intro to macro Flashcards
leakages
The flows of money that leave the economy: savings, taxation and imports.
injection
The flows of money that come into the circular flow of income from outside: investment, government spending and exports.
gdp
GDP is the total monetary value of all final goods and services produced within an economy in a given period of time.
GDP vs gnp
The GDP of countries with many Multi national corporations is likely to be much lower than if income earned from abroad were included. Since an MNC is driving consumption in a foreign country, rather than where the headquarters is located, it means that much of the GDP belongs to those foreign countries. When we factor in net income earned from abroad, GDP becomes the gross national product (GNP)
GNI = GDP + incomes flowing in from other countries – incomes flowing out to other countries
measuring national income:
The output method
Using this method of accounting, firms are surveyed for their output during a given period. It is important to note that only the value that is added at each stage of production is counted and not the full value of the output; otherwise, economic output would be counted twice.
The income method
This method of accounting involves adding up all the income earned by groups when the factors of production are sold in resource markets. Owners of the factors of production are paid wages, rent, interest and profits.
The expenditure method
The final method of national income accounting involves adding up total sales receipts for goods and services sold in the economy. In a closed economy this is the measure of consumption, but in an open economy (as discussed in subtopic 3.2) this also includes government spending, investment and net exports. To construct this measure, statisticians gather sales receipts, credit card statements, utility bills
Happy Planet Index (approximate) ≈
life expectancy × experienced well-being × inequality of outcomes / ecological footprint
gdp vs green gdp
Economic growth today is damaging prospects for growth in the future. GDP counts production within the country, but not the external costs of pollution, for example. For this reason, therefore, GDP overestimates production and growth.
Think about the concept of green GDP this way: when we pay someone to clean up the streets and pick up rubbish, that person earns an income. This income is included in the estimates for GDP. The more people we pay, the higher the GDP; or, in fact, the more rubbish, the higher our GDP! The same applies to all negative economic activities that are paid for, such as, for example, the amount of money spent to mitigate climate change’s impact on coastal cities.’
an economic growth index that quantifies and calculates the environmental consequences of that growth
why is ad downward sloping
The wealth effect: As the average price level falls, the wealth of participants in the economy increases in real terms as their ability to purchase goods and services improves. The real value of assets, like property or stock, is now higher.
The interest rate effect: At lower price levels, interest rates are lower too, giving people more disposable income to spend and with which to demand higher volumes of output. The incentive to save is also lower.
The net balance effect: A lower price level makes goods and services relatively cheaper for foreign countries to buy. Therefore, the demand for exports rises and the demand for imports from abroad falls, increasing the net trade balance and leaving it in an overall better position
new classical
- The new classical school of thought primarily believes in the power of the market.
- if prices are fully flexible in the long run, the price level does not affect the level of output of firms and their profits, so firms have no incentive to produce more in the long run. this causes a perfectly inelastic (LRAS) curve. If the price level of goods and services falls, and firms can lower wages of workers, then firms can employ the same number of workers and produce the same output.
- If resource prices are allowed to rise and fall according to market behaviour, then all resources can be fully employed in the long run, maximising the nation’s output. The economy will always return to the full employment level of output (or potential GDP) as the price level has no effect on the full potential of output. Therefore, we can draw a perfectly inelastic long-run aggregate supply (LRAS) curve.
Keynesian
His reasoning was that resource prices exhibit downward inflexibility
When there is spare capacity in the economy and firms look for ways to cut costs, Keynes argued that they cannot do this by cutting wages. Nowadays, wages are protected by labour contracts, trade unions and minimum wage laws. As a result, the economy gets stuck in a short-run position. when output falls below Yfe, the price level stays relatively constant at P1. Rather than adjusting to lower prices and therefore coming back to full employment, an economy can remain operating below its full potential. This is called a ‘recessionary gap’.
Unless wages fall, firms have no choice but to make workers redundant during a recession. This is because they sell fewer goods, as aggregate demand is low, and so look for ways to keep profits from falling. This explains the gap between Y1 and Yfe and the resulting unemployment in the labour force. Firms find it very difficult to reduce people’s wages, although it is not impossible to do so.
Firms are also very reluctant to reduce the prices of the goods and services they sell. There are more likely to be other areas where costs can be cut rather than reducing prices and, subsequently, revenues. All of this depends on the severity and duration of the crisis, and wage and price cuts are more likely to occur in very deep or long-lasting recessions. It is only when the economy nears Yfe and resources have to be allocated between competing uses that prices start to rise.
OECD Better Life Index
housing income jobs community education environment civic engagement health life satisfaction safety work–life balance.
However, the BLI has been criticised as it focuses on a rather narrow set of indicators.
