Econ Dal Videos Flashcards
What is the circular flow of income
Movement of spending in an economy thru households and businesses
How can incomes earned in the economy leak out of the circular flow (withdrawals/leakages)
STM
savings
Taxes
Import spending
What are the injections, ways which money can enter outside of consumer expenditure
IGM
investment
Governamnt spending
Exports
How to tell whether economy is growing or not
If there are more injections than withdrawals, money is coming into the economy, economic growth rising
Vice versa
If equal it’s macroeconomic equilibrium
GDP
Measure of economic growth
We can measure either goods and services, factors of production, factor incomes, consumer expenditure and year on year see if it is rising, to measure economic griwhtb
How to make an index number
- pick a base year, always have a value of 100
Index number = raw number/base year raw number * 100
Percentage change is the difference between two numbers, divided by Orginal *100
Aggregate demand
Total demand for a countries goods and services at a given price level at a given time period
Measure of total SPENDING taken place
AD =
C + I + G + (X-M)
X axis - real gdp
Y axis - price level
Downaward slope, inverse r/s between price level and AD
MOVEMENT like contraction will only happen bc of PRICE and the effects are reasons why the curve is like that
Wealth effect
Says that when price level decreases, purchasing power of income increases, more richer people, more spending will be down
Trade effect
Says that when a fall in price level, exports become more competitive (because if it’s cheap in country, then people would want to buy more of our stuff, meaning demand rises) and imports become less, greater demand for exports, revenue for exports will increase
This will increase X and reduce M
(X-m ) will increase
Interest effect
As price level decreases, interest rates can be kept lower,, which stimulates more investment
Boosts C, I, (X-M)
When does the AD curve shift
When there is an increase in CIGX-M
NOT THE PRICE LEVEL
When does the AD curve shift
When there is an increase in CIGX-M
NOT THE PRICE LEVEL
Factors that shift after affecting C in the equation (spending)
MARIGNAL PROPENSITY TO CONSUME - willingness of a household to spend extra income.
MULTIPLIER EFFECT - anytime AD is shifting, helps analysis
Level of disposable income: if increases maybe bc of income taxes, decreases maybe bc of cuts of income tax. This affects C, increases/decreases MPC
Interest rates: if cut, cost of borrowing falls, increases incentives to borrow, and to spend, this increases MPC. Vice versa, if cut, reduces incentive to save, reduces borrowing, reduces MPC
Availablility of credit: if low, reduces impact of borrowing bc banks are not willing to lend, affects interest rate impacts
Consumer confidence: if high confidence, higher MPC. Job prospects and level of unemployment can affect confidence in a good way.
Asset prices: link to wealth, the more likely they are to spend money, higher MPC. Share prices, bond prices for example, if they go up and people hold those assets, they feel more confident, high MPC
Level of household debts: individuals are more likely to save than spend, lower MPC and higher MPS. The more the debt, the more the saving
Factors affect saving for C
Disposable income: if incomes rise, savings could also increase, this will be big in developing countries
interest rates: if high interest rates, encourages savings, bc the rate of return will increase for savings, incentive to save , increase MPS
Confused confidence : if low, bc people may lose jobs, people will save money, in prep, encourages more saving
Range and trustworthiness of businesses: in developing countries, firms and banks don’t exist that well and will be corrupt, reduces incentive to save in corrupt banks. Also education, do they eben know the benefits of savings
Tax incentives: gov policy to encourage savings, increases MPS
Age structure: middle aged is more likely to save for children and retirement, but those who are younger will spend their money. If Marjory is middle, MPS will rise based on a theory
Factors that affect investment for I
Investment is when firms spend money on capital goods to increase productive capacity
Interest rates: crucial when it comes to borrowing. If low, cost of borrowing is low, greater incentive to invest and borrow and marginal propensity to invest increases. If high, investment will be lower
Business confidence: determined by the expected profit and expected demand. If high for both, business are more lie,ly to invest, MPI will be higher, incentivises investment.
Level of corporation tax: retained profit is the profit left after corp tax was paid. Corp tax is tax on business profits. Lower the Corp tax, higher level of retained profit, mor potential to invest.
Spare capacity: if more, then they have more unused machines and stuff, which means they don’t need to buy extra , grater the level, the less the MPI.
