MACRO: (4.9/10) (Unit 9/10) The measurement of macroeconomic performance / How the macro-economy works: the circular of income, AD/AS analysis, and related concepts Flashcards
What is macroeconomics?
The zooming out and looking at the bigger picture, economy at an aggregate level.
What does aggregate mean?
The adding of all the elements.
What are the 4 macroeconomic policy objectives?
1) To achieve economic growth
2) To work towards full employment (minimise unemployment)
3) To limit inflation (price stability)
4) To ensure a ‘satisfactory’ balance of payments
What does ‘the balance of payments’ mean?
The government does not want more importing than exporting (within a limit). It measures currency flow into and out of an economy, in a particular time period.
What is a policy objective?
A goal/desired outcome that a government wants to achieve.
What is another type of macroeconomic policy that the economy may have (other than the other 4)?
- Balancing the budget
- Achieving an equal distribution of income.
What is short-run growth?
This occurs when the economy moves from a situation where there are factors of production not being utilised (unemployment of resources, including labour) towards fully employment of resources (LINKS TO PPF CURVE).
What is long-run growth?
This occurs when the economy’s productive capability increases, pushes PPF curve outwards.
What is an example of a conflict between macroeconomic objectives in the short-run, when attempting to achieve them?
For example, when pursuing the objective of economic growth- this may result in a conflict with being environmentally stable:
- extraction and consumption of natural resources (e.g. oil)
- pollution and waste on factories
- habitat destruction (expanding factories into urban areas)
What is short-run negative growth?
This is moving from a point on or near the PPF curve to one further away (increase unemployment of resources).
What is long-run negative growth?
The PPF curve inwards.
What data methods are used to measure the performance of an economy (macroeconomic)?
- real GDP
- real GDP per capita (per person)
- CPI
- RPI
- measures of employment
- productivity levels
- balance of payments
What is GDP?
Gross Domestic Profit
What are the 3 ways GDP can be measured?
1) Output measure (total value of goods/services produced by all sectors)
2) Expenditure measure (exports left by the economy)
3) Income measure (revenue= wages + profit)
What is real GDP?
An inflation-adjusted measure that reflect the value of all goods and services produced by an economy in a given year.
What is the difference between real GDP and nominal GDP?
Real GDP includes inflation, Nominal GDP doesn’t.
How do you calculate GDP per capita?
GDP / Population
How do you calculate Nominal GDP?
Real GDP X Average current price level
What is Nominal GDP?
The raw numbers in current £, unadjusted for inflation.
What is full employment (Beverdige definition)?
This is where 3% or less of the labour force are unemployed.
What is full employment (Free-market definition)?
The level of employment occurring when all labour resources are being used efficiently, no significant unemployment.
What does CPI stand for?
Consumer Price Index
What does RPI stand for?
Retail Price Index
What is CPI?
This measures the price changes of a broader range of goods and services, typically consumed by households (basket of goods).
What is RPI?
This measures the price changes of retail prices of goods and services.
What are lead indicators?
Indicators that aims to provide information about the future.
What are lag indicators?
These are indicators that describe the past (and current) state of things (such as GDP, unemployment data etc.)
What is income?
The flow of new output or production over a set period (per year) (flow concept).
What is wealth?
This gives a snapshot at a particular instant in time of the accumulation of goods (stock concept).
When is national income at an equilibrium?
Savings + Taxation + Imports = Investment + Government spending + Exports
What is the circular flow income concept?
National output (households) = National income (firms) = National expenditure (government)
What is gross investment?
Replacement + Net investment
What is replacement investment?
The level of investment needed to maintain the same national capital good stock.
What is net investment?
The investment to increase the national capital good stock, shift PPF outwards (economic growth).
What are the injections in the circular flow?
Government spending, Investment and Exports
What are the withdrawals in the circular flow?
Taxes, Savings, Imports.
What does national income measure?
National income measures the total value of all goods and services produced in a country during a specific period of time. It’s also known as national output or GDP
What are injections?
Money entering the economy.
What are withdrawals?
Money leaving the economy.
What does AD stand for?
Aggregate Demand.
What does AS stand for?
Aggregate Supply.
What is the macroeconomic equilibrium?
The point at which AD equals AS.
What is AD?
The total planned spending in an economy over a given period, at a given price level.
C + I + G + (X-M)
What is AS?
The total quantity of output that all firms in an economy are willing to produce, at a given price level.
What is an economic shock?
An unexpected event that causes a shift in AS or AD.
What is consumption (component of AD)?
The total planned spending by households on consumer goods and services.
How much of AD is consumption, as a component?
Roughly 70%.
What are factors that affect AD (consumption)?
- Interest Rates
- Consumer confidence (on the economic future)
- Level of Income
- Level of Future Income
- Wealth (feel wealthier, consume more)
- Availability of Credit
- Distribution of Income (policies that redistribute money from rich to poor, increase consumption)
- Unemployment
What happens when price level changes on an AD/AS graph?
Movement on the lines of AD and AS.
What is the multiplier effect?
The multiplier measures the relationship between a change in national output, when a change (component) of AD changes.
How do we calculate the multiplier (multiplier effect)?
Change in national income / Initial change in government spending
What does MPC stand for?
Marginal propensity to consume.
What is the MPC?
The proportion of an increase in disposable income that people plan to spend on domestically produced consumer goods.
How do we calculate the multiplier, using the MPC?
1/(1-MPC)
What is the accelerator theory?
The accelerator effect refers to the relationship between investment and the rate of GDP growth.
- investment much more volatile part of AD than consumption
- small change in demand leads to proportionally much bigger change in investment
How can we measure savings?
The proportion of income saved by households is called household savings ratio:
Realised savings / Household disposable income
What is AS?
The total quantity of output that all the firms in an economy are willing to produce at a given price level.
What does LRAS stand for?
Long run aggregate supply
What is SRAS?
Short run aggregate supply
How can we shift the SRAS (AS) curve?
- fall in labour costs
- fall in raw materials costs
- increase in labour productivity (e.g. due to training or technical progress)
How can we shift the LRAS to the right?
We can only shift the LRAS if economic growth (more economic capacity) takes place as we have already used maximum production capacity (e.g. more workers).
Why is the LRAS a straight line?
As all resources have been used to the maximum.
Why is the Keynesian LRAS L-shaped?
As the economy has spare capacity at low output levels, but eventually reaches a point where it can’t produce more without increasing prices.
What are the factors affect the LRAS curve?
- improvements in technical progress
- increased factor mobility
- improvements in productivity
