Macro Pack 6 Flashcards
Use a diagram to help define actual growth.
Actual growth refers to an increase in real GDP due to higher output levels. It can be illustrated using an AD-AS diagram where AD shifts rightward, or a PPF diagram where production moves closer to the frontier.
Jot down causes of actual growth.
Higher consumer spending (C), investment (I), government spending (G), and net exports (X-M).
Expansionary fiscal/monetary policy.
Increased confidence among firms and households.
Higher employment levels.
Use a diagram to help define potential growth.
Potential growth is the increase in an economy’s productive capacity over time. This can be shown by an outward shift of the PPF or an LRAS curve shifting to the right in an AD-AS model.
Jot down causes of potential growth.
Increase in factor inputs such as labour (e.g., immigration, higher birth rates).
Improved productivity due to better education, training, and technology.
Investment in infrastructure and R&D.
Institutional improvements (e.g., better governance, efficient markets).
Define negative output gap.
A negative output gap occurs when actual GDP is below potential GDP, meaning there is spare capacity in the economy. It is associated with high unemployment and low inflationary pressures.
Draw a negative output gap on a classical diagram.
In a Classical AD-AS model, a negative output gap is shown when the short-run equilibrium occurs at a level below full employment output (LRAS).
Draw a negative output gap on a Keynesian diagram.
In a Keynesian AD-AS model, a negative output gap occurs when equilibrium GDP is at the horizontal (spare capacity) section of the Keynesian LRAS curve.
Why might the size of the output gap be difficult to estimate.
Inaccurate data on employment, investment, and productivity.
Structural changes in the economy (e.g., technological progress, globalisation).
Issues with measuring underemployment and hidden unemployment.
Explain the key features of the four stages of the trade cycle. Include a diagram to help you.
Boom: High growth, inflationary pressure, low unemployment, high confidence.
Recession: Negative growth for two consecutive quarters, rising unemployment, falling confidence.
Slump (Depression): Prolonged low growth, high unemployment, deflationary risks.
Recovery: Increasing growth, falling unemployment, improving confidence.
What are the three identical ways of measuring GDP.
Output, income, expenditure.
Outline benefits of economic growth.
Higher incomes and living standards.Lower unemployment.Higher tax revenues for public services.Encourages investment and innovation.Can reduce poverty and improve development.
Outline drawbacks of economic growth.
Potential inflationary pressures. Widening income inequality. Environmental degradation. Risk of unsustainable boom-bust cycles
How is GNI calculated.
GNI (Gross National Income) = GDP + net income from abroad (remittances, profits from overseas investments).
Explain the difference between real and nominal GDP.
Nominal GDP: Measured in current prices, without adjusting for inflation.
Real GDP: Adjusted for inflation using a base-year price index.
Explain how GDP per capita is calculated and why it is useful.
GDP per capita = Total GDP / Population.
It measures average income per person and is useful for comparing living standards across countries.
What does it mean if GDP is adjusted for ppp and why is this useful.
Purchasing Power Parity (PPP) adjusts GDP for differences in price levels across countries. It makes international comparisons more accurate by considering cost-of-living differences.
Explain the limitations of GDP as a way of measuring changes in living standards.
Does not account for income inequality.
Excludes non-market transactions (e.g., unpaid work, black market).
Ignores externalities (pollution, resource depletion).
Does not measure quality of life (health, education, happiness).
Define the term subjective happiness.
A measure of well-being based on individuals’ self-reported life satisfaction and emotional well-being.
Explain the term relative income. Why is this significant.
Relative income refers to an individual’s income compared to others in society, rather than their absolute income level. It is often measured in relation to average income, median income, or income distribution within a country or social group.
Explain the Easterlin Paradox.
The paradox suggests that higher income increases happiness only up to a certain point. Beyond this, additional income does not lead to greater long-term happiness, as people compare themselves to others and adjust their expectations.
