Macro Flashcards
Aggregate Demand
Is the total amount of spending on goods/services produced in an economy during a period of time
AD formula
AD = C + I + G + X – M
Wealth
Is the value of assets that people own e.g. houses, stocks and bonds, jewellery, works of art etc + not the same as income
Nominal GDP
Value of GDP that has not been adjusted for inflation + not a clear measure as it overstates the value
Real GDP
Value of GDP that has been adjusted for inflation/ takes it into account
Investment
Is an increase to the capital stock of the economy (i.e. factories, machines) used to produce other goods/services
For an economist, investment only occurs if real products are created e.g. buying new machinery
Economic growth
Increase in the productive capacity of the economy
Gross Domestic Product (GDP)
Value of goods/services produced by a country in a year OR total output of an economy
3 ways to measure GDP
1) Total value added produced by firms in the domestic economy during a period
2) Total expenditure in a period
3) Total amount of income earned
Calculated as an average of the 3 measures
Gross National Income (GNI)
Takes into account the income flows between countries
Some residents receive some income from abroad + some income earned in the domestic economy is sent abroad
Standard of Living
Quality of life that is enjoyed by the country’s residents
Inflation
Sustained rise in the general price level over time
Cost of living increases + purchasing power of money decreases
Deflation
When the average price level in the economy falls
-ve inflation rate
Disinflation
Falling rate of inflation + when average price level is still rising but to a slower rate
Consumer Price Index (CPI)
Survey is used to find out what consumers spend their income on
From this a weighted basket of goods is created
Measures average price change of these goods
Updated annually
In employment
Includes those who are employed by firms or other organisations (e.g. governments) + self-employed
Economically inactive
Includes students, retired, sick or looking after family members
Discouraged workers
People who have failed to find work + given up looking
Unemployment
Number of people who are looking for a job but cannot find one
Underemployed
People who are unable to work as many hours as they want to or are overqualified for their job e.g. a doctor working in McDonalds
Balance of Payments
Records all financial transactions of a country with other countries
States how much is spent on imports and what the value of exports is
Trade in goods
Measures imports + exports of visible goods
Trade in services
Measures imports + exports of services
Primary income
Results from loans of factors of production from abroad
E.g. deposits in foreign banks receive interest payments + businesses set up overseas by a UK firm will earn profit
Secondary income
Transfers include payments made to family members abroad + aid paid to or received from foreign countries
Current account surplus
Occurs when exports are greater than imports
Money flowing into the country from trade in goods/services + primary/secondary income is greater than money flowing out of the country from these transactions
Current account deficit
Occurs when imports are greater than exports
Money flowing out of the country from trade in goods/services + primary/secondary income is greater than money flowing into the country from these transactions
Aggregate supply
Is the total output produced in an economy at a given price level over a given period of time
Depreciation
Also called capital consumption
Is when the value of capital stock depreciates over time as it wears out + used up
Gross investment
Measures investment before depreciation
Net investment
Gross investment minus value of depreciation
Advantages of GNI
1) More closely reflects the income of residents (including net flows of income between countries)
2) Well-established indicator + available in almost all countries so used to compare income levels
Limitations of CPI
1) Basket of goods is only representative of the average household + so not accurate for households who don’t own cars
2) Different demographics have different spending patterns
3) Slow to respond to new goods/services despite updated regularly
Rate of unemployment
No. of people out of work as a percentage of the labour force
Used when making comparisons between countries as they have differently sized populations
Disadvantages of unemployment
1) Leads to reduced incomes + reduced spending + impact on firms as they sell fewer goods or need to cut prices + make less profit
2) Unused labour so fewer goods/services produced
3) Governments have extra costs e.g. welfare benefits + less revenue as less tax paid
4) Underutilised resources as FoP are not used efficiently (labour)
Closed economy
No foreign trade or no gov
National output (O)
Value of flow of g/s from firms to households
National expenditure (E)
Value of spending by households on g/s
National income (Y)
Value of income paid by firms in return for land, labour, capital
Injection
An injection into the circular flow of income is money which enters the economy + in the form of gov spending, investment, exports
Withdrawal
A withdrawal from the circular flow of income is money which leaves the economy + in the form taxes, savings, imports
Marginal Propensity to Consume (MPC)
Refers to the additional spending following a change in income
Average Propensity to Consume (APC)
The total spending as a proportion of total income
Reasons for changes in consumer confidence
- Falling unemployment
- Rising incomes
- Rising economic growth (because it leads to a more sense of job security)
- Lower inflation rates
Influence on consumer spending (AD)
- Interest rates
- Consumer confidence
- Wealth effects
Influence on investment (AD):
- Rate of economic growth
- Business expectations/confidence
- Demand for exports (more demand, more investment)
- Interest rates
- Access to credit
- Influence of gov and regulations
Expansionary fiscal policy
Gov may use it during periods of economic decline
Involves increasing spending or reducing taxes to boost AD + leads to an increase in real GDP
Contractionary fiscal policy
May use during periods of economic growth
Falling gov spending and rising taxation
Leads to a decrease in real GDP
Influence of the net trade balance (AD):
- Real income
- Exchange rates
- Degree of protectionism
- Competitiveness
Multiplier effect
Occurs when an initial injection into the circular flow causes a bigger final increase in real national income
Multiplier coefficient = final change in real GDP / initial change in AD
Economic trade off
A trade off occurs when one macroeconomic objective is achieved but that worsens performance of another macroeconomic objective
Current account on the BoP
Is the balance of trade in goods and services
Evaluation of supply side policies:
- Long time lags
- Magnitude of impact of policies (only affects a small place)
- Opportunity cost
- Conflicts between objectives (environment vs growth)
- Gov spending leads to budget deficit
Investment (exam def)
- An increase in capital stock of the economy
- Money spent on purchasing capital goods to raise productivity, LRAS, to provide consumer goods
- An injection into the circular flow of income
