Macro economics (Sarah G) Flashcards
What is Macroeconomics ?
the study of the economy as a whole
what is an economic indicator?
a quantitative measure of economic performance
what are the four main macroeconomic objectives ?
- Low and stable inflation
- Low unemployment
- positive economic growth
- stability and equilibrium in the balance of payments
what are the macroeconomic minor objectives ?
- stable exchange rates
- the eradication of poverty
- a more equitable distribution of income and wealth
- reduce national debt
and overall economic stability
What is economic stability ?
the avoidance in volatility in the main macroeconomic indicators
what is inflation?
a sustained rise in the average price level
what is a decrease in the increase of the rate of inflation
disinflation
how is inflation measured?
year on year % change in the average price level.
what happens to wages and prices if there is low inflation?
wages and prices remain relatively the same
what do firms do when there is low inflation?
Firms are more likely to invest
what happens to the value of incomes when there is low inflation ?
the value of incomes does not erode as fast
what is unemployment ?
a situation where people are out of work, but are actively seeking work and are willing and able to work
how is unemployment measured
unemployment is measured by the total number of people who are without a job but are actively seeking work as a percentage of the workforce
why dose the government want low unemployment
fewer people are claiming unemployment benefits
more people contributing to the economy
more tax revenue generated
what happens if more people are employed
people will have more income and therefore likely to have a better standard of living
what is the economic cycle
the fluctuations in real gdp around the long term growth path of output
2 synonyms for the economic cycle?
trade cycle
business cycle
what are the four main phases of the trade cycle
peak/boom
recession
slump/depression
recovery
how is a reccesion classified ?
two successive quarters of negative change in real gdp
how is a recovery classified?
two successive quarters of positive % changes in real gdp
what is the unemployment rate?
those who are out of work,but are actively seeking work as a percentage of the workforce/economically active
What is the formula for the unemployment rate?
unemployed/economically active x100
what is the workforce ?
those who are in work and those who are actively seeking work
What is the formula for calculating the workforce
employed + unemployed
what are 3 synonyms for workforce ?
labour force
working population
economically active
what is the population of working age ?
men and women aged (16-64)
what is the participation rate
the percentage of the population of working age who are economically active
how do we calculate participation rate
workforce/population of working age x100
what is a synonym for participation rate
activity rate
what are the two measures of unemployment
and which is the uk’s official measure of unemployment ?
the claimant count
the labour force survey (official)
how is the labour force survey conducted
the office for national statistics (ons) interviews 33000 households to collect figures of labour and employment status
how is the claimant count collected?
counts as everyone who is claiming job seekers allowance
how often if the labour force survey collected?
quarterly
how is the claimant count collected ?
the claimant count is everyone who is unemployed claiming job seekers allowance
how often is the claimant count collected
monthly
what are four problems measuring unemployment and a brief summary of each?
1.changes to unemployment statistic- changes are constantly made to the unemployment statistic to
reduce the unemployment figure
- hidden unemployment- many people who should be classed as unemployed are classed as unfit for work
- fraudulent claims- those claiming benefits fraudulently overestimate unemployment
- the labour force survey is only an estimate- not completely accurate of the whole population
what are 2 advantages and 2 disadvantages of the claimant count ?
advantages:
- useful in determining dependency on government
- relatively quick to compile
disadvantages:
- benefit rules change over time which make comparisons difficult
- can be manipulated by the government by benefit criteria
what are 2 advantages and 2 disadvantages of the labour force survey ?
advantages:
- allows international comparison between countries as based on international labour organisation definitions
- captures more of those unemployed or do not want to claim benefits
disadvantages:
- sampling errors means its not truly representative
- costly to collect data
what is the international labour organisation
an agency of the united nations that collects statistics on the labour market and seeks to improve working conditions
what is the uk’s target inflation ?
