MACRO 2 - How the Macroeconomy works Flashcards
What is national income?
the total value of goods and services a country produces, the output in one year
Whats is real GDP?
the value of GDP adjusted for inflation
What is nominal GDP?
the value of GDP without being adjusted for inflation
What is GNP?
the market of all products produced in an annum by labour and property supplied by the citizens of that country
What is GNI?
the sum value added by all producers who reside in a nation
What is the circular flow of income?
a model that illustrates how money circulates through economic agents around an economy
What does the circular flow of income show?
the interconnections and relationships between economic agents
Firms to households (2 sector economy)
- goods and services
- income (wages and rent)
Households to firms (2 sector economy)
- consumption
- factors of production
What are injections?
money which enters the economy
Examples of injections:
investment, exports, government spending
What are withdrawals?
money which leaves the economy
Examples of withdrawals:
taxation, imports, savings
What are net injections?
expansion of national output
What are net withdrawals?
contraction of production, decrease of output
When is equilibrium reached?
rate of withdrawals = rate of injections
What is the expenditure method?
consumption + investment + exports + government spending
What is the income method?
wages + rent + interest + profits
What is the output method?
value of all output produced
What is aggregate demand?
total demand in the economy
What does AD measure?
spending on goods and services by consumers, firms, government and overseas firms / consumers
Why does the AD curve slope downwards?
at a lower price level, more output is demanded
What is the equation for AD?
AD = C + I + G + (X-M)
What is consumption?
the total amount spent by households on goods and services (not firms)
How much % is consumption of AD?
70% (roughly)
Factors that affect consumption:
- income / employment
- interest rates
- consumer confidence
- taxes
- wealth effects
What is investment?
the addition to the capital stock by firms e.g. machinery
How much % is investment of AD?
15% (roughly)
Factors affecting investment:
- risk
- government incentives
- interest rates & access to credit
- technical advances
- business confidence
What is government spending?
the money spent by the government on public goods and services e.g. NHS
How is government spending financed?
through taxations
When is the budget in a deficit?
GS > revenue
When is the budget in a surplus?
GS < revenue
What does a budget surplus lead to?
overall withdrawals
What does a budget deficit lead to?
overall injections
What are exports?
goods and services bought by another country (injection) (inflow of money)
What are imports?
goods and services bought in by a country (withdrawal) (outflow of money)
When is there a trade surplus?
exports > imports
When is there a trade deficit?
exports < imports
Factors affecting exports + imports:
- exchange rates
- changes in international economies
- degree of consumption
- non price factors
What is aggregate supply?
the quantity of real GDP which is supplied at different levels of price in an economy
Why does the aggregate supply slope curve upwards?
at higher price levels, producers are willing to supply more so they can earn more profit
When does the SRAS curve shift?
when there are changes in the condition of supply:
- cost of employment
- cost of other inputs
- government regulations / intervention
What is LRAS?
represents the maximum output when all factors of production are fully + efficiently employed (long run)
What is SRAS?
when the prices + quantity of capital is fixed, it is the quantity of supply firms will produce in an economy at a given price level (labour & raw materials can be changed) (immediate / short run)
What is an LRAS curve the same as?
a PPF
Determinants of LRAS:
- technology
- enterprise
- labour and quality of inputs
- infrastructure improvements
Determinants of SRAS:
- wage rates
- raw materials
- tax / subsidies / grants
- productivity
- exchange rates
What is macroeconomic equilibrium?
rate of withdrawals = rate of injections AND/OR AD = AS
Factors that influence economic activity:
- employment
- confidence
- events
- taxes + interest rates
What is the multiplier process?
new demand leads to an injection of more income, which leads to economic growth
What is the multiplier ratio?
the ratio of the increase in national income to the initial rise in AD
What is marginal propensity to consume? (MPC)
how much a consumer changes their spending following a change in income
What is marginal propensity to save? (MPS)
the proportion of an increase in income that gets saved instead of spent on consumption
What is the equation for MPC and MPS?
MPC + MPS = 1
What is the equation for the multiplier?
1 / (1 - MPC)
What is the multiplier effect?
when an individual increase in one of the components of AD leads to an overall larger increase in AD
What is the accelerator effect?
the positive relationship between changes in AD and investment
