more they spend
- consumption spending of households accounts for about 64% of total spending in the economy
- makes up a huge percentage of GDP
- consumption is very important driver of economic growth
Definition of final consumption expenditure by government (G)
indicates how the government uses its income to finance goods and services needed by the public sector
what does final consumption expenditure by the government include (2)
- the spending of all departments of central, provincial and local government
- consumption expenditure on services rendered to the communities
3 divisions of government expenditure
functional division
administrative division
financial division
what is the importance of final consumption expenditure by the government (4)
- gov provides the legal framework for the economy to operate frequently
- A lot of the spending is on enforcing laws that entrench private ownership of property
- enables the market economy to function well, drive economic growth and create jobs
- gov is responsible for important injections into the circular flow
what two parts does gross capital formation consist of in the national accounts
- gross fixed capital formation (production and purchasing of capital goods)
- change in inventories
when does gross fixed capital formation take place (2)
- when there is an increase in the country’s capital stock
- when money is contributed towards the economy’s ability to manufacture consumer goods and services
what does the word gross mean in gross fixed capital formation
it means that no provision has been made for consumption of fixed capital
in the circular flow, investment takes place in which areas
- private households
(family savings in the banks are borrowed by firms for investment purposes) - business sector
(businesses invest their profits in the production process) - state
(gov purchases of goods and services are intended to create future benefits) - foreign sector
(contributions made in the form of injections)
what is the importance of gross fixed capital formation? (5)
- capital formation is important for economic growth
- increase in capital formation will expand the production
- increase in capital formation through investment in the private sector will reduce the unemployment rate in the economy
- Will increase the income and welfare of workers, resulting in an increase in the economic growth rate of the country
- improved infrastructure will ensure that the distribution of goods and services through the existing markets will be easier
what are national account aggregates
methods that are used to determine the value of economic activity
what are three different ways that economic activity is measured
- production method
- income method
- expenditure method
how does the production method calculate gdp at basic prices
adds final values of all goods and services
how does the income method calculate gdp at factor prices
adds all income earned by owners of factors of production
how does the expenditure method calculate gdp market prices
Adds spending of four main economic sectors
what is the four main economic sectors
consumption
government
investments
exports (minus imports)
what is the production (output value) method
method whereby we determine the gdp at basic prices by adding the final values of all goods and services
what is gdp at basic prices referred to as
Gross Value Added (GVA)
what is the income method
method where we determine the gdp at factor prices by adding all the income earned by the owners of the factors of production
what is the expenditure method
a method whereby we determine the gdp at market prices by adding the spending of the four main sectors of the economy - household (C), government (G), businesses (I), and foreign sector (X-M)
how do you calculate the difference between GDE and expenditure on GDP
GDE= C+I+G
calculate expenditure on GDP
C+I+G+(X-M)
what is the difference between GDE and GDP
GDE includes spending on imports and excludes spending on exports. GDP includes spending on exports but excludes spending on imports
what are the most important determinants of the end values of the circular flow aggregates
taxes and subsidies
how do you work out GDP at basic prices
GDP at basic prices = GDP at factor cost - other taxes on production - other subsidies on production
what do basic prices include and exclude
includes taxes on production and excludes subsidies on production
what do subsidies on production include
employment subsidies and subsidies paid to prevent pollution
how do you calculate GDP at market prices
GDP at market prices = GDP at basic prices + other taxes on production - subsidies on products
what does net operating surplus equal to
surplus after taxes
what does net income equal to
income after tax
what is net fixed capital formation equal to
after consumption of fixed capital (depreciation)
what are net exports equal to
exports - imports
difference between GDP and GNP
GDP relates to the income and production happening within the borders of a country
GNP relates to the income or production by the citizens of the country
what are nominal figures also known as
market or money value
or
national product at current prices
how is the nominal value of production calculated
by multiplying the volume of the final goods and services by their prices
has inflation been taken into consideration with regards to nominal figures
no
has inflation been taken into consideration with regard to nominal figures
no
what are real figures also known as
national product at constant prices
has the rate of inflation as expressed by the consumer price index (CPI) been taken into account with regards to real figures
yes
what are the nominal values of national product adjusted for the price increase
real values of production
what is real national product
the national product expressed in prices applied in a certain base year
nominal GDP is the same as
GDP at current prices
real GDP is the same as
GDP at constant prices
when calculating the rate of economic growth which figures of GDP must you use
only use the figures for real GDP
How do you calculate the GDP at constant prices for a particular year
multiply the quantity by the price of the base year.
Rate of economic growth calculation
Rate of economic growth (year t)= (real GDPt / Real GDPt-1 -1) x 100/1