2%
what is hyper inflation ?
hyperinflation occurs when inflation rates exceed 100%
what is it called where there is a fall in the average price level of goods and service s over time
deflation
what do w e use to measure inflation
the consumer price index (cpi)
how often is the consumer price index calculated
monthly
how can we calculate the the rate of inflation
bu finding percentage changes in the cpi
how do we present comparisons of inflation over time
we use index numbers to show in relation to a base year the price increase or decrease of the year selected
the cpi collects the average price level of goods and services what is this known as
the basket of goods
how many goods and services are in the basket of goods
around 700
how do we calculate price changes (not using the base year)
new price - old price / old price x100
what are weighted index numbers
weighted index numbers are index numbers which give a truer reflection of how people are affected by price changes
how do weighted index numbers work
items in the basket of goods are weighted so that items which make up a larger proportion of a households spending show the true impact of how they would affect if the price changed.
what is the formula for the weighted index
weighted index = weight x unweighted index
the new ONS measure (2017) of measuring inflation is CPIH what does this stand for
consumer price index (including owner occupied housing cost)
what does this measure introduce compared to just cpi
it adds housing costs and council tax when calculating inflation.
why is CPIH better than just using CPI
it gives us a better measure of how we are experiencing price rises in the uk
How do we get the basket of goods and how often is it collected
we use the living cost and food survey to find the spending patterns of 6000 households yearly.
How often are the weights updated for the basket of goods
yearly
how often is inflation calculated
monthly
how do the ONS collect the prices of goods which make up the basket
the ONS visit 20,000 retail locations nationally and also include some online prices
what are the 5 limitations of using price indices to measure inflation include a brief summary of each
- changes in quality-
the cpi will overstate inflation whenever there are improvements in the quality of goods and services - special offers-
people may be purchasing some goods and services more cheaply than the cpi suggests so inflation may be overestimated - substitution effects-
weights are only calculated yearly so when consumers switch to cheaper products to limit the cost of goods in their basket therefore this changes the pattern of their expenditure.cpi will likely overestimate changes in living cost - changes in the pattern of expenditure-
the index is always at least a year behind and changing consumer spending may not be accurately reflected as the weights are not updated frequently enough - statistical errors-
the expenditure and food survey is only a sample of 7000 households which means this is just an estimate and not entirely accurate for the entire population
what are the three differences between cpi and rpi and include a brief summary of each
- population base-
rpi excludes very high and very low incomes therefore the cpi has a wider population coverage - commodity coverage-
the cpi excludes owners occupied housing cost therefore the rpi has a wider commodity coverage
3.index methodology-
the cpi and cpih use the geometric mean whereas rpi uses the arithmetic mean
what are the three similarities between cpi and rpi and include a brief summary
- price collection-
both indices collect prices of around 700 goods monthly from around 180,000 price quotes - fixed basket approach-
the basket of goods and services is fixed each year which is derived from the (LFS) - weights-
items in both baskets are weighted to give a truer reflection that price changes of goods and services which make up smaller and larger proportions of a households spending.
what is econom ic growth
economic growth is the increase in an economy’s output of good and services
what is economic growth
an increase in the economy’s output of goods and services over time
what is actual growth
occurs when an economy produces more goods and services
what is potential growth
this occurs when there is an increase in the productive capacity of the economy
what causes actual growth
making more and better use of current resources
what causes potential growth
increasing the quality and/or quantity of the factors of production
what is an output gap
it occurs when the output of an economy is below potential output
what is sustained growth
is a continued and steady increase in output
what is sutainable growth
it occurs when thee needs of the current generation are met without compromising the ability of future generations to meet their own needs.
what two vectors must increase simultaneously to achieve sustained growth
potential growth and actual growth
how do we measure the qauntity of good and services produced in an economy
using pounds sterling to calculate the total value of the goods and services rather than the total number of goods and services
how often is growth measured
yearly
what is the formula for economic growth
GDP for current year - GDP for previous year /GDP for previous year x100
what is national income
the monetary evaluation of the total output produced in a country usually within a year
what is national wealth
is the monetary evaluation of the stock of money and goods that a nations citizens own
what are the three methods we can use to measure gdp and a brief summary of each
1.income method-
calculate the total of everyone’s income in an economy
- output method-
add up the total value of the new output of every firm - expenditure method-
a record of all the expenditure on new goods and services
what is the formula which shows the relationship between the three methods of measuring gdp
income = output = expenditure
what is the circular flow of income
it is a model of the economy which shows the movement of goods and services and factors and their payment around the economy
WHAT IS THE FORMULA FOR THE INCOME METHOD WHEN CALCULATING GDP
gdp = rent + wages + interest + profits
what is the problem when using the income method for calculating gdp
black market activity this means some income is unrecorded.leads to gdp being undervalued
what are the three problems with the output method include a brief summary
where goods and services are not sold on a market-
those provided by the government,the cost of their provision however cost is not the same as value.
