Introducing the Macroeconomy Flashcards
define macroeconomics
the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity
What are the major macroeconomic issues?
- Economic growth e.g. reducing fiscal debt
- Unemployment
- Inflation
- balance of payments and exchange rates
- Inequality
- sustainability
define GDP
○ Gross domestic product- measure of economic activity in a particular boundary of a nation state (see how companies are doing)
§ Measure of productive output in an economy
define GNP
Gross national product
-measures level of output/ income, level of economic activity generated by business that belongs to a particular nation state
How to measure economic growth?
Income Method
Output Method
Expenditure Method
define trend output
how the it is performing against its target, or collaborators (business cycle)
define actual output
the growth in the quantity of goods and services produced in a country, or in other words the percentage change in GDP
Does a GDP change matter for a firm?
- Economic vulnerability
Rising GDP means the economy is growing, and the resources available to people in the country – goods and services, wages and profits – are increasing. - If a firm’s output moves from the minimum of AC, firms may have a severe cost penalty
- It also depends on the industry and product
define actual growth of national income
the % increase in actual output
define potential economic growth
the % increase in the economy’s capacity
What is the aggregate demand equation?
Aggregate Demand = C + I + G + X - M
○ Consumption- inner flow activity
○ Investment- outer flow activity
○ Government expenditure - spending activity
○ Net Exports (Exports - Imports)
What is endogenous demand
inside the income flow
What is Exogenous demand
arising from outside the income flow
What is the Keynesian cross- 45 line
- relationship between national output (Y) and aggregated expenditure/ demand (vertical axis)
- At equilibrium, injections into the economy = withdrawals from the economy
- What is produced is what is consumed
what is the consumption function
- the consumption function C = a + bY
§ ‘a’- national income
§ ‘b’- income that is consume
What is the mpc?
marginal propensity to consume- rate of consumption out of income
i.e. ‘b’ in consumption function
what is the mpw?
marginal propensity to withdraw
What causes the consumption function to shift?
- Confidence changing
- Wealth changing
- Interest rates changing
- Tax rates changing
- A change in the relative ease of credit
- A random shock - Brexit!
What are withdrawals determined by?
-endogenously
- net saving: the saving function
○ the mps
○ determinants of saving - net taxes: tax functions
○ the tax rate and the mpt - imports: import functions
○ the mpm
○ effect of imports on Cd - the withdrawals function
○ the mpw
What are injection determined by
-exogenously
- investment ○ increased consumer demand ○ Expectations ○ cost and efficiency of capital ○ rate of interest
- government expenditure
- exports
- The expenditure function
Determination of national income
- The multiplier
○ the circular flow of income and effects of changes in injections
§ The changes will become smaller and smaller each time
○ definition of the multiplier: ∆ Y/∆ J
○ The formula: 1 / mpw
or: 1 / (1–mpcd)
What are the different types of unemployment?
• Equilibrium unemployment - good
○ Frictional
○ Structural
• Disequilibrium unemployment - bad
○ Real-wage
○ Demand-deficient
what is frictional unemployment
takes time for someone to find a job
what is structural unemployment
unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand
what is real-wage unemployment
Unemploymentthat occurs when labour market imperfections preserve a higherreal wagerate than the equilibriumreal wagerate
§ If inflation is high, real level of wages will deteriorate
what is demand-deficient unemployment
insufficient demand in the economy to maintain full employment.
What is inflation?
quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
indicates a decrease in the purchasing power of a nation’s currency
What causes inflation?
○ Oil prices
○ Import prices- withdrawal from national income
○ Uncertainty
○ Exchange rates
○ Interest rates and Quantitative Easing - introduction of new money into the money supply by a central bank
Types of inflation
Demand-pull inflation
Cost- push inflation
What is demand-pull inflation
involvesinflationrising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve
What does demand-pull inflation mean?
□ The economy is at full employment/full capacity.
□ The economy will be growing at a rate faster than the long-run trend rate.
□ A falling unemployment rate
How does a rise in demand affect demand-pull inflation
aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation.
firms produce more, they employ more workers, creating a rise in employment and fall in unemployment.
upward pressure on wages, leading to wage-push inflation.
Higher wages increases disposable income of workers leading to a rise in consumer spending.
define demand-pull inflation
inflation caused by AD increasing faster than AS
define inflation
a sustained increase in the price level.
When does cost-push inflation occur?
§ when we experience rising prices due to higher costs of production and higher costs of raw materials
(supply-side factors)
§ caused by an increase inpricesof inputs like labour, raw material, etc.
leads to a decreased supply of these goods
□ the demand remains constant, the prices of commodities increase causing a rise in the overall price level.
Causes of cost-push inflation?
□ Higher prices of commodities
□ Imported inflation- devaluation increase price of imports, increasing inflation
□ Higher wages- higher costs
□ Higher taxes- higher price of good
□ Profit-push inflation- firm gains monopoly power, push up prices
□ Higher food prices
Why are the main macroeconomic objectives important?
- economic growth
– this is the percentage change in GDP or GNP
– can directly influence their profitability
- high growth, demand is buoyant and thus so are sales and profits - unemployment,
- If unemployment is low, and a firm wants to expand i.e. more workers, but there are few workers to choose from
- a firm may have to offer a high wage to push up costs. - Inflation
- should be low and stable = certainty.
- when high (uncertainty), firms should be volatile
- when high, Costs of production increase = affect profit margins = reduce investment
define unemployment
– the number of people who do not have a job at the current wage rate, but who are willing and able to work
define inflation
a sustained rise in the general price level.
measured by the consumer prices index (CPI)
or
retail price index (RPI)
What are the benefits of economic growth?
Benefits
- increasing income levels = individuals consume more
- People typically feel happier the more they are able to purchase.
- sales increasing = boosting profits= owners’ incomes.
- reduce other macroeconomic problems, e.g. unemployment, = boost government tax revenues = reduce benefit payments,
- scope for redistribution,
What are the costs of economic growth?
Costs
- generate extra wants, if the economy’s capacity is not increasing= see demand-pull inflation.
- push up input prices = create cost-push factors
- though incomes rise, could be that the rich get richer = negative effect on the distribution of income.
- move towards more hi-tech industries = skills made irrelevant = unemployment
- environmental costs of economic growth, e.g. rising carbon emissions, = fall in your quality of life
What happens to each of the macroeconomic indicators at each of the 4 phases of the business cycle?
- In the upturn,
- stagnant economy begins to recover
- growth in GDP resumes.
- confidence grows = firms investing
- Unemployment falls, as aggregate demand rises.
- inflation is relatively low. - During the expansionary phase,
- rapid economic growth; the economy is booming.
- Rapid growth in consumer demand = increase confidence = firms produce/ investing more = employment increases.
- inflation becomes problematic= costs of production will increase.
- high prices, overseas competitiveness worsens and balance of trade deteriorates.
- AD will shift to the right, thus boosting national output and causing unemployment to fall.
- Inflation may rise= with rising costs, AS may also shift to the left pushing prices further up. - During the peaking-out phase,
- growth slows down or even ceases.
- business confidence decreases
- Inflation is high, demand falls, growth falling.
- Aggregate demand thus starts to shift back to the left. - during the slowdown or recession,
- there is little or no growth or even a decline in output.
- Prices tend to fall = competitiveness abroad improves.
- AD shifting to the left, national output falls and unemployment rises, but inflation falls back on target.
