Introduction to macroeconomics Flashcards
1
Q
Income flow
FOP & COP
A
- factors of production: LLCE (land, labour, capital, entrepreneurship)
- cost of production: WRIP (wages, rent, interest, profit)
- sum of all factor payments is national income
2
Q
Other flows: Leakage/withdrawals (STM)
A
- household income not returned to circular/income flow
- savings, taxes paid to gov, expenditure on foreign gds (STM)
3
Q
Other flows: Injections (IGX)
A
- expenditure on domestically-produced gds
- increase circular flow
- investment expenditure by firms
- gov expenditure on gds and services (development e.g. Jewel)
- exports to foreign sector
4
Q
Conclusion for circular flow of income
A
- C+G+I+(X-M) constitute aggregate demand
- changes in these 4 sectors will affect AD
5
Q
Define National Income
A
- measures incomes earned by all residents of country
- participation in current production
- final goods and services
- over period of time (usually 1 yr)
- FOP (WRIP)
6
Q
2 ways to calculate NY
A
- expenditure approach
- income approach
7
Q
Expenditure approach
A
- C+G+I+(X-M)
- avoid double counting (only expenditure of final goods counted, not intermediate gds. Why?)
- Intermediate gd: raw material, gds and services still processing, manufacturing)
- resale gds of excluded, FOP already paid
- expenditure on services by sales agents for used cars included
8
Q
Components of national expenditure (C)
A
- total household expenditure
- new domestically produced gds and services for own use
- gross national expenditure: expenditure on domestically produced gds
- e.g. consumer durables (cars), non durable consumer gds (soap,food) , services (medical care)
- imputed value for products consumed by producers themselves e.g farm crops included in national expenditure
9
Q
Components of national expenditure (I)
A
- total expenditure on physical capital goods for further increase in production e.g. machines
10
Q
Examples of investment expenditure
Changes in inventories
A
- changes in inventories (semi-finished products, unsold finished products held by firms; may be sold in future)
- increase in inventory stock, nation’s stock of wealth increase as FOP paid alr
- hence treated as tho firms have purchased them at market price, included in NE
11
Q
Examples of investment expenditure
gross fixed capital formation
A
-investment in new machines, factories, expansion of plants/production facilities
12
Q
Examples of investment expenditure
New residential housing construction
A
- house= durable asset, yields monetary return (rental) over long time
- assume investment made by firm that constructed house, sale is transfer of ownership, not part of NY
- housing construction thus counted as investment expenditure, not consumption expenditure
13
Q
Components of national expenditure (G)
A
- gov spending on infrastructure development (building/maintaining parks/roads)
- provision of public goods (defence)
- provision of merit goods (education, healthcare)
- value gov outpt at factor cost (price of equipment) as market value of e.g. price of service, can’t be calculated
- transfer payments excluded (e.g. unemployment benefit), not made in return for factor services/no increase in output lvl
14
Q
Components of national expenditure (X-M)
A
- net exports: total exports minus imports
- exports: domestically produced, consumed abroad (not part of (c)), create jobs/incomes
- imports: spending by domestic residents, produced abroad (foreign resources), not national product
- value of imports thus deducted as households, firms and gov have spent on these items
- e.g. refining oil and water in SG
15
Q
Income approach
A
- adding up all earnings of FOP and resources over a period of time (1 yr) (WRIP)
- when calaculating NY, only current factor incomes (paid for participation in current production process) included
- transfer incomes (retirement pensions, family allowances) and interest payments on national debt (G) not included
- (payments didnt arise directly from production)
