Introduction to Macroeconomic Analysis Flashcards
Actual and Potential Growth
Actual growth: Increase in real output of a country/ percentage increase in the annual level of output produced by the economy. Illustrated by the movement outwards of a point within the PPC.
Potential growth: Increase in the potential output of goods and services the economy can produce (increase in productive capacity). Illustrated by an outwards shift of the PPC.
Sustainable Economic Growth
A rate of growth that can be maintained without creating other significant economic problems (depletion of resources and environmental problem), particularly for future generations. It implies positive and stable growth rate over an extended period of time, where sustained growth is required.
Inclusive Growth
A rate of growth that is sustained over a period of time, is broad based across economic sectors, and creates productive employment opportunities for the majority of the country’s population. Sustained growth is also required for there to be inclusive growth.
Gross Domestic Product
The GDP of a country is the total market value of all final goods and services produced within the geographical boundary of a country over a period of time.
Unemployment Rate
The percentage of total number of unemployed persons to the economically active population.
Consumer Price Index
A value derived from the individual prices of a ‘basket’ of goods and services that majority of families in the country spend on each month.
Inflation Rate
The percentage change in the CPI over two time periods. If inflation rate is positive, prices on average has risen.
Inflation
A sustained increase in the general price level within an economy.
Aggregate Demand (AD)
The total value of domestic goods and services demanded in an economy in a given time period at different price levels.
AD consists of 4 components: Consumption expenditure, Investment expenditure, Government expenditure, and net expenditure on exports.
Aggregate Supply (AS)
Total value of domestic goods and services produced within an economy at every price level. Representing the willingness and ability of an economy to produce goods and services either in the short run or long run, at every price level in a given time period.
Long Run Aggregate Supply (LRAS)
A measure of a country’s ability to produce goods and services when all resources are fully and efficiently employed, reflecting the productive capacity of the economy.
Factors affecting AD: Consumption Expenditure
a) Consumer’s expectations of the future: If households are expecting an economic downturn in the future, C is likely to decrease to increase the level of savings as to provide a precautionary buffer against possible job losses.
b) Expectation of future price change: If households expect a higher rate of inflation in future, they will tend to buy durable goods sooner rather than later. Current C thus increases.
c) Interest Rate: If interest rate increases, cost of borrowing to finance consumption will increase, and thus are less likely to borrow. Moreover, an increase in interest rate allows households to earn more interest in savings. As such, the opp cost of consumption increases, leading to a fall in C.
Factors affecting AD: Investment Expenditure
a) Interest Rates: If a firm borrows to invest, the rate of return should be equal to or more than the cost of borrowing. The higher the interest rate, the fewer number of projects that can earn a return at least as great as the cost of borrowed funds. Therefore, I will decrease.
b) Expectation of future economic conditions: If firms are optimistic about the level of demand for their products in the future, they are more inclined to invest now as they expect higher profits in the future.
c) Political stability and good infrastructure: As investment projects tend to be extremely costly, the level of investment is also dependent on the risk of investment returns. Investment is unlikely to take place in politically unstable areas, as the investment returns might be uncertain
d) Government Policy: Investment grants and therefore higher after tax profits, allowing more investment expenditure.
e) Cost and efficiency of capital equipment: Expected returns arising from I wil increase if costs of equipment falls, or equipment becomes more efficient. Firms have greater incentive to increase I since higher profits can be earned.
Factors affecting AD: Government Expenditure
a) Level of Government Debt: When Debt is high, govt has a lower credit rating which means that creditors are less willing to lend and charges a higher interest rate. Funds available to the government for expenditure will be reduced and leads to a fall in G.
Moreover, If debt is high, more of tax revenue collected is used to repay interest payments for these debt. Funds available for G will be reduced and this leads to a fall in G.
Factors affecting AD: Net Export Expenditure
a) Foreign income level: As the level of national income in foreign country increases, Consumption increases, including on imports from domestic country. Therefore, value of exports will increase and level of net export increases, ceteris paribus.
b) Exchange rates: A depreciation of domestic currency causes the foreign price of exports to decrease and domestic price of imports to increase. Assuming PEDx and PEDm >1, there will be a more than proportionate increase in quantity demanded of exports and a more than proportionate decrease in quantity demanded of imports. Thus, export revenue increases while import expenditure falls, leading to a net increase in X-M.
c) Relative quality of G&S: Domestic goods will be relatively more attractive in foreign markets if there is an improvement in quality of G&S. Domestic households are likely to switch to buying domestic G&S of better quality.
