Macro Flashcards
Define GDP
The value of total output of an economy in each period
Define economic growth
refers to the increase in the capacity of the economy to produce goods and services over time. It is measured by the rate of increase of real GDP
Define inflation rate
the percentage increase in the average price of goods and services
Gross debt
total liabilities owed to creditors
Net debt
total liabilities minus total assets that could be sold to raise money to pay creditors
Define Recession
a period of negative growth
growth calculation
Economic growth in poor countries
If poor countries are to catch up with the living standards of rich countries, they must grow at a faster pace.
what is a goal of macro policy
keep the economy as close to the straight line as possible, along the business cycle
Inflation calculation
Define a household
earn income which they use to purchase goods and services
Define a firm
produce goods and services which are sold in the market. Owned by households
how do the facotrs of production relate to economic activity
And all factors of production (e.g. labour and land) are owned by households, rented to firms.
- Further assume no savings, no surplus production, and no inter-firm sales.
explain the link between firms and households
- Revenue flows into the firm are divided up into wages, rents and profits.
- These wages, rents and profits are then taken back to households as incomes.
- The income is then used as expenditure on the goods that the firm produces.
- These expenditures are the firmβs revenue.
The circular flow of income holds:
- The value of output is equal to household income π β‘ π.
- The value of output must equal the expenditure used to purchase π β‘ πΈ.
- Expenditures must equal income πΈ β‘ π .
What does y stand for
Output (the value of all production)
what does e stand for?
The value of all expenditure on goods and services
what does r stand for?
The value of all household income
Intermediate goods
goods which fully depreciate in the production process
Capital goods
goods purchased by firms from other firms, which do not depreciate in the production process. They are used many times.
Capital and intermediate goods in GDP
- Capital goods are final goods β we do want to include this in GDP, but not the intermediate goods.
Define value added
the change in the value of a good as it moves through the production process.
what does total expenditure equal
C + I
What does Household income equal
C + S
How is investment for firms funded?
The savings of household
How does savings finance investment
- Loans through the banking system (using the savings of households).
- Issuing debt (bonds) which are sold to households in the financial market.
- Issuing equity (shares) which are sold to households in the financial market.
How do we account for unsold production?
- Unsold stocks of inventory are counted as part investment by firms,
- When these stocks are sold in the next year, they are counted as dis-investment (negative investment) by firms.
- Inventory counts towards GDP (as investment) in year 1, but not year 2.
two functions of government
- Providing income transfers (benefits, pensions etc) to households
- Providing final goods and services (education, police, bridges, etc) to households
How does government collect revenue
- Direct or income tax (wages, capital, rent, profits)
- Indirect, or expenditure tax
Define net taxes
tax minus benefit transfers:
NT β‘ Td β B
Household disposable income
π β ππ β‘ πΆ + π
The leakages of the economy
π + ππ
The injections into the economy
πΌ + πΊ
what happends when πΊ β ππ = 0
balanced budget so S = I
what happends when πΊ β ππ > 0
Budget deficit so S > I β> Households finance the deficit
what happends when πΊ β ππ < 0
budget surplus so π < πΌ β> Government pays down the deficit
Imports
Goods purchased from foreigner firms by domestic households and firms.
- Imports are not part of domestic output. We need to account for them in final expenditure.
Exports
Goods sold to foreigners by domestic firms.
- Exports are part of domestic output.
Net Exports value
NX = X β Z
What happens when ππ > 0
trade surplus
What happens when ππ < 0
trade deficit
Nominal GDP
GDP computed at current prices
Real GDP
GDP computed at the prices of a base year
GDP deflator
Gross National Product
the value of all income earned by citizens in a country.
example of german who works in london on GDP and GNP
- Contributes to UK, not German, GDP.
- Contributes to German, not UK, GNP.
Investment from foreign to domestic country
- Contributes to domestic GDP.
- Contributes to foreign GNP.
Full capacity output
The maximum level of output an economy can achieve at a given period by using all inputs at full capacity.
Potential output
The level of output the economy can achieve using all inputs at βnormalβ capacity.
Recession
A period of slow to negative economic growth for which the actual output starts to diverge from the potential output.
Boom
A period of rapid economic growth in which the difference between actual output and full capacity output becomes small.
Phases of the business cycle
- The upturn: the economy is below trend output but slowly recovering.
- The expansion: The economy experiences rapid economic growth.
- The peaking out: Growth slows down or even ceases.
- The recession: GDP starts to fall (negative growth).
Keynesian cross model - overview
- Aggregate output fluctuations are caused by changes in aggregate demand.
- In periods of recession or boom, the government can use policy to move the economy back to potential output.
Keynesian cross model - assumptions
- Prices, rents, and wages are all fixed.
- Firms always produce what demand requires.
- Workers are always available to work at current wage.
- Firms always have spare capacity that can profitably be used at current prices.
- There are always resources available at current rents.
- We start with two agents: households and firms
- Government and foreign trade will be added.
What does the Keynesian cross model consist of
Investment: Firms desired or planned additions to physical capital and inventories.
Consumption: Household demand for goods and services.
The Consumption Function
πΆ = π΄ + ππ
- π΄ > 0
- 0 < π < 1
What does the consumption function show
The desired aggregate household consumption at each level of aggregate income.
What is A in the consumption function
The part of consumption that does not depend on income, called autonomous consumption. This is the level of consumption at π = 0.
What is c in the consumption function
The marginal propensity to consume. It is the amount of each additional pound in income that is
consumed (rather than saved.)
MPC in different households
- A very poor household is likely to immediately spend any extra income they earn. Their MPC is relatively high.
- A very wealthy household is likely to spend very little of a small income change. Their MPC is relatively low.
Marginal propensity to save
1 - c
Relationship between conumption and saving function
The steeper the consumption functions the flatter the saving function.
Savings function
π = π β πΆ
= π β π΄ β ππ
= βπ΄ + (1 β π)π
what is aggregate demand the sum of
consumption and investment
what does the 45degree line correspond to
the circular flow
In equilibrium
In equilibrium πβ = πΆ + πΌ
We know that πβ = πΆ + π
Therefore, in equilibrium it must be the case that π = πΌ
autonomous spending and investment calculation
πβ = π΄ + πΌ/(1 β π)
what is the multiplier
- A change in AD leads to a change in output which leads to a change in household income which leads to a change in AD.
multiplier calculation
1/1-c
what happens when desired savings fall
- At π0β: π < πΌ (not in equilibrium)
- As incomes rise from π0β to π1β, households increase their savings.
- This happens until π = πΌ.
- Notice, there is no change in savings
Summarise an increase in A
- Decrease in C
- Decrease in Y
- No change in S
Consumer Confidence
- Shifts in A and I are often due to change in consumer and firm confidence.
- we assume that confidence about the future is independent of current income levels.
- If households and firms lack confidence in the outlook for the economy, they will increase savings (put off investment).
- If households feel less wealthy, they will increase savings (put off investment).
- The government will try and deter system-wide increases in savings during times of recession.
Fiscal policy
the governmentβs policy on spending and taxes
Stabilisation policy
refers to actions taken by the government to minimize movements in aggregate demand and output (keep it close to potential output).
Budget deficit
the excess of government spending over government receipts (taxes) each year.
national debt
the stock of outstanding government debt.
