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THEME 2 > GDP (measures of NI, circular flow, multiplier, GDPmacrotarget) > Flashcards

GDP (measures of NI, circular flow, multiplier, GDPmacrotarget) Flashcards

1
Q

An economy is in equilibrium when

A

the rate of injections = rate of withdrawals from circular flow

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2
Q

Define withdrawals and give examples

A

Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output) e.g. savings, taxation, imports

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3
Q

Define injections and give examples

A

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output e.g. investment expenditure (capital like new technology), government expenditure (NHS, defence, education), UK export expenditure

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4
Q

What is the difference between income and wealth

A

Income is a flow of money going to factors of production whereas wealth is a large amount of money or possessions.

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5
Q

How can the productive potential of an economy and economic growth be increases

A

Increase labour, land, capital or enterprise

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6
Q

Define GDP

A

Gross Domestic Product is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. GDP is usually calculated on an annual basis or quarterly basis

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7
Q

Define economic growth

A

the percentage increase in the potential maximum output of an economy in a given time period, usually a year. Difficulties in measuring potential output however means that economic growth is usually measured as percentage increase in GDP in a given year

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8
Q

When does economic growth occur

A

when there is a rise in the value of GDP

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9
Q

Define actual growth

A

Actual growth is the percentage increase in a country’s real GDP and is usually measured annually and is caused by AD increases

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10
Q

Define potential growth

A

Potential growth is the long run expansion of the productive potential of an economy caused by AS increases (what could be produced if fully employed)

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11
Q

How can national income be measured

A

Gross National Product is the market value goods and services produced in one year by labour and property supplied by the citizens of a country and allocates production based upon ownership not location
- Gross National Income is the total domestic and foreign output claimed by residents of a country consisting of GDP plus incomes earnt by foreign residents minus income earned in the domestic economy by non-residents

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12
Q

Define the multiplier effect

A

The multiplier effect is where an original injection into the circular flow of income leads to secondary spending rounds and a multiplied expansion of output. The size of the multiplier depends upon household’s marginal propensity to consume (MPC). The size of the multiplier can be calculated using (1/1-MPC)

The significance of the multiplier can be used regarding changes in aggregate demand and economic growth for evaluation

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13
Q

Multiplier formulae

A 
k = (1/1-MPC) = 1/MPW = 1/MPS
(MPS+MPC = 1)
MPW = MPS+MPT+MPM
k = change in national income / change in expenditure
MPC = change in consumption/change in income
MPS = change is savings/change in income
MPT = change in tax/change in income
MPM = change in imports/change in income
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14
Q

Economic growth can be depicted by…

A

outward shift in PPF

positive shift in LRAS

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15
Q

What causes true economic growth (growth in potential output)

A

to increase the productive potential of the economy and therefore create true economic growth one of the factors of production must be increased i.e.

labour
land
capital
enterprise

increase retirement age, immigration

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16
Q

Name and explain a measure of economic activity

A

GDP is the total value of all goods and services produced over a given time period excluding net property income from abroad

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17
Q

Problems with GDP

A

GDP figures are often used to indicate living standards however problems are:

differences in the distribution income and wealth - richest 20% have massive economic growth whereas poorest have very small growth so GDP usually measures richest

externalities - more goods = more pollution, GDP does not take into account externalities

hidden economy - black market not recorded e.g. tax fraud

non-marketed goods - such as healthcare or education which are free so hard to value

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18
Q

Costs and benefits of economic growth on consumers

A

higher wages and less unemployment and higher confidence so more consumption meaning standard of living improves

growth doesn’t benefit everyone equally and those on low fixed incomes might feel worse off if high inflation and inequality could increase

higher demand pull inflation due to increase AD from consumption increase

consumers face more shoe leather costs meaning spend more time and effort finding best deal while prices rise

benefits of consumption may not last after first few units due to law of diminishing returns which states that the utility consumers derive from consuming a good diminishes as more of the good is consumed

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19
Q

Costs and benefits of economic growth on firms

A

Firms could face more menu costs as a result of higher inflation as they keep changing their prices

increase wage pressure, pay higher wages as employment more scarce, loss of profits

higher demand means more profit which increases investment - also driven by higher levels of business confidence

higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run

As firms grow, they can take advantages of the benefits of economies of scale

If there is more economic growth in export markets, firms may face more competition which will make them more productive and efficient but will also give them more sale opportunities