Level of competition: if strong competition, innovating and improving tech for example, investment will increase, trying to beat competition and be on the same level.
Price of capital machinery: if higher, MPI is low, vice versa
ACCELERATOR EFFECT - increase in rate of real gdp, increases rate of investment.
Factors affect gov spending for G
Current spending - spending on public secure services like NHS and schools, and wages for public sector , injection so moves to right
Capital spending - infrastructure projects like buildings roads , injection so moves to the right
Welfare spending - benefits and pensions, for many developed countries, big part , injection so moves to right
Debt interest payments - countries have to repay debt, it’s a withdrawal
Budget deficit is when gov spending is greater than tax revenue, in a fiscal year (one year)
Vice versa for surplus
Factors affecting (x-m)
Value of (x-m) increases, shifts to right. Exports increase/I,ports decrease vice versa
Talk about Export REVENUE and import EXPENDITURE
real disposable income earned abroad : if boom abroad, more money abroad, their marginal propensity to import will increase, means demand for exports for our country increases, bc we’re giving it to them, increases export revenues, shifts to right. But if recession abroad, their import propensity will reduce, demand for uk exports will decreases, shifting AD left.
Real disposable income earned here: if boom here, marginal propensity to import will increase, import expenditure will rise, will increase M in the bracket, shifts to left. But if we go poorer, the propensity to import decreases, expenditure falls, shift AD to right.
Strong or weak exchange rates : SPICED (strong pound, Imports cheap exports dear) WIDEC (weak imports dearer, exports cheap) so strong means imports are cheap, demand for Imports rise, expenditure on imports rise, exports are more expensive, demand falls, less revenue, lower x and higher m, bracket shifts to the left.
Weak pound, exports are cheaper, demand increases, more export revenue, X increases, imports more expensive, demand falls, lower m, bracket shifts to right as bracket is higher
Protectionism abroad: is strong tariffs abroad on uk exports, prevents us from accessing international markets, reduces revenue we can generate, x is lower vice versa
Protectionism at home: we have high tariffs, reduces import expenditure, reduces m and shifts AD to right
Relative inflation levels to abroad: if inflation in uk is higher, exports will be less competitive and demand will be lower but imports will be more competitive , revenue generated will be lower for exports , reduces x so then shifts AD to left.
Aggregate supply SRAS
Classical - SRAS (upward sloping) determined by cost of production like
Wages - if wages go up, increases cost of production , shift to left
Raw material - cost of production rises, shifts to left (left, bad)
Business tax - if VAT goes up, increases cost of production, shift to left
Import prices - when strong exchange rate, imports are cheaper, cost of production decreases, SRAS sifts to right. Vice versa
When SRAS shifts, there can be shocks to economy, can be either positive or negative
Aggregate supply LRAS classical
Classical is vertical shows one level of output economy will always produce at in the long run
Yfe- Maximum level of output an economy can produce using ALL factors of production
There is onlyyyyyy one level of output, when at that point, economists believe we are using all factors of production
If quality and quantity of factors of production increase, then LRAS shift to the right. There could also be an improvement in productive efficiency, shifting it to the right
Could be bc of Labour productivity, Increase in investment, infrastructure improvement , quantity of Labour, these all decrease long run costs, shifts LRAS to the right , vice versa
LRAS Keynesian
They can be multiple long run level of output
Curve
Determined by level of spare capacity
The end of the curve is which is the full employment output level (max use of factors of production)
Horizontal part has a lot of spare capacity (unused factors of production ). When this happens, output increases without any inflationary pressures, bc when there’s spare capacity, there isn’t any pressure put on resources therefore the price of the resources doesn’t have to rise, no inflation.
When AD graph shifts
Describe growth, unemployment, inflation and trade position
Growth increases, as they need to meet the demand and react to it by producing more, therefore output increases.
Unemployment decreases, as Labour is a DERIVED DEMAND, if growth increases, there will be more need to workers
Inflation increases bc bc there is more pressure put on the factors of production
Trade position worsens bc exports become less competitive bc no one wants to buy it
Multiplier effect
Any change in component will lead to an even bigger change in national output
= 1/1-MPC
After finding multipler then times by og value
Accelerator effect
Changes in investment can be directly linked to changes in the rate of GDP growth
