LS2 Flashcards
Formula for index number
Raw number in period / raw number in base period x 100
What is real GDP
inflation-adjusted measure of the value of all goods and services produced in an economy.
What is nominal GDP
measure of the value of all goods and services produced in an economy without rate of inflation
Formula for price index
100 x nominal / real
Formula for real gdp
100 x nominal/price index
What is GDP
Total output of an economy during a period of time
What is GNI
the sum of a country’s gross domestic product (GDP) plus net income (positive or negative) produced from abroad
Difference between GDP and GNI
GNI is more preferred because it closely reflects the incomes of the residents, including net flows of income between countries
What is PPP
Helps to compare the cost of living between countries
What causes an increase in output
Increase in the quality and quantity of the inputs of production
Limitations of using GDP to compare living standards between countries and over time?
Doesn’t not take account into the improving quality of goods
Does not include unofficial or unpaid/goodwill work
Does not take into account other factors that affect living standards
Increases in real GDP may not be shared equally among an economy’s population
What is deflation
A decrease in the general price level of goods/services within an economy resulting in an increase in the purchasing power of money
Disinflation?
A decrease in the rate of inflation (general price level is decreasing but at a slower rate)
What is the ONS
Office for national statistics
They track an average baskets of essential goods (about 700 goods) to find what British households buy through the living costs and food survey
The effect of inflation on consumers?
Reduction in purchasing power.
Weekly spendings will not buy the same quantity of goods/services as it used to
This will have a larger impact on those with lower incomes
The effect of inflation on firms?
Increase in interest rates - Bank of England will try control inflation by deterring consumption and investments thus reducing the upward pressure on price
Effects of inflation on government?
Cause GDP growth to slow down, leading to government receiving low tax revenues and increased level of borrowing.
Market interest rates will also increase, causing government borrowing to become more expensive
Effects of inflation on workers?
They will experience a fall in real incomes, if their incomes do not rise in line with inflation.
This will lead to workers purchasing power falling as price of goods/services rise.
Name the two measures of unemployment?
The claimant count
The international labour organisation (ILO)
What is the claimant count?
Measures the number of people claiming job seekers allowance in the UK
Those who are unemployed, but have a partner that is working are not eligible to claim JSA
Those under 18 or have a certain level of savings also cannot claim JSA
As a result of this, the claimant count figure of unemployment is often lower than the labour force survey figure
What is the ILO
A survey give to a random sample of households within the UK
They answer whether they fit the ILO definition of unemployment
= READY TO WORK WITHIN 2 WEEKS AND HAVE ACTIVELY LOOKED FOR WORK IN THE PAST MONTH BUT CANNOT FIND A JOB
It is a worldwide measurement of unemployment, making it easier for comparisons of unemployment to be made
In total, the survey goes out to around 60,000 UK households
Who are the “economically inactive”
Students, those who have retired or sick or looking after family members.
Also, discouraged workers - who have failed to find work and have given up looking
Problems of measurement of unemployment?
Claimant count isn’t reliable because it excludes people who might be validly recognised as being unemployed - those returning to the workforce after raising children or other reasons for absence
Excludes those on government training schemes
The ILO is based on sample evidence and the sample cannot be guaranteed to be fully representative.
What is underemployment?
People who cannot find jobs for which they are qualified and who take jobs in second choice occupation
What is hyperinflation?
Very high rates of inflation
Occurs when the price level increases by more than 50% per month.
What is GDP per capita
the total income of a country, divided by the number of people living in that country
What is GNP
All goods/services and other forms of output produced by an economy in a given period of time
What is the balance of payments?
Record of all financial dealings over a period of time between economic agents of one country and all other countries
What is the current account?
Where payments for the purchase and sale of goods and services are recorded
Capital/financial accounts
Where flows of money associated with saving, investment, speculation and currency stabilisation are recorded
Trade in goods?
Known as visibles, such as trade in raw materials , semi manufactured goods
What is growth?
growth is the expansion of the economy, leading to improved factors of production and higher output
Trade in services?
Known as invisibles, examples are financial services, transport services - intangible.
Current account consists of?
Trade in goods, services - intangible and tangible goods
Primary and secondary incomes - remittances etc
Transfers - eu fees, aid contribution
What is primary and secondary incomes
Income generated and paid off abroad such as interest profits and dividends on assets owned abroad. Secondary income is mainly government transfers to and from overseas organisations such as EU
Trade surplus
When the country’s exports revenue exceed the cost of their imports
Trade deficit?
When a country’s total import exceeds the value of their export revenue
Primary and secondary income are also known as
Invisibles along trade in services
Factors of trade deficit
Rate of consumer spending on imports
International competitiveness
High costs of production for domestic firms
Exchange rates
High relative inflation
Recession overseas
Structure of economy
Aggregate demand?
Total amount of spending on goods and services produced in an economy at a given time
Ad =?
Consumption + investment + government expenditure + (ex - imp)
Ad curve shows?
