Macroeconomics Flashcards
GDP
the total market value of all final goods and services produced in an economy in a given period of time (produced within borders)
National Income Accounting
measurement of the economy’s income or value of output
Nominal GDP
refers to the value of goods and services in terms of prices at the time of measurement
Real GDP
refers to a measure of value that accounts for price changes over time (ie adjusted for inflation)
GDP per capita
refers to the total GDP of a country divided by its population to account for population growth or difference between countries
Purchasing Power Parity
special exchange rates between currencies to equate the buying power of each currency
GNI
total income received by residents (regardless of location of factors), equal to GDP plus or minus foreign income (add money earnt abroad, subtract money earnt onshore that is received offshore)
Business cycle
fluctuations in the growth of real output/GDP, consisting of alternating periods of expansion and contraction
Expansion
positive growth in real GDP (upwards-sloping portion); resource employment and inflation increases
Peak
represents the maximum real GDP, the end of a period of expansion; low unemployment and high inflation
Contraction
negative growth in real GDP (downwards-sloping portion); resource employment decreases and inflation slows, if lasts over 6 months classified as a recession
Trough
represents the minimum real GDP, the end of a period of contraction; high unemployment
Value of output unconsidered in GDP
- Non-market transactions (if clean house yourself, grow own food)
- Informal transactions (ie pay in cash and do not declare)
- Parallel market transactions
- Depreciation (if replaces past thing, ie house burnt then rebuilt counts as if added value)
Aspects of wellbeing GDP does not consider
- Composition of output (eg spent on healthcare, education, food instead of nuclear weapons)
- Distribution of income (inequality unconsidered)
- Quality improvements (better quality computer over time for same price)
- Negative externalities unconsidered (eg environmental damage)
- Depletion of natural resources
- Leisure (less work lower GDP yet increased wellbeing)
- Health significant factor despite healthcare (eg even if good healthcare poor diet affects well-being)
- Quality of life factors (conflict, freedom, traffic, etc)
OECD Better Life Index
Measures key aspects of individuals’ lives, ie housing, environment, social network, work-life balance, personal security, education, health, democratic processes
- Doesn’t rank the 11 indicators so making comparisons can be difficult
- Only a small number of countries
Happiness Index
surveys that require participants to rank their level of happiness based on an assortment of quality of life factors
- Index changes over time to reflect changing importance but this makes comparisons over time less valid
Happy Planet Index
Measure of sustainable wellbeing, ranking countries by how efficiency they deliver long, happy lives, using our limited environmental resources
- Ignores some key factors e.g. Human rights violations
- Australia regularly ranks highly in quality of life measures BUT ranks 105 on Happy Planet Index
Human Development Index
measure of a country’s average achievements in three basic aspects: health, knowledge and standard of living
- Wide divergence within countries, and reflects long-term changes like life expectancy. Higher national wealth does not indicate higher welfare etc
Aggregate demand
the total quantity of aggregate output, or real GDP, that all buyers in an economy want to buy at different possible prices, ceteris paribus
AD=C+I+G+(X-M)
Aggregate demand curve
shows the inverse relationship between the aggregate output buyers want to buy, or real GDP demanded, and the economy’s price level, ceteris paribus
Changes in consumer spending
- Changes in consumer confidence
- Changes in interest rates
- Changes in wealth
- Changes in income taxes
- Changes in the level of household indebtedness
- Expectations of future price levels
Changes in investment spending
- Changes in business confidence (measure of degree of optimism among firms about future performance)
- Changes in interest rates
- Changes in technology
- Changes in business taxes
- Level of corporate indebtedness (degree to which corporations have debts)
- Legal/institutional changes
Changes in government spending
- Changes in political priorities
- Changes in economic priorities: deliberate efforts to influence aggregate demand
Changes in net export spending
- Changes in national income abroad
- Changes in exchange rates
- Changes in trade priorities, or level of trade protection
Aggregate supply
the total quantity of goods and services produced in an economy over a particular time period at different price levels
short-run aggregate supply curve
shows the relationship between the price level and quantity of real output produced by firms when resource prices (especially wages) do not change
Reasons wages are rigid
- Labour contracts fixed wage rates for certain periods of time (eg 1-3 years)
- Minimum wage legislations fix the lowest legally permissible wage
- Workers and labour unions resist wage cuts
- Wage cuts have negative effects on work morale
Factors causing shifts in SRAS
- Changes in wages
- Changes in non-labour resource prices
- Changes in indirect taxes
- Changes in subsidies offered to businesses
- Supply shocks
short-run equilibrium
the point of intersection of the AD and SRAS curves, determining the price level, level of real GDP and level of employment
long-run aggregate supply curve
shows the relationship between the price level and quantity of real output produced by firms when resource prices change
Deflationary (recessionary) gap
equilibrium real GDP lies to the right of potential GDP; unemployment is above the natural rate; economy is likely to be in recession; not enough demand so less labour is needed
Inflationary gap
equilibrium real GDP lies to the left of potential GDP; unemployment is below the natural rate; economy is likely to be experiencing inflation; too much demand so more labour is needed
full employment level of real GDP
equilibrium real GDP is equal to potential GDP, natural rate of unemployment
Factors causing shifts in long-run supply curve
- More resources (increased quantity)
- Improved quality of resources (more educated workforce)
- More efficient use of resources (technology/innovation; legal/institutional change to promote efficiency)
- Improved natural rate of unemployment (jobs better matched; gives more and better quality resources)
Inflation
a sustained increase in the general level of prices in an economy over a period of time
CPI
a measure of the cost of living for the typical household, comparing the value of a basket of goods and services in one year to the value of the same basket in a base year
Deflation
a sustained decrease (decline) in the general price level (increase in purchasing power)
Disinflation
a deceleration or reduction in the rate of inflation (price level is increase at a slowing rate)
Issues with CPI
- Averages: not representative of all people/groups/incomes/regions/cultures
- Changes in the basket: price change (consumption pattern changes due to substitution if prices change), sales (if often bought on sale, cheaper than price listed), new products (no longer comparable; time lag)
- Other: international (different baskets across different areas), quality (computer quality improved for same price, therefore lower cost of living not accounted for), comparability over time (updating basket)
Demand-pull inflation
increased total aggregate demand
Cost-push inflation
short-run aggregate supply curve decreases due to increased costs of production
Costs of inflation
- Redistribution effects
o Benefits: borrowers, payers of fixed incomes/incomes rising slower than inflation
o Harms: fixed incomes/incomes rising slower than inflation, cash holders, savers, lenders - Uncertainty
- Lowered incentive to save
- Decreased aggregate demand from above reduces economic growth
- Reduced international competitiveness
- Inefficient resource allocation: signals/incentives distorted (price increase not uniform across products)
- Social/personal costs unequally distributed (pensioners, unemployed)
Hyperinflation
increase in price levels of more than 50% per month
Costs of deflation
- Redistribution effects: opposite to inflation; benefit savers/those on fixed incomes and harm borrowers
- Increase in the value of debt
- Rise of bankruptcies and financial crisis
- Uncertainty
- Deferred consumption (postpone spending, lower AD, unemployment increases, intensifying deflation)
- Inefficient resource allocation: signals/incentives distorted (price decrease not uniform across products)
- Policy ineffectiveness: difficult for governments to manage