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20
Q

Cost and benefits of economic growth on the government

A

Benefit - the government budget might improve, since fewer people require welfare payments and more people will be paying taxes

Cost - government might increase spending on healthcare if consumption of demerit goods increases

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21
Q

Impacts of economic growth on current and future living standards

A

Cost - high levels of growth could lead to damage to the environment in the long run due to negative externalities from the consumption and production of some goods and services e.g. oil in cars

Benefit - as consumer incomes increase some people may be able to show more concern about the environment

lead to development of technology to produce more eco-friendly goods and services

higher average wages mean consumers can enjoy more goods and services of higher quality and more goods means better standards of living

public services improve since governments have higher tax revenues so can afford to invest in services leading to increase in life expectancy and education levels

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22
Q

How can you use the significance of each component of AD to help evaluate

A

Consumption affects AD a lot more than Net exports so when looking into AD changes, Net exports will not affect it dramatically whereas consumption would

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23
Q

As you input money into the economy there is a

A

multiplied increase (100%) of the inputted amount in the economy

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24
Q

What is economic growth and how is it depicted

A

Expansion of productive potential of the economy

depicted by an outward shift in the PPF or in the LRAS curve

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25
Q

Short term growth is calculated…

A

annually by the percentage change in real national output

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26
Q

Long term growth is a _____ which is a _____

A

trend

potential

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27
Q

Factors which cause economic growth

A

Increase in aggregate demand

Improving the labour force with a better quality and quantity to increase productivity

Improved, more productive technology

More investment to fuel growth

Capital deepening which is an increase in the size of physical capital stock

28
Q

Discuss international trade for export led economic growth

A

Export led growth occurs when countries open up their economies to the international market (e.g. China). International trade is important for this as counties can specialise where they have a comparative (when it can produce at lower opportunity costs than others) increasing world output and lowering average costs

However means economy is unbalanced since surplus on current account so unsustainable as relies on economic state of other countries so if consumer country in recession exports and growth falls

29
Q

Economic growth occurs when

A

there is a rise in the value of Gross Domestic Product

30
Q

GDP measures the

A

quantity of goods and services produced in a economy

31
Q

Real GDP is the

A

value of GDP adjusted for inflation

32
Q

Nominal GDP is the

A

value of GDP without being adjusted for inflation

33
Q

Total GDP is the

A

combined monetary value of all goods and services produced within a country’s borders during a specific time period

34
Q

GDP per capita is the

A

value of the total GDP divided by the population of the country

35
Q

Gross national product is the

A

market value of all products produced in a year by the labour and property supplied by the citizens of once country

36
Q

Gross national income is the

A

sum of value added by all producers who reside in a nation plus product taxes plus receipts of primary income from abroad

37
Q

National income is the

A

total value a country’s final output of all new goods and services produced in one year

38
Q

Circular flow of income is

A

the way income flows between firms and households through factors of production and goods and service with injections and withdrawals from the government, the trade sector and the foreign trade` sector through investment imports and savings

39
Q

Purchasing power parity is the… and why is it good

A

exchange rate at which a unit of currency will buy a bundle of goods and services wherever it is spent

which helps minimise misleading comparisons between countries and makes it more accurate when comparing them

40
Q

What are the limitations of using GDP to compare living standards between countries over time

A

GDP does not give any indication of distribution of income leading to inaccurate representations of average living standards within a country

may need to be recalculated in terms of PPP so that it can account for international price differences

there are large hidden economies unaccounted by GDP making it misleading

gives no indication of welfare unlike happiness index

41
Q

What is the long-term trend in growth rates

A

the long run expansion of the productive potential of an economy caused by an increase in AS

42
Q

What is the potential output of an economy

A

what the economy could produce if resources were fully employed

43
Q

When does an output gap occur

A

when there is a difference between the actual level of output and the potential level of output measured as a percentage of national output

44
Q

A negative output gap occurs when… and what are the effects

A

A negative output gap occurs when the actual level of output is less than the potential level of output putting downward pressure on inflation – usually means there is the unemployment of resources in an economy so labour and capital are not used to their full productive potential meaning lots of spare capacity in the economy

negative output gap using ASAD - Equilibrium < LRAS therefore negative output gap, LRAS is potential output

45
Q

A positive output gap occurs when… and what are the effects

A

A positive output gap occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity such as if labour works overtime. If productivity is growing, the output gap becomes positive putting upwards pressure on inflation e.g. China

positive output gap using ASAD - Equilibrium > LRAS therefore positive output gap

46
Q

What is meant by the short run

A

The short run is defined as the period when money wage rates and the prices of all other factor inputs in the economy are fixed.

