Macroeconomic Definitions Flashcards
Methods of measuring National Income
Expenditure, Income and Output method
Expenditure Method
Adding up all expenditures made on goods and services during a year
Income Method
Sum of 4 different types of income in a year
Output Method ( Value-Added Method )
Avoids double counting, taking the final value of all goods and services in a year
Multiplier effect
An initial injection into the economy causes a bigger final increase in RGDP
National Income
The income earned by factors of production within a country’s economy
Accelerator theory / effect
States an increase in GDP will often lead to a proportionally higher increase in the private sector investment ( I )
Formula for Multiplier effect
1/1-MPC or 1/MPW, MPS+MPT+MPM are combined to measure total withdrawls ( MPW )
Macroeconomic objectives
Stable prices, Full employment, Stable balance of payments, Fairer distribution of income and control government finances
Calculate RGDP from nominal
Real GDP = Nominal GDP / Price Index X 100
Gross National Income
GNI = GDP + Net Property Income from abroad
HDI
Human Development Index : GNI per capita, Adult literacy rates and Life expectancy at birth
Capital flight
When the receiving country of FDI stops being useful, the MNC’s may take their resources back out of the economy
Sustainable growth
Growth that meets the needs of the present without compromising the ability of future generations to meet their needs ( SDG’s )
Types of Unemployment
Frictional, Cyclical ( demand deficient ) and Structural
Frictional unemployment
Temporarily out of work due to changing personal circumstances or simply between jobs
Cyclical unemployment
Also called “demand deficient”, according to the economic cycle
Structural unemployment
Can persist in the long term, two types: Geographical and Occupational immobility.
Geographical - Jobs in different areas which are inaccessible to unemployed
Occupational - Skills are no longer needed
How to measure inflation, explain them
CPI ( Consumer Price Index ) and RPI ( Retail Price Index )
CPI - Calculated using an imaginary shopping basket of 750 goods and services
RPI - Includes housing costs
Different categories of items have different weightings
Calculate inflation
Using indexes, Change in weight / Original weight X100
Comparative advantage
This means a country has a lower opportunity cost of producing a good compared to other goods it could produce, allowing it to specialize in that good and trade for others even if it doesn’t have an absolute advantage in any good.
Absolute advantage
This means a country can produce a good using fewer resources than another country, essentially being “better” at producing that good in absolute terms.
Current account
Size of Imports and Exports
Financial account
Transactions in financial assets ( e.g. FDI/ moneyflows etc. )
Capital account
Transactions in capital ( e.g. patents/ copyrights/ fixed assets )
What is equal balance of payments
Current account + Financial Account + Capital Account = 0
Primary Income
Income from economic agents including profits from overseas firms e.g. Amazon from UK back to USA
Secondary Income
Current transfers, entails money sent overseas ( e.g. gifts, overseas aid, remittances ), no expectation of a service in return
( Deliberate ) Fiscal policy
All about Government expenditure and Taxation to influence the AD of an economy ( and achieve macroeconomic objectives )
Austrian school
Believes in minimal intervention by the government, arguing the free mearket will achieve macroeconomic objectives
Keynesian school
Argues for a much more active degree of government intervention
Monetarists
Money supply is the chief determinent in GDP as well as monetary policy tools
Monetary policy
Indirect intervention, carried out by the central bank with guidance from the government, using tools such as interest rates to influence AD
Supply-Side policy
Government attempts to increase productivity and shift aggregate supply to the right. Target LRAS but may impact SRAS as well
Budget
Financial plan, outline of expected spending and expected revenue for the next financial period
Progressive tax
Higher earners pay a higher percentage of their income in tax
Proportional tax
Everybody pays the same percentage of their income in tax
Regressive taxation
Allows higher income groups to pay a lower percentage of income in tax
Current government expenditure
Expenses of running a country from day to day. e.g. pay of public sector workers, schools heating and lighting, hospitals medicine etc.
Capital government expenditure
Plan for the future, improving the facilities available to the public, just as important as current but easier to delay. e.g. building schools, hospitals, better military equipment tanks ships etc.
Part of G spent on investment in infrastructure / long-term needs
Public sector net borrowing
Mostly done through selling government bonds, loaning money to the government in return for an agreed rate of interest. Also known as Gilts in the UK or Treasuries in the USA. Low risk investments.
Structural deficit
Part of a deficit that is not related to the state of the economy and will not disappear when the economy recovers. Estimated and up to interpretation
The economy is strong but the government still runs a budget deficit
Cyclical budget deficit
Considers fluctuations in tax revenue and spending due to the economic cycle
When a government is forced to run a budget deficit due to a recession
Automatic fiscal stabilisers
Automatic changes in the fiscal policy in response to the economic cycle
Government’s debt rules
Budget deficit should be no larger than 3% of GDP
National Debt should not exceed 60% of GDP
Crowding out effect
The reduction in private sector investments induced by increased public sector spending
Crowding in effect
When higher government spending leads to an increase in private sector investment ( due to the accelerator effect )
Laffer curve
Increasing tax rates above a certain level will actually reduce tax revenue because it becomes a disincentive for workers to work or firms to maximise profits
What is used in Monetary Policy
Interest rates
Quantitative easing
The reserve requirement / ratio
The exchange rate
Monetary policy exchange rates
Central bank purchases and sells its own currency on the open market with the objective of sustaining the level they want utilising their foreign currency reserves
Monetary policy liquidity trap in the 2020’s
Where consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymieing efforts by economic policy makers to stimulate economic growth
When lower rates of interest fail to increase the money supply
Types of SRAS policies
Free market policies : involve policies to increase competitiveness and competition. e.g. privatisation, deregulation, etc.
Interventionist policies : involves government intervention to overcome market failure. e.g. higher government spending
Measure unemployment
Labour force survey and Claimant count
Quantitative easing
A form of monetary policy aimed at increasing the money supply in the economy
