Macroeconomic Models Flashcards
3 withdrawals of the balance of payments
- Saving
- Imports
- Taxes
3 injections in the balance of payments
- govt spending
- investment
- exports
Definition of AD
Total demand of all goods in the economy
National output
Total output of all goods in the economy
Disposable income
income post the deduction of tax
GDP Equation
NI=NE=NO
Multiplier effect
increase in injections leads to a greater than proportional increase in AD
multiplier equation
Change in Real GDP //// Initial injections
Multiplier ratio
1// (1-MPC)
MPC
Marginal perpencity to consumer is the % of income which is spent rather than what is saved
Accelerator
the change in GDP (or NI) leading to greater investment
Do benefits count as government spending
benifits dont count as spending as the government isn’t buying anything
Balance of Payments
- current account
- Capital and financial account
Components of the current account
- trade in services
- Trade in goods
- current transfers
- investment income
4 Macroeconomic objectives
2% inflation (+- 1%)
steady growth
full employment
trade equilibrium
what is the balance of payments
record of all payments in and out of one country
investment income
money flowing into an economy from oversees investors investing in the UK economy
current transfers
remittances and money for nothing.
Why does the UK want an equal current account
so the capital and financial account then doesn’t have to be excessively positive to lead to a equal balance of payments
6 factors affecting the current account
- exchange rate
- relative inflation
- costs of commodities
- quality
- income
- protectionism
SPICy acroynym
Stronger
Pound
Imports
Cheaper
Mortgage
borrowing for a house
interest rate
cost of borrowing and the reward for saving
changes in the bank rate affecting the balance of payments
AD= C + I + G + (x-m)
impact of lower confidence
higher savings
dot.com bubble
over confidence in tech firms led to over investment and when may of these firms seemed unviable many firms withdrew and this spooked market led to low confidence and hence low investment
Animal spirits
The Kensian view that firms and economic agents act as one entity and follow what others are doing
Positive wealth effect
increase in wealth makes consumers feel more confident increasing AD through increasing consumption and investment.
What is the largest source of wealth in the US and the UK
Houses however US house owenership is higher than in the UK
Differences in wealth effect
In cities and in lots of European countries a high wealth effect from an increase in house prices is felt less than in the us as there is in the UK lower house ownership will mean that a negative wealth effect leads to a cancelling out of the wealth effect
Savings ratio
percentage of income saved
savings ration EQ
SR= saved/ disposable income
Income vs wealth
Income- the flow of money a person or economy receives each year
wealth- the sum of all of the assets in an economy
What are factor incomes
the income households earn from loaning factors of productions to firms
Real GDP
A state of measuring the output of a county
GDP Equation
National income = national output = national expenditure
NI = GDP= AD
AS definition
total goods produced in the economy
Short Run
A period where one factor of production is fixed
SRAS
As in the short run where all factors of production is fixed and supply varies with demand and price
Why does the SRAS slope upwards
if firms want to increase output in the short run they have to pay higher wages as they want to hire more workers. This increases firms cost and hence they increase prices
Why does price increase when output increases
Costs of production increase (extra pay for workers working overtime) leading to an increases in the price level
Does profit change with movement in the AS curve
profit doesn’t change with movements in the AS curve
What does a Kenyan LRAS look like
its an SRAS curve meeting an LRAS curve.
Awknolege the increasing challenge to access the factors of production
as resources become competitive market prices
Sick Back Flip acronym
3 features of the Kenyan LRAS
Spare Capacity
Bottleneck
Full Employment
Maximum potential output
LRAS curve
What does a neoclassical LRAS look like
Believes economics always at full employment in the long rum
This is because the economy has time to operate at full employment
How does overtime lead to SRAS
as the factors of production are fixed to increase labour firms must pay above the usual cost of Labour in the form of overtime to increase production
Which graph shows a shift in cost
SRAS
Which curve is used to show the impact of quantity produced and productity
LRAS
Impact od a change in price of Oil
Left shift in SRAS
Impact of commons price changes
SRAS left
What happened when diamonds were found in Sierra lean
increase in the factors of productio n
LRAS shifts right
Impact of more investment on LRAS
Increased in investment
increased in productivity
shift right in LRAS
What is the unit on the real national output line
Y
Impact of decrease in incomes
shutdown of manufacturing
lower incomes
lower consumption
x multiplier
firms lowering saving
less investment
government gets less tax
as moves inwards
How does exports and imports create demand for pounds
imports (sells pounds)
exports- buy pounds to purchase product
Sources of currency supply
tourists abroad
imports
Currency demand
Domestic tourism
exports
What is an increase and decrease in the price of a currency called
appreciation
depreciation
When the UK was concerted for imports of swine flu there was lower imports pigs
ER appriciated as less currency was being sold
If the UK regulates exports what is the impact on the ER
the ER will depreciate
Speculation
When investors predict changes to a currencies exchange rate to make profit
Impact of speculation
speculation of a further appreciation causes a present appreciation noe
SPICED acroynum
Stronger
Pound
Imports
Cheaper
Exports
Dearer
Which graphs is to show the impact of exchange rate
SRAS
Changes dont last long
Impact on appretion on AD
Stronger pound makes imports cheaper
Demand for exports is higher
balance of trade becomes more negative
Ad shifts to the right
Oil prices, impact on graph
Oil is a commodity
increase in cost of production
cost push inflation
supply moves left
Inflation
What was the dot com bubble
when investors, through heard behaviour, over invested in digital products.
This led to a crash in the price of technology prices
What is VAT
% tax on goods and services
George Soros
The guy who manipulated the pound and made billions of pounds
Exchange rate
the price of one currency in terms of another.
Axis on exchange rate diagram
price of pounds
Quantity
factors that affect supply of currency
- tourism abroad
- imports
How is the Labour Market different to the goods market
goods are demanded by households and supplied by firms
because labour is a factor of production (All factors of production are supplied by households to firms) households lend these to firms in return for factor incomes
What is excess supply in the labour makret
unemployment
8 factors changing demand for labour
Derived Demand
Productivity
Capital costs
migration
benefits
income tax
education
Definition of derived demand
Demand for a factor of production that occurs as a consequence of demand of another good or service
impact of productivity in a labour diagram
increase inproducitivity decreases the opportunity cost of productivity more product which may lead to the firm increasing the demand
they may not do this because an increase in productivity may encourage more market entrance
Capital costs defined
Capital and labour are substitutes
a person operating a checkout or a self checkout
Impact of migration on labour supply
if migrants leave the economy the supply of labour decreases
Debate in the income tac rate
if apple have to earn a set amount
lower tax
work fewer hours
decrease in labour supply
orrr
lower tax
work more to earn more money
increase in labour supply
Non percutinary benefits
non money benefits of a job
Examples of non percutinary benefits
- company car
- paid holiday
- job satisfaction
Non percutinary benefits example Jobs
Bin man or Low pay admin.
- subjective
