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A2 Macroeconomics > Macroeconomic Performance > Flashcards

Macroeconomic Performance Flashcards

1
Q

What four indicators build up a picture of a country’s macroeconomic performance?

A
  • Real GDP growth
  • Inflation
  • Unemployment
  • Current Account (BoP)
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2
Q

What is real GDP growth?

A

a measure of the total output, expenditure or income of an economy after adjusting for changes in the price level

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3
Q

What is inflation?

A

The sustained increase in the general level of prices, measured in the UK by changes in the cost of a basket of goods and services bought by a typical household (Consumer Price Index), weighted according to the expenditure on each item in the basket

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4
Q

What is unemployment?

A

arises when someone is out of work and actively seeking employment.

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5
Q

What is the balance of payments?

A

records money flows into and out of a country over a period of time

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6
Q

What is current account (in BoP)

A

records money flows into and out of a country over a period of time

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7
Q

What is standard of living?

A

a measure of the material well being of a nation and its people

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8
Q

What is short run economic growth?

A

the actual annual percentage increase in an economy’s output, sometimes referred to as actual economic growth

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9
Q

What is long run economic growth?

A

the rate at which the economy’s potential output could grow as a result of changes in the economy’s capacity to produce goods and services, sometimes referred to as potential economic growth

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10
Q

When does short run economic growth happen?

A

when more of an economy’s resources are being used

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11
Q

When does long run economic growth happen?

A

can only happen if there is an increase in either the quantity or quality of a nation’s resources of land, labour, capital or entrepreneurship, increasing the potential output of the economy

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12
Q

What is the output gap?

A
  • The difference between actual and potential GDP
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13
Q

When does a positive output gap occur?

A

If actual output exceeds the economy’s potential level of output

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14
Q

What does a positive output gap indicate?

A

that there is very little, if any spare capacity in the economy

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15
Q

What is the result of a positive output gap?

A

The result will be that actual economic growth is likely to generate inflationary pressures

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16
Q

When does a neg output gap occur?

A

If actual output is below the economy’s potential output, then the economy has clearly that will allow output to expand further without generating inflationary pressure

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17
Q

What is spare capacity?

A

Exists when firms in the economy are capable of producing more output than they are actually producing

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18
Q

What is trend rate of growth?

A

The average rate of economic growth measured over a period of time, normally over the course of the economic cycle

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19
Q

How is equilibrium level of national income determined?

A

by the interaction of AD and AS

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20
Q

AD=

A

C+I+G+(X-M)

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21
Q

Aggregate supply refers to the relationship..

A

between the total output of the economy and the general or average level of prices (positive)

22
Q

What is short run aggregate supply?

A

Shows the level of production for the economy at a given price level, assuming labour costs and other factor input costs are unchanged

23
Q

Changes in the cost of production arise from changes in:

A
  • Labour costs
  • Other input prices
  • Taxes and regulation
24
Q

How does labour costs affect cost of production?

A
  • Change in wage rates - lower wage rates reduce the cost of production for firms, allowing them to reduce prices (this will result in a rightward shift of the SRAS curve)
25
How does other input prices affect the cost of production?
- a term that covers a wide range of factors including raw material prices, the price of components and the price of plant and machinery - if these prices fall, firms will be able to lower prices (SRAS shifts right and real GDP increases)
26
How do taxes and regulation affect production costs?
Changes in the taxation or regulation of business will have an impact on business costs and therefore shift the SRAS curve - most regulation increases business costs and therefore SRAS shifts left and real GDP is reduced
27
Real GDP, can rise or fall due to changes in ...
AD and SRAS
28
What is the economic cycle?
fluctuations in the level of economic activity as measured by GDP.
29
What are the stages in the economic cycle?
- recession - recovery - boom - slowdown
30
What is the recovery (economic cycle)?
Where economic growth becomes positive after a recession
31
What is the boom (economic cycle)?
When the rate of economic growth exceeds the rate of growth of potential GDP so that the output gap is narrowed
32
What is the slowdown (economic cycle)?
When the rate of economic growth becomes negative and real GDP actually falls
33
What is the recession (economic cycle)?
When the rate of economic growth becomes negative and real GDP actually falls
34
Why might the stages in the economic cycle vary?
Each of the stages will vary in length and severity. For example, some recessions can be short lived and output may not fall by a significant amount. At other times, the recession can be very long and deep.
35
What are the three explanations to the causes of the business cycle?
- The multiplier and accelerator effects and their interaction - The role of stocks (inventories) - Monetary explanations of the economic cycle
36
What is the multiplier effect?
the process by which any change in a component of aggregate demand results in a greater final change in real GDP
37
What is the size of the multiplier effect determined by?
the size of leakages from the circular flow of income.
38
What is the proportion of additional national income that goes into leakages known as?
the marginal propensity to withdraw (MPW)
39
What is the MPW made up of?
- marginal propensity to save (MPS) - marginal propensity to tax (MPT) - marginal propensity to import (MPM)
40
What is marginal propensity to save?
The proportion of additional national income that is saved = ∧S/∧Y - s = savings, y = national income, ∧ = change in s or y
41
What is marginal propensity to tax?
The proportion of additional income that is taxed = ∧T/∧Y
42
What is marginal propensity to import?
The proportion of additional income that is spent on imports = ∧M/∧Y
43
What is the accelerator?
The theory of investment that states that the level of investment depends on the rate of change of national income
44
Why is investment needed?
- To replace capital stock that is wearing out | - To provide new capital stock to give additional productive capacity to meet rising demand
45
Investment depends on...
The rate of change of national income
46
What are the limitations to the theory and to the interaction of the accelerator and the multiplier as an explanation to the economic cycle?
- If firms have spare capacity, rising demand can be met without rising investment - The theory of the accelerator ignores the crucial role that confidence and expectations play in investment decisions - Firms can exercise choice over investment to replace machinery that is wearing out and they may delay such investment - Investment decisions are planned well in advance of changes in economic activity and can be difficult to halt or postpone - The multiplier effect of changes in investment may be small - External or random shocks to the economy - Fiscal and monetary policy changes
47
What are other ways of explaining the economic cycle?
The behaviour of stocks
48
What are stocks?
The amount of finished goods that firms hold in order to be able to satisfy increases in demand
49
How do economists distinguish between short-run economic growth from economic growth in the long run?
Use of the concept of the long-run aggregate supply curve
50
What is the long-run aggregate supply curve?
The relationship between total supply and the price level in the long run. The LRAS curve represents the maximum possible output for the whole economy - its potential output (P213)

A2 Macroeconomics (7 decks)

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