How The Macreoeconomy Works Flashcards
What is national income
The flow of new outpost produced by the economy in a time period
How is the flow of national output produced
The economy must process a stock of physic capital goods and human capital goods (land and entrepreneurship)
What is national capital stock
All physical assists owned by the nations residents as well as owned by the state e.g. schools and rosds
How do national income, output and expenditure measure the flow of new output produced by the economy
Output - measures the goods and services produced
Income - income earned by labour
Expenditure - shows amount of consumption/ spending
Draw a simplified circular flow model
Page 163
2 flows between households and firms
Labour
Goods
2 economic transactions between households and firms
Consumption
Income/ wage
What is a closed economy
No international trade
What is a withdrawal
A leakage of spending power out of the circular flow of income
Examples of withdrawals of the circular flow
Savings
Imports
Taxes
What are injections
Spending power entering the circular flow of income
Examples of injections
Govern,ent spending
FDI
Exports
When is national income in equilibrium
When planned saving equals planned investment
What happens when withdrawal is less than the injection
The resulting net injections into economy causes output and income to rise and vice versa
Macroeconomic equilibrium
AD = AS
Draw a diagram for macro equilibrium
Pg 167 7.5
What is an economic shock
An unexpected event hitting the economy
Demand or supply side
Favourable or unfavourable
Example of UK economic shock
2014 flood and storm damage costs of. £15 billion
Heavy snow causing 0.5% reduction in national output in 2010
Components of AD
Consumption
Investment
Government spending
Exports minus imports
Aggregate consumption
Spending by all households in the economy on consumer goods and services
Factors influencing consumption or saving
Interest rates
Level of income available
Expected future income
Wealth
Confidence in the economy
How to calculate personal savings ratio
Actual personal saving ./. Personal disposable income
What is investment in macro terms
Planned demand for capital goods
By improving education and training firms are investing in human capital
Factors influencing investment decisions
Expected future sales revenue and costs of production
Future profits
Prices of capital and labour
The nature of technical progress
Adequacy of financial institution to supply the funds for invesmtnsg
Where does the accelarator theory come from
The assumption that forms wish to keep a fixed capital:output ratio (accelerator coefficient)
Why is it called the accelerator theory
-firms invest in same amount so level of investment is constant
-if growth of output accelerates than investment increases as firms enlarge their capital stock and vice versa
Link between AD and employment
As ad increases / output rises then firms employ more works to produce the additional goods and services
National income multiplier
Measures relationship between initial change in component of AD and resulting change in level of national income
Show the national income multiples on AD/AS curve
Page 178
How to calculate multiplier
Change in Y / change in initial G
Multiplier numerical example
G increases £10 billion tax revenue stays same
Increases people’s incomes
Everybody saves a small fraction
Leads to smaller successes and further increases
If multiplier was 2.5 than increase of national income was £25 billion
25/10=2.5
Marginal propensity to consume
Fraction of the increase in disposable income that people plan to spend on goods
E.g if plan to spend 20p of £1 income increase the MPC is 0.2
Multiplier formula
K= 1/1- MPC
If MPC 0.2 the multiplier is 1 / 0.8 = 1.25
Nominal national income formulas
Real national income x average price level (Y=Py)
Difference between SRAS and LRAS
SRAS- when the level of capital is fixed though utilisation of FOP can be altered to change real output
LRAS- economy is producing at its productive potential, if more factors become available the curve shifts
Draw increasing AD1,2,3,4 along SRAS curve and what each means
Page 181
Two microeconomic assumptions to explain. Upwards SRAS
All firms aim to max profit
In short run cost of producing extra units of output increases as firms produce more output
Factors causing shift of SRAS curve right
Fall in business cost of production
Fall in unit unit labour costs
A reduction of indirect taxes
Increases in granted subsidies to firms
Improving quality of technical progress
Where is the LRAS curve located
At the normal capacity level of output ( full production potential of economy occurs)
Draw the LRAS and SRAS curve together
Page 183
Factors that determine position oft the LRAS curve
State of technical progress
Quantity of capital and labour
Mobility of FOP
Economic incentives
Institutional structure e.g rule of law and efficiency of banking system
Draw an shift in LRAS
Page 184
Draw the Keynesian LRAS curve
Page 184 figure 7.18
What does the horizontal part of Keynesian LRAS explain
That the economy can settle into an under full employment equilibrium
demand side shocks
global financial crisis
interest rate/tax cuts
supply side shocks
volatile world commodity prices
trade and investment deals
geopolitical uncertainty
climat change
economic shock absorbers
monetary policy
fiscal policy
flexible labour market
flexible product market
