Circular Flow of Income Real Flashcards
What percentage of GDP does consumption typically comprise?
Around 55%.
How much of the final value is counted in GDP
For example a farmer grows wheat and sells it to a flour mill for $10,000. The mill produces flour and sells it to the grocery chain for $20,000. The supermarket sells the flour to consumers for $30,000.Only the final value of $30,000 is counted in GDP.
What is consumption expenditure?
he market value of all goods and services purchased by households, including both durable and non-durable goods.
What are the components of the expenditure method of measuring GDP?
GDP = C + I + G + (X - M)
What are the determinants of aggregate consumption?
a) Disposable income b) Household wealth c) Consumer expectations d) Government policies
Why is consumption spending relatively stable over time?
arge proportion of consumption is on essential goods and services such as food, rent, and healthcare.
What does investment expenditure refer to?
Investment expenditure refers to purchases of capital goods such as machinery, equipment, and new construction.
What are the three main categories of investment?
- Business investment 2. Residential investment 3. Inventories
What are the determinants of aggregate investment?
a) Rate of interest b) Real rate of interest c) Business expectations d) Government policies
What types of government spending are not counted in GDP and why?
Transfer payments, such as unemployment benefits and pensions, are not counted in GDP because no new good or service is created.
What is included in aggregate government expenditure?
Expenditure on government programs in health, education, social welfare, and defense.
What are the two main categories of government expenditure?
- Current expenditure 2. Capital expenditure
What are the determinants of aggregate government expenditure?
The state of the economy (economic fluctuations).
How are net exports defined in the context of GDP?
Net exports are the difference between the value of exports (money flowing into the economy) and imports (money flowing out of the economy).
What are the determinants of net exports?
Exchange rate and terms of trade.
What are the key indicators of economic performance?
- Gross Domestic Product (GDP) 2. Unemployment rate 3. Inflation rate
What is aggregate expenditure (AE) and how is it calculated?
Aggregate expenditure is the total spending on final goods and services produced by the economy, calculated as AE = C + I + G + (X - M).
What is the government’s target rate for economic growth, unemployment, and inflation?
GDP growth at 3-4%, unemployment at 5-6%, and inflation at 2-3%.
What is inflation?
nflation is a sustained increase in the general price level of goods and services over a period of time, reducing the purchasing power of money.
What causes demand-pull inflation?
Demand-pull inflation occurs due to increased consumer, business, government, and foreign spending.
What is cost-push inflation?
Cost-push inflation is the rise in prices of goods due to increased production costs, which companies pass on to consumers.
What are examples of factors that contribute to cost-push inflation?
Increases in the cost of raw materials, electricity, labor, and oil.
How did the Russia-Ukraine war affect global inflation?
It created supply shocks by increasing prices for key resources like crude oil and gas, leading to higher prices for many goods and services.
What recent example of cost-push inflation occurred in Australia?
The increase in lettuce prices due to floods, which led to substitutions in food products like KFC’s use of cabbage instead of lettuce.
