MacroEconomics Flashcards
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What is the circular flow of income?
A simple economic model which describes the reciprocal circulation of income between producers and consumers
What are factors of production?
Land, labour, enterprise and capital
What are the assumptions made for the closed economic model of the circular flow of income?
- No government sector (tax or capital injections)
- No exports or imports
- All money earned is spent (none saved)
What is national output?
Economic output produced by firms
What is economic output?
quantity of goods or services produced in a given time period, by a firm, industry, or country
What is National Income?
The total income received by people in the economy.
What is National expenditure?
Total amount spent on goods and services
Give examples of ‘injections’ into the circular flow of income
- Capital produced through exports
- Private investment
- Public spending
What are capital injections?
Spending that puts money into the circular flow
What are withdrawals/leakages?
Items that take money out of the circular flow
Examples of withdrawals/leakages?
- Savings
- Imports from abroad
- Taxes
What are commercial banks?
Banks such as Barcalys, Natwest etc. that hold money for masses of people
What is the current bank rate?
The interest rate
What is a base rate?
The interest rate
What is quantitive easing?
Injecting more money (liquidity) into the economy by buying assets
Effects of quantitive easing?
- More money for people to spend= better economy
- Inflation
What does the Bank of England do?
- Holds money for the government
- Holds money from commercial banks
What is the effect of the independence of the Bank of England?
The B of E sets it own monetary policy for the good of the country rather than the good of an individual party
Methods of measuring an economy’s wealth
- National Income
- National output
- Expenditure method
What is GDP?
‘Gross domestic product’- The value of goods & services produced over a given time, usually 1 year
How can resources be described?
Scarce or Finite
How are human wants described?
Infinite
What is the economic problem between ‘human wants’ and ‘resources’
Human wants are infinite but resources are finite
Give the 3 economic problems of production
- What to produce
- How to produce
- Whom to produce to
Name the 4 main economic resources and what they are rewarded with
Land – Rent
Capital – Interest
Labour – Wages
Enterprise – Profit
What is Land?
Natural resources
What is Labour?
Human resources
What is capital?
Man made good used to produce Goods + services
What is enterprise?
Ability to combine other inputs (capital, labour, land)
What are households?
People in an economic system
What are firms?
Factories/businesses/anything that provides goods/services
What is investment?
Money invested by firms into purchasing capital stock
What is macroeconomic equilibrium?
When injections=withdrawals
What is disposable income?
The amount of money households have for spending after income tax
Whats are factors of production?
Land
Labour
Capital
Enterprise
What is a closed economic system?
When firms and households are the only components in the system and there are no external factors
What is an open economic system?
When external factors such as investment, govt spending, tax, imports/exports etc. are involved in an economic system
What are injections:
Money added to an economic system externally eg. exports, govt spending, investment etc
What are withdrawals/leakages:
Money taken out of an economic system through tax, imports and savings
In regards to injections and withdrawals, how can GDP be increased?
If total injections > total withdrawals
In regards to injections and withdrawals, how can GDP be decreased?
If total withdrawals > total injections
When GDP increases, how does it return to equilibrium?
Households spend more money abroad = imports = increased leakages
Taxes increase = more leakages
people save more money = more leakages
All this continues until injections = leakages
When GDP decreases, how does it return to equilibrium?
People pay less taxes = Less leakages
Firms lower costs so more exports = more injections
Govt try to stimulate economy by spending = more injections
People spend less abroad = less leakages
All this continues until injections = leakages
3 ways to measure a country’s wealth
National income
National output
National expenditure
What is national income?
The combined amount that a country’s people earn as income, in a given time
What is national ouput?
The value of the goods and services produced by a country, in a given time
What is national expenditure?
The combined amount that a country’s people spend
What are the macroeconomic objectives?
- Full employment
- Price stability
- Sustainable economic growth
- Balance of payments in equilibrium
- Low levels of inequality
- Concern for the environment and sustainability
What is the value added?
The amount by which the value of an article is increased at each stage of its production, exclusive of initial costs.
The advantages of index numbers
- Shows data in a simplified form
- Makes it easier to compare prices between years
Calculating index number
100 x GDP (specific year) ÷ GDP (base year)
Nominal GDP
THe value of national output at current prices
What is quantitative easing?
An unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective
What is the asymmetric inflation target?