Double counting -
sometimes the output of one industry is used as an input to another industry,only the final products value must be included
unpaid output-
such as the work of carers is not recorded
what are the five main types of expenditure and a brief summary of each
consumption - expenditure by consumers on goods and services
investment - expenditure by firms on new machinery and other capital goods
government - expenditure by the government on the provision of goods and services
export - expenditure by foreign individuals and organisations on domestic goods and services
import - expenditure by domestic individuals and organisations on foreign goods and services
what is the formula for calculating gdp when using the expenditure method
gdp = consumption + investment + government + (exports - imports)
what is the formula for net exports
exports - imports
what is gdp
(gross domestic product) the total value of a nation’s domestically produced output ,within a specific time period , usually one year
what is property income going abroad
where a foreign business or organisation receives income from the domestic economy as it owns some of its factors of production
what is property income from abroad
income the domestic economy receives from the rest of the world as it owns some of its factors of production
what is GNP
(gross national product) is the money evaluation of income accruing to the nations citizens irrespective of the location of the factors of production that generated it. usually over one year.
what is the formula for net property income from abroad
net property income from abroad = property income from abroad - property income going abroad
what is the formula for calculating gnp
gnp = gdp + net property income from abroad
what is a synonym for gnp
gni ( gross national income)
when is gdp> gnp
when countries have multinationals located within its business who provide significant investment to the economy
when is gnp > gdp
when countries have invested overseas and set up firms there
what is the formula for nnp
nnp = gnp - depreciation
why must we account for deprciation
the nations wealth and capital stock falls in value over time
what is a synonym for depreciation
capital consumption
why do we need to know how much our economy depreciates
to gauge how are standard of living is affected
what are the three measures of national income known as and what measures are they
the national income statistics
GDP
GNP/GNI
NNP
why is NNP not often used
it is seen as too unreliable when calculating depreciation
what 4 components help define living standards
- the amount of goods and services the citizens of a nation consume
- the wellbeing/welfare of the citizens
- the happiness of the citizens of a nation
- the quality of life that individuals experience in a country
what three ways do we use the national income statistics
- to calculate growth
- to compare living standards
- to compare economic performance
what 2 ways do we adjust gdp to make it more of an accurate reflection of living standards
- converting from nominal to real gdp
2. accounting for the size of the population
what would a higher gdp suggest about living standards
the higher the gdp the more goods and services an economy consume therefore the better of it is
what is the formula for gdp per capita
gdp per capita = gdp/population
what are the 5 reasons why gdp and gdp per capita are limited measures of living standards and a brief summary for each
- composition of output -
a country’s gdp may be comprised of goods and services not for current consumption by its citizens - distribution of income -
gdp per capita can be skewed where a country national income is owned by a very small proportion of the population leaving large numbers in poverty - statistical problems - many ledcs have poor or no recording mechanisms and do not have the resources to accurately record and collect data
- illegal activities - unrecorded income for illegal activities in the black economy and tax fraud all contribute to the standard of living but cannot be recorded.
- non marketed economic activities - activities such as housework and diy significantly improve standard of living however we do not include this as it is unpaid work
what is an ledc
less economically developed country
what is an medc
more economically developed country
what is the black economy
unorganised and unregistered mostly legal activities which provide income
what is a synonym for the black economy
informal economy
name 3 other factors that affect human welfare and why they aren’t included
these factors aren’t included as they cannot be easily qauntified
leisure
political freedoms
the quality of products
environmental factors
what 2 indexes do we use to provide a better image of living standards
the happy planet index
the human development index
what is nominal gdp
as inflation increases so will gdp to reflect these price increases. nominal gdp is gdp at current prices
what is a synonym for nominal gdp
money value of gdp
why doesn’t nominal gdp reflect economic growth
it may be the case that consumers cannot buy more goods and services with more income as prices have risen .it doesn’t reflect growth because its about producing more goods and services
what is real gdp
the total value of an economy’s output in a time period adjusted to take inflation into account
what is the formula for calculating real gdp using index numbers
real gdp = nominal gdp x price index in base year/price index in current year
what is the price index in the base year/ price index in current year known as
GDP deflator
what is a synonym for gdp deflator
gdp at constant prices
