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how the economy works Flashcards

1
Q

what is economic growth?

A

an increase in real GDP (actual growth) and potential growth

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2
Q

what are the three ways of measuring economic growth?

A
  • output = total value of goods and services produced by an economy
  • expenditure = total value of purchases on goods + services
  • income = total income generated by producing goods + services
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3
Q

how do you calculate the value of a good or service?

A

value = price x quantity

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4
Q

what is the GDP deflator?

A
  • a measure of the level of prices (inflation) of all goods and services produced domestically
  • it allows economists to convert nominal to real GDP
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5
Q

how do you calculate the GDP deflator?

A

GDP deflator = (nominal GDP/real GDP) x 100

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6
Q

what does GDP stand for?

A

Gross Domestic Product

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7
Q

what is GDP?

A

the total value of all goods and services produced within a country’s geographical border in a one-year period

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8
Q

how do you calculate GDP?

A

GDP = consumption + investment + government spending + (exports - imports)

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9
Q

what does GNP stand for?

A

Gross National Product

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10
Q

what is GNP?

A

the total value of all goods and services produced by the residents and businesses of a country, irrespective of the location of production

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11
Q

what are some of the benefits of economic growth?

A
  • higher incomes
  • reduced poverty
  • better education
  • increased life-expectancy
  • improved government finances
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12
Q

what are the advantages of using GDP as a measure of economic growth?

A
  • tracks changes in the size of an entire economy, making it an important measure for economists and investors
  • serves as a comprehensive measure of economic health
  • provides insights into the factors driving economic growth or holding it back
  • enables policy makers and central banks to judge whether the economy is contracting or expanding + promptly take necessary action
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13
Q

what are some limitations of using GDP as a measure of economic growth?

A
  • it does not consider the income earned by its citizens while operating outside of the country
  • lack of information on inequality: the differences in the standards of living within the same country could be significant, GDP only provides the distribution of income as an average
  • does not include unpaid/voluntary work
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14
Q

explain the circular flow of income

A
  • firms and households interact and exchange resources in an economy
  • households supply firms with the factors of production, and in return, they receive wages and dividends
  • firms supply goods and services to households, consumers pay firms for these
  • this spending and income circulates around the economy in the circular flow of income
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15
Q

what is an injection into the circular flow of income?

A

money which enters the economy

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16
Q

what is a withdrawal from the circular flow of income?

A

money which leaves the economy

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17
Q

what are the injections into the circular flow of income?

A
  • government spending
  • investment
  • exports
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18
Q

what are the withdrawals from the circular flow of income?

A
  • taxes
  • savings
  • imports
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19
Q

what does it mean for the economy to reach a state of equilibrium?

A

rate of injections = rate of withdrawals

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20
Q

what is aggregate demand?

A

the total demand for all goods and services in an economy at any given average price level

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21
Q

what are the components of aggregate demand?

A
  • C = consumption
  • I = investment
  • G = government spending
  • X = exports
  • M = imports
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22
Q

what is the equation for aggregate demand?

A

AD = C + I + G + (X-M)

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23
Q

what is meant by consumption?

A

the total spending on goods and services by consumers in an economy

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24
Q

what are the determinants of consumption?

A
  • disposable income
  • consumer confidence
  • interest rates in banks
  • employment rates
  • wealth effects
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25
what is investment?
the total spending on capital goods by firms
26
what is gross investment?
the total level of investment
27
what is net investment?
gross investment - depreciation
28
what are the determinants of investment?
- interest rates (cost of borrowing) - business confidence (animal spirits) - performance of the economy - foreign demand for exports - access to credit (bank's willingness to lend) - government regulation (lowering corporation tax)
29
explain how interest rates can affect the level of investment
- if interest rates increase, the cost of borrowing is higher - deters firms from borrowing money to spend on capital - results in less investment
30
what are the macroeconomic advantages of a higher level of investment?
- investment is an injection into the circular flow of income, it is a component of AD - new capital can boost productivity + creates additional capacity to supply - creates extra demand in investment goods industries + can lead to strong multiplier effects on the level of GDP - investment will boost a country's competitiveness + therefore improve the trade balance
31
what is government spending?
the total spending by the government in the economy
32
why is the AD curve downward sloping?
- real balance effect = as the price level rises, the value of real income falls and consumers can afford fewer goods and services - a persistent rise in the price level of a country could make foreign-produced goods and services cheaper, causing a fall in exports and a rise in imports, net exports would decrease and AD falls - if the price level rises, this causes inflation + an increase in demand for money + a possible rise in interest rates --> deflationary effect on consumer and business demand
33
what causes a shift in the AD curve?
changes in the components of AD (C, I, G or X-M)
34
what is real GDP?
the value of GDP adjusted for inflation
35
what is nominal GDP?
the value of GDP without being adjusted for inflation
36
how do you calculate GDP per capita?
GDP / population
37
why is GDP per capita a good indicator of economic growth?
- it measures the mean wealth of each citizen in a country - makes it easier to compare standards of living between countries
38
explain what the multiplier effect is
an injection into the circular flow of income leads to a more than proportionate increase in economic growth
39
what does MPC stand for?
marginal propensity to consume
40
what is MPC?
proportion of additional income that is spent on consumption of goods and services
41
how do you calculate MPC?
change in consumption/change in income
42
how do you calculate the multiplier?
1 / 1- MPC
43
what determines the size of the multiplier?
- interest rates - consumer confidence - income levels (low vs high income households) - marginal tax rates - marginal propensity to import, exchange rate or price of foreign goods and services
44
what is aggregate supply?
the total amount of goods and services produced in an economy at a given price over a period of time
45
why is the SRAS curve upward sloping?
- higher prices for goods and services make output more profitable - enable businesses to expand their production
46
what causes shifts in the SRAS curve?
costs of production: - worker's wages - raw materials - import prices - taxes on firms
47
what causes shifts in the LRAS curve?
changes in the quality and quantity of factors of production of an economy
48
what does the acronym SPICED stand for?
strong pound, imports cheaper, exports dearer
49
what determines how much is exported and imported?
- exchange rates - domestic + global economic growth rates - degree of protectionism (e.g. tariffs or quotas) - domestic inflation - quality of imports/exports
50
what is inflation?
the sustained increase in the average price level
51
what is deflation?
the sustained fall in the average price level
52
what is disinflation?
the sustained slowdown in the increase of the average price level
53
what are the two types of inflation?
demand-pull and cost-push
54
what is stagflation?
high inflation and high unemployment
55
what is the balance of payments?
a record of the flow of money between a country and the rest of the world - it is made up of the current account and capital account (which includes the financial account)
56
what are imports?
goods and services entering a country
57
what are exports?
goods and services leaving a country
58
what does a current account surplus mean?
greater monetary inflows from abroad than outflows
59
what does a current account deficit mean?
greater monetary outflows from domestic households, firms and government than inflows
60
what makes up the current account?
- trade in goods - trade in services - net investment - net transfers
61
what are the two main tools of monetary policy?
- bank (base) rate - quantitative easing
62
what is quantitative easing?
the purchasing of bonds in order to provide liquidity to private banks
63
how do interest rates affect the exchange rate?
- higher interest rates increase the value of a country's currency - higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency
64
what is forward guidance?
providing information about the central banks' future monetary policy
65
what are the factors considered by the MPC when setting the base rate?
- unemployment rate - savings rate - consumer spending - high commodity prices - exchange rate
66

macroeconomics (7 decks)

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