Macroeconomics Flashcards
Macroeconomics
The area of economics that studies the economy as a whole, focusing on the ‘aggregates’ of the economy and on countries’ fundamental economic goals in relation to several main variables: economic growth, employment, price stability, external stability and income distribution
National economy
Examines all economic activity taking place in a country
Circular flow of income model
Shows that in any given time period, the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output. Also shows injections and leakages
Business cycle
Short-term fluctuations in real GDP over time, consisting of alternating periods of expansion and contraction (peaks and troughs)
Leakages
The flows of money that leave the economy - savings, taxation, imports
Injections
The flows of money that come into the circular flow of income from outside - investment, gov’t spending and exports
GDP
Gross domestic product - total value of all final goods and services produced within an economy in a given period of time (usually a yr), regardless of who owns FOPs
Sum of C+I+G+net exp
GNP
Gross national product - total monetary value of all final goods and services produced by factors owned/supplied by the country’s citizens in a given period of time
GNI
Gross national income - total value of incomes earned by a nation’s FOP, regardless of where the assets are located (+ net property income from abroad)
GDP + net income from abroad
Income method
Measuring the national income by adding up all the income earned by groups when factors of production are sold in resources markets
Wages + rent + interest + profits
Output method
Measuring the national income through the output of firms in a given period
Expenditure method
Measuring national income by adding up total sales for goods and services sold in an economy
Real GDP
The market value of all the final goods and services produced within the borders of a country within a given period of time, taking into account inflation (often includes adjusted for inflation)
Nominal GDP
GDP calculated in a given year without considering inflation
Expenditure: GDP = C + I + G + (X - M)
(consumer expenditure, investment spending, gov’t expenditure, exports expenditure, imports spending
Deflator
Used to calculate real GDP and GNI from their nominal values, using a price index
Real GDP = (nominal/deflator) x 100
Green GDP
This refers to the GDP that has been corrected for loss of biodiversity as a result of economic activity, and the monetary costs of pollution and climate change.
PPP
Purchasing power parity - compares economic productivity and standards of living between countries on the basis of relative costs of goods and services
GDP per capita
Total value of all final goods and services produced in an economy in a given period of time (a yr), per head of the population
Aggregate demand
Total quantity demanded for a nation’s output of goods and services at different price levels by all buyers in an economy (consumers, firms, govt, foreigners), ceteris paribus
AD = C + I + G + (X-M)
Aggregate supply
Total quantity supplied of goods and services by all the industries of a country/economy over a particular time period at different price levels, ceteris paribus
Average price level
An index of the average prices of goods and services over time
National output
Total output of all the industries of a country
Recession (↓ demand)
A fall in total output resulting from a decrease in AD or AS
Inflation (↑ demand)
An increase in average price level resulting from an increase in AD
Supply shock (↓ supply)
An increase in the price level and decrease in output from a fall in AS
Economic growth (↑ supply)
An increase in national output resulting from an increase in AS
Consumer spending/ consumption
Spending of disposable income by households on goods and services
Investments
By firms: addition to the capital stock of the economy, eg tech, factories; expenditure spending by firms on capital
Government spending
Spending by govt, eg labour costs and infrastructure
Net exports
Spending overseas on exports - spending domestic on imports
Direct tax
Taxes that are paid directly to the government, eg on income, revenue (housegold and firms)
Wealth
Assets accumulated that can retain value and change in value (eg property, financial investment)
consumer/business confidence
When individuals/firms fear a recession → individuals incentivised to save more (fall in consumption), businesses invest less (fall in investment)
Link to expectations of future prices
Economic growth
Increase in the value of real output/real GDP or potential output over time
Actual output
Quantity of g/s produced by an economy over time
Potential output
Productive capacity of an economy over time
Real output
The value of output produced in an economy measured in base year prices
Full employment
When all FOPs are fully utilised in their best use;
The natural rate of unemployment, or unemployment that prevails when the economy is producing the potential output in its LR equilibrium, determined by position of LRAS curve
Deflationary gap
A situation where real GDP < potential GDP, unemployment > natural rate
Inflationary gap
Economy is at a level of output that is greater than the full employment or potential level of output
Real GDP > potential GDP, unemployment < natural rate
Macroeconomic equilibrium
When quantity AD = quantity AS, quantity real GDP demanded = that supplied
Recession
When an economy experiences 2 consecutive quarters of falling real national output
Unemployment
People of working age who are part of the workforce, but are currently not employed - actively seeking a job, but unable to get work
Unemployment rate = % people of total labour force unemployed
Unemployment of resources
When there are unused resources and not all FOPs are fully used