47
Q

Why does aggregate supply slope up in the short run

A

Assume that firms wish to increase their level of output. In the short run, they are unlikely to take on extra workers. Taking on extra staff is expensive; sacking them is costly in monetary terms and in terms of industrial relations within the company. So firms tend to respond to increases in demand in the short run by working their existing labour force more intensively, for instance through overtime. Firms will need to provide incentives to workers to work harder or longer hours. In many sectors of the economy, firms have the power to increase their prices in response to these increasing labour costs. It only takes prices to increase in some sectors before the general price level increases explaining the upward sloping short run AS curve.

48
Q

Why does the aggregate demand curve slope downwards

A

Diminishing marginal returns to the variable factor - when you increase labour the increase in productivity is reduced but costs of producing more is higher as labour cost is fixed and returns decreases. Average units cost more due to DMR so output only increases if price increases

49
Q

Negative output gap means that

A

downward pressure on inflation

50
Q

Positive output gap means that

A

upward pressure on inflation

51
Q

Positive output gap achieved when

A

actual GDP > potential GDP

52
Q

Effects of positive output gap

A
  • Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and overtime.
  • The main problem is likely to be an acceleration of demand-pull and cost-push inflation.
  • A positive output gap is associated with countries where an economy is over-heating because of fast and rising demand - a good example of this might be countries such as India and China
53
Q

Negative output gap achieved when

A

If actual GDP is less than potential GDP

54
Q

Effects of negative output gap

A

Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be higher than average unemployment

A rising number of people out of work indicate an excess supply of labour, which causes pressure on real wage rates.

55
Q

Keynesian vs classical in output gap and unemployment

A

Keynesian economists believe there is always a negative output gap in the short run and long run and there is always unemployment and to reduce unemployment you must increase aggregate demand

Classical economists believe markets clear in the long run so there is full employment and there are output gaps in the short run but not the long run as they clear because each micro-market clears at equilibrium in the long run

56
Q

In a classical economists LRAS diagram with 3 AD curves and one LRAS curve (ALWAYS COMPLETELY VERTICAL AS FULL UNEMPLOYMENT) where is the output gap

A

Negative output gap between Ye and Y1 and a positive output gap between Ye and Y2

57
Q

In a Keynesian economists LRAS curve with one LRAS and two AD where is the output gap

A

Negative output gap between Y1 and Y2 as

58
Q

Output vs time graph shows what

A

potential growth straight line y-intercept just above origin

actual growth curve started just above and fluctuating either side of potential growth. In the semicircle above potential growth there is a positive output gap because actual growth > potential growth and in the semicircle below potential growth there is a negative output gap because actual growth < potential growth

59
Q

The calculation for the output gap is

A

Actual output - potential output

Y-Y* (Y*=potential output=LRAS) (Y=actual output)
equilibrium < LRAS

If +ve then inflationary gap i.e. the growth of aggregate demand is outspacing the growth of aggregate supply causing demand-side inflation

If -ve then recessionary gap causing deflation

60
Q

In classical LRAS how to know whether negative or positive output gap

A

equilibrium < LRAS negative output gap

equilibrium > LRAS positive output gap

LRAS = potential output = Y*

61
Q

Problems with using GDP/Capita as a measure of living standards

A

Black market
Wealth inequalities
Negative externalities

62
Q

GDP growth rates in LEDCs

A

Lower and more volatile

Doesn’t take into account diseases

63
Q

Alternative to measuring GDP growth, national happiness

A

Objective measures: incomes, unemployment, life expectancy

Subjective measures: surveys, job security

64
Q

Pros of HDI as a measure of living standards

A

broader perspective
easier to compare
uses education and health so more accurate

65
Q

Cons of HDI as a measure of living standards

A

PPP values volatile
little sense of income distribution
difficult to measure human development

THEME 2 (19 decks)

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