Lecture 28: Introduction to Macroeconomics Flashcards
What is macroeconomics?
the study of the economy as a whole
What is the goal of macroeconomics?
to explain the economic changes that affect many households, firms and markets at once
What is GDP?
the market value of all final goods and services produced within a country in a given time period
What does GDP add together?
many different types of products using market prices to create a common unit of account for each good
What are the four main components of GDP?
- consumption (C)
- investment (I)
- government purchases (G)
- net exports (NX)
What does the C stand for in the components of GDP and what does this mean?
consumption
this is the spending by households on goods (eg. cars, appliances and food) and services (eg. haircuts and medical care)
What does the consumption component of GDP not include? Where is it included instead?
the purchase of new housing
it is included under investment
What does the I stand for in the components of GDP and what does this mean?
Investment
this is the purchase of goods (eg. capital equipment, structures, inventories and household purchases of new houses) that will be used in the future to produce other goods and services
What does the G stand for in the components of GDP and what does this mean?
Government purchases
This is the spending on goods and services by local and central governments
What things doe government spending include and what does it not include?
it includes the salaries of government employees and government workers but does not include transfer payments, as these payments do not reflect the economy’s production
What does the NX stand for in the components of GDP and what does this mean?
net exports
this is the foreign purchase of domestically produced goods (exports) minus domestic purchases of foreign goods (imports)
Are exports added to the equation determining the value of goods produced domestically? What does this mean?
they are not included and so they must be added to the equation
Are imports added to the equation determining the value of goods produced domestically? What does this mean?
they are included and so they must be subtracted from the equation
What is fiscal policy?
Government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.
What is Keynesian economics
The government changes in taxation and government spending can influence aggregate demand and the level of economic activity.
What is the purpose of fiscal policy?
to stabilise the economy over the business cycle
What is monetary policy?
monetary authorities control the supply of money, often targeting an inflation rate or interest rate to ensure price stability
What is nominal GDP?
This uses current prices to value the economy’s production of goods and services in that year. Changes reflect both changes in the quantities of goods and services and their prices
What is real GDP?
This uses constant (base year) prices o value production of goods and services. Changes in real GDP only change in the quantity of goods and services
GDP is used as a measure of what? (2)
economic activity and economic well-being
Although GDP can be used as a measure of economic well-being, what are four aspects of wellbeing that GDP does not take into account?
leisure time
non-market activities
Environmental quality
the distribution of income
What does negative economic growth mean in terms of the size of the cake?
it shrinks the size of the cake
What is GDP used as a key measure of?
a country’s living standards and economic development
What things does depend on?
- nutrition
- health and longevity
- the distribution of income
- education levels and knowledge
- gender equality
- more broadly the ability of all people to participate ni society
- happiness
Increase in GDP often means an increase in
income inequality
Why do we care about GDP per capita?
- GDP is highly correlated with most things we are interested in such as life expectancy, adult literacy rate, school enrolment rate
- GDP is a cardinal measure, not just an ordinal measure so it makes sense to make comparisons across countries or through time
GDP is a cardinal measure not an ordinal measure. What does this mean?
we can use the number to compare across time and countries
Is there a positive or negative correlation between GDP and life expectancy?
positive
Is there a positive or negative correlation between GDP and adult literacy?
positive
Is there a positive or negative correlation between GDP and internet usage?
positive
During a recession, you have __________ economic growth
negative
Out of a recession you have ____________ economic growth
positive
You typically see higher economic growth being achieved is _______ developed countries who are going into a
growth process
What is the overall trend of the business cycle? What does this show?
it is increasing which shows that the economy is growing
Where is a recession on the business cycle?
What is it defined as?
it is the period between a peak and a trough
it is defined as two quarters of negative growth in real GDP, a period with economic growth significantly below normal
What happens to output and unemployment during a recession?
Output falls and unemployment rises
What is a growth recession?
this is when GDP grows but GDP per capita falls and unemployment rises
What happens to inflation during a recession?
there is less inflation (not deflation
What is a depression?
this is a deep, long recession
