Macroeconomic And Business Cycle Test Flashcards
Macroeconomics
Studies the economy as a whole, concerned with the big picture of the economy, as to why the economy grows and why economic activity fluctuates.
It provides information on: - The business cycle
- Economic growth
- Inflation
- Unemployment
- Govt. economic policies developed in response to the change in these variables
Whereas Microeconomics focuses studies on the behaviour of individual households and firms
Circular Flow of Income Model
As a whole it is assumed that a proportion of income is cyphered to tax, imports and exports
It is assumed that there are only two sectors in the simple model, household and firms
It is assumed that all output produced is sold to consumers
Households have no savings
There is no govt. sector
There is no overseas sector
Product and Factor Market
Product markets is the buying and selling of finished goods (bottom half of the circular flow model)
Factor markets is the buying and selling of factors of production (top half of the circular flow model)
Economic Equilibrium
Output is everything produced in the economy that adds value
Income is earning, wages, rent, interest and profit
Spending is consumption, planned investment, govt. spending and net exports (imports - exports)
The sum of equilibrium is Ę0 (output) = ĘY (income) = ĘE (spending/expenditure)
Circular Flow of Income
Expansionary
Contractionary
Equilibrium
Equilibrium - S+T+M (Leakages) = I+G+X (Injections)
Expansionary - S+T+M less than I+G+X
Contractionary- reverse of above
Eg. When savings are greater than investment that creates greater leakages from the economy, causing a contractionary effect as less is spent.
Aggregate Expenditure
AE = C+I+G+(X-M) Consumption - C 60% Investment - I 15-20% Government Spending - G 25% Net Exports - X-M 1-2%
Factors Affecting Consumption
- Expectations of Consumers
- Disposable Income
- Cost of Credit (interest rates) - consumption increases as cost of credit falls as a reduced portion of disposable income is required and opportunity cost falls
- Stock of personal wealth (holding assets = increase in confidence in health)
- Government Policies - taxes = decrease in Disposable Income
- cost and availability of income
Factors Affecting Investment
- Rate of interest - cost of repayments
- opportunity cost (increases when interest rates increase) - Business Expectations
- Profitability - as economic conditions fall profitability so does profitability, therefore firms run down capital equipment
Government Policies - fiscal and monetary have a direct effect as they alter costs eg. Taxation
- Subsidies, taxation allowances and overseas trade promotion directly effect investment opportunities
Factors Affecting Government Expenditure
- Government actions are generally ignored by macroeconomists as they are influenced by social and political factors
Factors Affecting Net Exports
- Exchange Rate - If Australian dollar rises, import value decreases and export value increases
- If Australian dollar falls, import value increases and export value decreases as there is more competition - Terms of Trade - It measures movement in export to import prices
- Improvement in terms of trade creates a rise in export value relative to import
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Business Cycle
Fluctuations of economic activity over time. It is measured by changes in the rate of GDP.
Gross Domestic Product (GDP)
It is the total wealth produced by a country
Characteristics of the boom
- Rise in consumption expenditure, especially durable goods and luxuries
- General confidence
- Profit share of GDP increase
- Working near capacity
- Inflationary pressure is likely
- Imports increase
- Level of borrowing increases (even with rise in Inflation rate)
Characteristics of the Downswing
- Returns to investment fall creating a risky and lower return, this equals lower output/income
- Profits fall
- Sometimes accompanied by: falling stock prices (1929), banning crisis (2008-09) and falling asset values (House prices UK - 1989-91, Jpn - 1992-95)
Characteristics of the Upswing
- Increase in investment - capital equipment
- ‘Multiplier Effect’ - applying with investment
