Macroeconomics Flashcards
where will the economy always be at in the long run
the economy will always be at full unemployment
what indicators in macroeconomics tell us how the economy is doing
growth -> indicator of income and living standards in economy
unemployment -> keep it low
inflation -> rate of growth of prices in an economy
trade -> looking at the value of imports of goods and services compared to the value of exports of goods and services
distribution of income -> how incomes are distributed across households in an economy
what are the different macroeconomic objectives
growth to be strong, sustained and sustainable -> growth is measure of living standards so want that to be high and sustained over time
low unemployment, full employment
low and stable inflation rate 2% (+-1%)
balanced trade in and out of country (trade deficit, trade surplus)
fair distribution of income -> idea of fair changes of whoever is in charge
Why did the UK use heavy expansionary fiscal policy during covid?
massive increases in government spending -> huge increase in healthcare spending on NHS + furlough scheme paying wages of employed and self-employed despite no production of goods and services taking place
massive tax cuts -> VAT cut for industries that were hit hardest e.g. leisure, hospitality, tourism from 20% to 5%
these industries were exempt from paying business rates -> tax on the value of physical property
why?
To increase aggregate demand -> bring economy out of recession + close the negative output gap and propel the economy towards recovery
increase inflation to avoid deflation with increased AD
increased AD to keep unemployment low
consequences:
demand pull inflation
massive budget deficit
aid and globalisation havent really been tested yet so make heavy revision on that
do this video when rest of notes are made and understood
https://www.youtube.com/watch?v=ZlJ8TfmzgL4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=3&ab_channel=EconplusDal
https://www.youtube.com/watch?v=kJAJiFEmzLg&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=4&ab_channel=EconplusDal
what is the circular flow of income and draw it illustrating the different parts
a useful way of modelling the economy
model - https://www.youtube.com/watch?v=2BINy9AzHhQ&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=5&ab_channel=EconplusDal
what is the equation for calculating an index number
an index always has a base year of 100
Index number = (raw number / base year raw number) x 100
What is GDP and what does it measure
GDP -> the value of all goods and services produced in an economy annually
-measures growth
-measures living standards as it measures income
What is the problems with using GDP as a measure of economic growth
Double counting -> when the value of output in the primary sector is included again when the primary commodity is manufactured again into something in the secondary sector -> inflates the final figure
informal activity isn’t accounted for e.g. black market, illegal activity (businesses that aren’t registered), DIY work etc.
errors given the vast data collection
negative externalities of production aren’t included -> e.g. cost of air pollution, resource degradation, loss of biodiversity
Income inequality -> nothing in GDP mentions the distribution of income
the output produced -> e.g. if majority was capital it wouldn’t benefit consumers much + only benefits firms -> takes a long time for it to benefit consumers
other quality of life aspects GDP takes into account that would benefit living standards -> level of healthcare, education in society etc.
What is GDP per capita and what does it measure, give the equation to calculate it
GDP per capita gives us an average measure of individual incomes in an economy
calculated by GDP / Population
what are the issues of GDP per capita
remittances (when a worker leaves a country to work abroad and earn higher income, with that income being sent back to their home country)-> GDP per capita doesn’t take into account any factor income made abroad e.g. domestic business working abroad -> even though that income is clearly raising living standards
influence of FDI -> foreign business comes and produces in a home country -> will increase their GDP figure -> however a lot of the income generated will be sent back to their own home country and wont stay within the domestic economy
what is GNI and what is it used for, what is the equation to calculate it
GNI is used to find the total income generated by a countries factors of production regardless of where they are located
as long as the worker or firm is domestic, it will be included in GNI -> therefore FDI will not be included as is foreign
GNI = GDP + net factor income (income earned by domestic workers/firms - income earned by foreign workers/firms who operate at home)
what does green GDP account for that other measures don’t, how is it calculated
accounts for the environmental costs of production -> which can massively effect living standards
Green GDP = GDP - Environmental costs
takes away all negative externalities from the GDP to find more accurate living standards
what are the problems with using green GDP
putting monetary value on environmental costs are quite subjective
GDP could dramatically fall -> too politically sensitive
Define economic growth
an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS
increased AD -> increases economic growth
what is the equation to calculate AD
AD = C + I + G + (X - M)
draw the diagram for the economic/business cycle and show the 4 phases of the cycle
Diagram -https://www.youtube.com/watch?v=CBvM3YqsJYs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=9
show a positive and negative output gap aswell
define recession
two successive quarters of negative economic growth
define a boom in an economy
Growth faster than trend rate -> high profits + low unemployment + high consumer and producer business confidence + high demand imports + rising tax revenues
however this boom also causes inflation
define a recession/trough
Declining AD -> high unemployment -> sharp fall in consumer/producer confidence and investment -> destocking and discounting of goods by firms + lower inflation + low demand for imports
define a recovery
rising consumer confidence -> higher house prices -> rising business confidence -> higher investment -> increase in construction
what are the benefits of economic growth
higher disposable income
higher employment
higher profits of firms
fiscal dividends for gov (increase in tax revenues)
what are the costs of economic growth
inflation
income inequality e.g. one sector dominates the economy, poor quality jobs, lack of welfare state
environmental costs -> producing goods from it -> e.g. deforestation, palm oil production -> cause negative externalities in production -> welfare loss
current account deficit -> incomes rise -> household incomes rise -> increase in imports spending -> widens the current account deficit