Relationship between aggregate demand and the overall price level
Also shows the total amount of goods and services demanded in an economy
Reasons for the downward sloping AD curve
The wealth effect - changes in the price level affect the real value of people’ wealth
The international trade effect - if the domestic price level increases while price levels in other counties remain the same, exports become more expensive to foreign buyers who will mow demand a smaller quantity of these
The interest rate effect - changes in the price level affect rates of interest, which affect AD
Shifts in the AD demand curve?
Right ward shift - AD increases ( AD. AD2)
Left ward shift - AD decreases ( AD - AD3)
Factors of consumption
Changes in consumer confidence
Changes in interest rates
Changes in wealth
Changes in the level of household indebtedness
Causes and consequences of a current account deficit
Strong domestic growth - better living standards, better wages so more people can afford goods do services - willing to buy
Recession overseas - incomes abroad are falling, demand for exports will fall
Strong exchange rate - imports are gonna be cheaper and exports will be more expensive
Low productivity and investment
High relative inflation
High unit labour costs
Poor quality of goods made/poor reliability
Depletion of resources
Reasons for the downward sloping AD curve
Wealth effect - as price level increases, less output is demanded, leading to a contraction in the graph
Real value of wealth increases as price level decreases, thus more output is demanded and causing an extension in the graph
Trade effect - rise in price level produces fall in exports and rise in imports, so net trade falls - contraction in the graph. Fall in price level would lead to increase in exports and fall in imports demanded, therefore a extension in the graph
Interest rate effect - increase in price level leads to an increase in costs of borrowing , leading to a decrease in consumer purchases financed by borrowing. Therefore an increase in price level would lead to a fall in quantity of output demanded - a contraction in the graph. A fall in price level would mean a rise in quantity of output demanded and an extension in the graph
Determinants of consumption
Change in consumer confidence
Changes in interest rates
Changes in wealth
Changes in the left of household indebtness
Fiscal policy
The type of government policy that results in changes on tax
Monetary policy
A type of government policy that results in a change in interest rates
Average propensity to consume?
The proportion of income that households devote to consumption
MPC?
Marginal propensity to consume - the proportion of additional income devoted to consumption
MPS?
Marginal propensity to save - the proportion of an increase in disposable income that households devote to saving
Aggregate supply?
Total planned output of goods and services in an economy at a given time and price level
Investment?
Addition to the capital stock of the economy factories, machines, offices and stock of materials used to produce other goods and services
Depreciation?
The value of a capital stock devaluing/decreasing over time as it wears and is being used up
Gross investment?
Net investment?
Measures investment before depreciation while net investment is gross investment less the value of depreciation
What is investment in physical capital?
Investment in factories and machinery, used to create goods and services
What is investment in human capital?
Investment in the education and training of workers
What is a variable that affects investment?
The rate of interest
The higher the rate of interest…?
The lower will be the profit that can be made from any investment
The higher the rate of interest that banks and money markets offer on savings….?
The more attractive is is for firms to save money rather than invest into physical capital
The lower the rate of interest…?
The greater the incentive for firms to run down their savings and use them to buy capital goods
Determinants of investment?
Changes in business confidence
Changes in interest rates
Changes in improvement in technology
Changes in business tax
The level of corporate indebtedness
Legal/institutional changes
Factors that affect government expenditure
Changes in political priorities
Changes in economic priorities - deliberate efforts to influence AD
Factors that affect net trade
Changes in national income abroad
Changes in exchange rates
Changes in the level of trade protection
Retained profit
Profit retained by a business for its own use and not paid back to company’s shareholders or paid in taxation to the government
In the short run, AS is sloping…
Upwards
Increase in wages in the SRAS curve would shift…
Upwards
Decrease in wages in the SRAS curve would shift….
Downwards
Increase in commodities and raw materials in the SRAS curve will shift
Upwards
Decrease in commodities/raw materials in the SRAS curve will shift…
Downwards
Increase in taxation in the SRAS curve will shift
Upwards
Decrease in taxation in the SRAS curve will shift
Downwards
Exchange rate?
The rate at which one currency will be exchanged for another.
Fall in exchange rates in the SRAS curve will cause a shift
Upwards
Increase in exchange rates in the SRAS curve will cause a shift
Downwards
Increase in productivity in the SRAS curve will cause a shift
Downwards
Decrease in productivity in the SRAS curve will cause a shift
Upwards
What is a supply-side shock
Large change in wages rates, raw materials or taxation
Why is the macroeconomic supply curve called the aggregate supply curve?
It is the sum of all the industry supply curved in the economy
What is the LRAS curve
The level of output shown by the trend or long term average rate of growth in an economy
When output is above or below the long term trend level in the LRAS curve…
An output gap is said to exist
Why is the classical LRAS curve vertical?
It shows level of full capacity output of the economy - where there are no under-utilised resources in the economy
Factors affecting LRAS
Technological advances
Changes in relative productivity to competing economies
Changes in education and skills
Changes in government regulations
Demographic changes and migration
Competition policy
Enterprise and risk taking
Factor mobility
Economics incentives
The institutional structure of the economy