Underemployment
Those with part-time jobs who want to work full-time, or those who are over-qualified for their current jobs
Natural rate of unemployment
Percentage of people who are unemployed due to structural, seasonal and frictional reasons (NOT CYCLICAL)
Full employment
where all who are willing and able to work are employed
Structural unemployment
A mismatch between the supply and demand for labour caused by labour market rigidity and changes to industries (eg manufacturing → service sector, but workers with manufacturing skills)
Seasonal unemployment
Unemployment resulting from specific skills only being utilised at specific times of the year (eg ski instructor)
Frictional unemployment
Those who are between jobs or between schooling and a job
Real wage unemployment
Gap between number of jobs available and number of people willing and able to work at the prevailing wage rate (ie supply of labour > demand for labour at specific minimum wage)
Cyclical unemployment
Demand-deficient unemployment, occurs when a lack or reduction in AD forces firms to make workers redundant, during downturns of business cycle
Inflation
A sustained increase in the general price level in a nation over a period of time
Inflation rate = ((y2-y1)/yr 1)*100
Consumer-price index (CPI)
Measure of cost of living for average household - compares value of a basket of goods/services in one yr with the value of the same basket in a base yr. Used to find inflation
Demand-pull inflation
When the demand for goods and services outstrips supply (one of the components of AD)
Cost-push inflation
Occurs when the costs of production rise for a country, or when SRAS falls; usually the result of a negative supply shock
Deflation
A decrease in the average price level of goods and services over time
Disinflation
When the rate of inflation reduces (eg 4% → 2%)
Absolute poverty
When people live below a certain level of income that is necessary to meet basic needs
Standard of goods and services is absolute and unchanging over time, determined by poverty line (min income needed to sustain basic needs)
Relative poverty
The inability to afford an adequate standard of goods and services, where the adequate standard is relative and changes over time (depending on what is ‘typical’ in a society, often taken to be 50% of society’s median income). With higher median income, this standard also increases
MPI multidimensional poverty index
A composite indicator that measures poverty in three dimensions: health, education and living standards
Gini coefficient
Measure of income inequality between 0 and 1 (closer to 1 is more unequal)
Ratio of area between Lorenz curve and line of inequality : total area below line of inequality
Lorenz curve
Visual representation of income shares received by percentages of the population; further away = more unequal distribution of income
Equity
Condition of being fair or just, usually applied to the context of the income distribution within a country
Progressive tax system
Percentage of income paid as tax increases as income increases
Monetary policy
A demand-side policy: when the central bank uses the money supply and interest rates to manage the economy and influence AD
Interest rate
The cost of borrowing money, the price of credit, the reward for saving
Real interest rate = nominal interest rate - inflation rate (simple)
Real interest + 1 = (1 + nominal) / (1 + inflation)
Fiscal policy
A type of demand-side policy, whereby there may be changes in govt spending and taxation to achieve macroeconomic objectives
Budget surplus
Budget deficit
When the planned govt spending is less/greater than govt revenues over a specific period of time
Public debt
Total amount borrowed over the years that hasn’t been repaid (due to budget deficit?)
Automatic stabilisers
Factors that automatically work towards stabilising the economy by reducing short-term fluctuations of the business cycle, without action by govt
Eg progressive income tax and unemployment benefits
Transfer payments
A type of govt expenditure that is not in exchange for goods and services, often used to redistribute income and support the poor
Current expenditure
Day-to-day spending to keep the govt functioning, eg salaries for govt workers
Capital expenditure
All building of infrastructure financed by the govt, eg roads
Automatic stabilisers
Factors that automatically work towards stabilising the economy by reducing short-term fluctuations of the business cycle (eg progressive taxes, unemployment benefits)
Informal sector
Economic activity that is unrecorded (illegal, not taxed) in national income accounts, by the govt
Supply-side policies (SSP)
Policies that focus on increasing the quantity and quality of FOPs, and institutional changes to increase the productive capacity and LRAS to achieve LR EG
Interventionist SSPs
Gov’t interventions in the market to improve the supply-side of the economy to … (above)
Eg investment in human capital, R&D, provision/maintenance of infrastructure
Market-based supply-side policies
Policies that support the allocation of resources through forces of demand and supply, rather than through govt intervention in markets
to develop well-functioning competitive markets etc
Eg labour market reforms (no min wage etc), incentive policies (low corp tax), increase competition
Productivity
Quantity of output produced for each hour of work of the working population
Infrastructure
Large scale public systems (services or facilities) of a country that is necessary for growth and development; add to an economy’s capital stock, usually govt-supplied
Privatisation
When govt sells state-owned enterprises to the private sector
Central bank
An independent national authority responsible for the monetary system. The central bank determines monetary policy by controlling the money supply and interest rate.