The 1% boundary eitherside of the target inflation rate
Examples of economic indicators
- Output growth:growth in real national output
- Price levels and inflation
- Levels and types of unemployment
- Balance of payments
Independant policies
Monetary policies that aren’t controlled by political parties and instead are for the economy
What is short run growth
Output measured as annual changes in real GDP and is typically recorded as %rate of change
What is the economic (business) cycle?
The annual fluctations in GDP over a period of time
What is recession
A decline in national output (output fall for two consecutive quarters)
What is recovery?
When upward movement of national output is restored, reducing the negative output gap between actual and capacity of production
What is full employment?
When national output reaches its potential or capacity level
What is a boom?
The overheating of an economy, representing an inability of supply capacity to meet high levels of demand
Symptoms of a boom
-A rise in inflation
-An increase in imports
A positive output gap may occur if output is temporarily over its capacity level
Measuring long term growth
Measured by averaging annual growth rates over longer periods of time (5~10 years)
Problems with measuring economic growth (4)
- The volume of data includes degrees of inaccuracy and omissions
- Omissions relate to non-marketed activities
- Non marketed government services need to be valued
- Omissions related to activity within so-called informal or hidden economy (black market)
The benefits of economic growth (6)
- Increased consumption and investment. This leads to increased material living standards
- Increased employment opportunities
- Strong economic growth contributes to business confidence
- Increased trade competitiveness
- Increases tax revenue for the government
- Decreases risk of inflation from overheating
Costs of economic growth (3)
- GDP statistics fail to take full account of the externalities involved in production, especially external costs caused by a negative environmental impact
- Growth of GDP gives no indication of the distribution of this rising income
- A ‘consumer society’ gives rise to social problems that detract from social well being but are not taken into account in GDP statistics
What is sustainable economic growth?
Economic growth achieved in a manner that does not threaten to reduce future economic welfare
What are transfer payments?
Transfers from tax-payers to benefit recipients through the working of the social security system.
What does ‘at constant prices’ mean?
Current price deflated by price index of goods and services
Bare facts about income distribution and redistribution (3)
- Income distribution encourages economic growth and visa versa
- Correct level of income inequality is when income growth is maximized for the least well off in society
- The tax and benefit system is used to redistribute income towards the less well off
Sources of LR economic growth (4)
- New natural resources
- New technology
- Increase in quality of labor
- Innovation
Sources of SR economic growth (3)
- Increase in aggregate demand
- Increase in aggregate supply
- Increased employment
Consequences of recession
- Fall in demand
- Rise in unemployment
What is a slump?
The bottom of the business cycle which represents a period of serious economic decline
Consequences of a slump (3)
- Low inflation
- Low business confidence
- high rate of bankruptcy and unemployment
What are the 4 macroeconomic indicators?
- Inflation
- Unemployment
- Economic Growth
- Balance of Payments
All of these are equally weighted
Why has their been an increased number of women entering the labour force (3)?
- Increasing, and changing types, of jobs
- Increased and improved childcare facilities
- Changing social attitudes
What are some of the benefits of having women in the workforce? (2)
- Increased labour force leads to an increased output and an increase in economic growth
- Increased income tax for the government
What is the benefit of unemployment for the worker?
Gives them time to search for a more rewarding job
What is the benefit of unemployment to firms?
Makes it easier for expanding firms to find workers at low wages
What is the benefit of unemployment to the economy?
- Decreases cost-push inflation as workers are less likely to risk their jobs for higher wages
- Decreases demand-pull inflation as workers are less likely to spend lots in fear of unemployment and those who are unemployed do not spend lots
How can low unemployment lead to inflation?
Demand for workers is greater than supply so firms have to pay more money keeping their workers for competition and stealing the best workers from other firms, leading to cost push inflation.
What is hysteresis?
Long term unemployment
What is classed as long term unemployment?
Unemployment for 6 months or longer
What are the problems associated with hysteresis (2)?
- Firms can be less likely to employ workers who have been out of work for a long time as they’re afraid their skills may have become outdated or that they are bad workers
- Workers can become discouraged and be less likely to apply for work
What are the problems for Britain with high unemployment in foreign countries (2)?
- Unemployed workers from abroad may come to Britain to look for work that is not in fact available, and add strains to the current resources in Britain, as well as adding to unemployment (TAKING OUR FUCKING JOBS)
- Leads to decreased foreign demand for British exports which leads to a decrease in aggregate demand, resulting in greater unemployment in the UK
What is underemployment?
A lack of paid work for an individual. Eg. When a part-time worker would like full time work
What is a flexible market?
One where skills and hours of work can be distributed and shared between many jobs
Does England have a flexible market?
Yes, one of the most flexible markets.
What is derived demand?
Demand for something that is dependent on demand of an external factor
Explain why is demand for labour is derived demand?
Demand for labour is dependent on demand for the good or service that the labour produces
How do changes in interest rates affect income?
Increased interest rates increase mortgages, which decreases DISCRETIONAL income
How to combat technological unemployment?
Create a highly skilled workforce
What can occupational immobility lead to?
A greater demand for workers, yet increased unemployment as there is a mismatch between skills needed for a job and skills of the workers
How to combat occupational immobility?
Create a more highly skilled workforce with more transferable skills
What are ‘Key workers’?
Social workers, teachers, nurses etc.
Why is there a lack of key workers in big cities, such as London?
They cant afford the high house prices in the big cities
Who qualifies as the labour force?
People between the age of 16 and 65 who are employed, unemployed and are economically active.
Economically inactive
People of working age who are neither employed or unemployed. These include those with terminal illnesses, full-time students and those who retire early (discouraged workers)
Claimant count
The number of people eligible for Job Seekers Allowance (JSA)
Are we measuring unemployment accurately?
- Official statistics miss out the hidden unemployed
- Some of the labour force is economically inactive due to other reasons (e.g. They need to look after family, people who have retired early)
- Underemployment leads to inaccurate information
Acronym for the determinants of Aggregate demand
W-ealth and assets
R-ates of interest
I-ncone
C-redit availability
D-emographic
I-nflation
E-xpectations
S-avings encouragement (ISA’s)
What demographic are net savers?
Over 45’s
Under 45’s have a higher propensity to consume
What percentage of Aggregate Demand does consumer expenditure make up?
75%
What is the acronym for the determinants of investment on Aggregate Demand?
G-overnment policy R-ates of interest A-dvancements in technology P-rofits of investors E-xpectations
What is the acronym for the determinants of Government spending in Aggregate Demand?
C-cycles of business (recession or boom)
G-rowth in the economy/less benefits/more tax
P-olitics and beliefs
What is the acronym for exports and imports in Aggregate Demand?
C-omparative productivity to foreign countries
E-xchange rate
E-conomic cycle (domestic)
F-oreign economic cycle
Why does the figure of GVT EXP significantly undervalues public spending?
Transfer payments are not included, and they make up the majority of government spending
Will an increase in disposable income have greater effects on spending levels of those on lower and higher incomes?
Lower incomes would experience a greater effect as they need more expenditure to meet their basic needs whereas higher income households already have enough and thus will save more
How can it be that there is a greater increase in expenditure than in disposable income?
Increases in disposable income make households more optimistic which encourages them to borrow more money and spend more than they actually get
What is the acronym for the effect on imports and exports from the exchange rate?
SPICED:
Stronger Pound Imports Cheaper Exports Dearer
What are the two ways high inflation can affect consumer expenditure?
Increase consumer expenditure: Makes people want to buy more as they fear future prices will increase
Decrease consumer expenditure: People save more to maintain the real value of their incomes and hope for the prices to fall again
What is the multiplier of income?
Finds total income when when consumption has been passed down the whole economic chain
eg. if the multiplier is 10, a £1 increase in Aggregate demand will lead to a £10 total increase in income
What is the equation to find the multiplier of income?
1/MPS
MPS=Marginal Propensity to Save
What are the two factors that affect long run aggregate supply?
QUALITY & QUANTITY of FACTORS OF PRODUCTION
What is Yfe?
Income at full employment: when there is full productive capacity
Where on a graph would you put Yfe?
On the X-axis of a graph under where full productive capacity has been achieved
What is the main determinant of long run aggregate supply?
Investment
Investment affects the quality & quantity of factors of production
What is macroeconomic equilibrium? (3)
When aggregate demand = aggregate supply
When injections = withdrawals
E+G+I = M+S+Tax
In terms of the macroeconomic equilibrium, what happens when injections do not equal withdrawals?
If spending on consumption (G+E+I) exceeds withdrawals so there would be an excess of demand over supply, and thus macroeconomic equilibrium is not met
If spending on supply (M+S+Tax) exceeds injections, there would be an excess of supply over demand, and thus macroeconomic equilibrium is not met