Macroeconomics Flashcards
What are the 4 main sections of macroeconomics?
Economic Growth
Unemployment
Inflation
Balance of Payments
What does aggregate demand stand for?
Total spending on goods and services in an economy
What is the equation for aggregate demand?
AD = C + I + G + (X - M)
C = Consumption
I = Investments
G = Government spending
X = Exports
M = Imports
What does economic growth measure?
The rate of change of a country’s output
What is the key measurement for economic growth?
Gross Domestic Product (GDP)
What does GDP calculate?
The sum of a country’s output over a calendar year
Why is high economic growth an objective?
It increases quality of life, creates new jobs and improves tax revenues
Why is unemployment bad?
It’s a waste of resources and a high unemployment rate usually means poor economic performance
What are the benefits of low unemployment?
More disposable income
Higher consumption
Higher aggregate demand
Higher incomes
higher tax revenue
lower government spending on unemployment
Reduced poverty (absolute and relative)
What is inflation?
The rate of change of average prices in an economy
What measures Inflation?
Consumer Price Index (CPI)
What can inflation affect?
Value of currency
Workers wage demands
Consumer confidence
Who controls inflation in the UK?
Bank of England
What is the goal rate for inflation?
Between 1 and 3 percent. Ideally 2
What is the balance of payments?
A measure of a country’s record of economic activities with other countries
Which account are countries primarily concerned with?
The current account
What happens if exports are greater then imports?
You get surplus
What happens if exports are smaller then imports?
You get deficit
What does the UK have in terms of goods and services? (BoP)
A surplus in services but a deficit in goods
What does the UK have a sustained and persistant x in?
Deficit
What does a high level of imported goods mean?
More variety which may be of higher quality and have lower prices
What is aggregate supply?
The total value of goods and services in an economy
What does it usually mean if a product can be made quicker?
It is cheaper and therefore the demand increases as more people can afford it
What is equilibrium?
Companies want to sell their goods or services for the most amount of money possible. Consumers want the goods and services to be as cheap as possible. Equilibrium is the point where companies are happy to sell their product at and consumers are happy to buy it at that price
What happens when the production potential has been reached?
People will want more of the service or good and this will drive the price up
How do you avoid hitting the production potential?
Make more factories, hire more people. If demand continues to rise, companies will be forced to expand
What are the 3 different ways of calculating the level of national income in an economy?
Income method
Output method
Expenditure method
What is nominal national income?
It’s expressed in monetary terms and doesn’t take inflation into account
How do you find real national income?
Nominal National Income ÷ Average Price Level
What is short-run economic growth measured by?
The annual percentage change in real GDP
What is the circular flow of Income?
It’s an economic model that illustrates the flow of goods and services, the factors of production and their payments between households and firms within an economy
What are the payments for each factor of production?
Land = Rent
Labour = Wages
Capital = Interest
Enterprise = Profit
What is unemployment usually measured as?
A level or rate
What is the trend rate of growth?
The rate of growth that can be sustained without generating any inflationary pressure
How do you determine the trend rate of growth?
The rate of growth of productive potential
What is the positive output gap?
When the economy temporarily grows faster than the trend rate operating in the short run beyond its full capacity
What is the negative output gap?
When aggregate demand is acting at a slower rate or falling in relation to its productive potential
What are the causes of inflation?
Demand-Pull
Cost-Push
What is unemployment?
The number of people looking for work but cannot find a job at that point in time. They are members of the labour that want to work but are unable to find a job
What is the measurement for unemployment?
The labour force survey or the claimant count.
There’s a difference between level and rate
What are the types of unemployment?
Cyclical
Structural
Frictional
Seasonal
Technological
Regional
What is cyclical unemployment?
It usually occurs during recessionary periods in an economy. A lack of demand for goods and services leads to a lack of demand for labour to produce those services
What is structural unemployment?
It occurs when there’s a difference between the characteristics workers have (skills and geographic mobility) and the characteristics wanted by employers
What is frictional unemployment?
The moment in time where a worker is moving between two jobs. It’s usually considered as short-term in nature
What is seasonal unemployment?
It occurs through seasonal fluctuations in demand throughout the year. Unemployment figures are usually adjusted for this and look more normal
What is technological unemployment?
It occurs through the increasing degree of automation in the production process
What is regional unemployment?
It’s typically linked to structural unemployment, a situation where a town or region experiences a downturn
What are the consequences of unemployment?
Lower living standards
De-skilling
Health implications
Social issues
Unemployment traps
Longer term employability
Government finances
Lost output
Lower international competitiveness
Rising inequality
Loss of resources invested in training
Lower consumer spending
Economists measure the productivity of all factors of production. What are the productivities for labour and capital?
Labour = total output of workers
Capital = output per unit capita
How is the labour force survey constructed?
Questionnaire data is collected face-to-face and other methods. The office for national statistics puts the data together to provide evidence for policy and decision making
How is the claimant count constructed?
It consists of all people claiming money at job benefit offices. They must prove that they’re looking for work and that they were out of work the week they make the request
What is the capital account?
It primarily records international flows of capital such as inter-country loans or government investments overseas
What is the financial account?
It primarily records foreign direct investment(FDI). It also includes government owned assets like gold, currency reserves and private assets abroad. It will also include short-term capital flows, such as speculative movements on currency or share investments like hot money
What are index numbers?
It’s a data figure reflecting price or quantity compared with a standard or base value which is usually 100
How do you calculate an index number?
(Current Value ÷ Last Year Value) x 100
How do you calculate base year value?
(previous value ÷ this year value) x 100
What is a weighted index number?
It’s an average index index that is made up of a combination of other indices
How to calculate weighted index numbers?
sum of weightings x index numbers ÷ sum of index numbers
What is a withdrawal and give examples?
It’s when money leaves the economy for example taxes, savings and imports
What is an injection and give examples?
When money enters the economy like government spending, investments and exports
What is the definition of aggregate demand?
The total demand for all goods and services in an economy at any given price level over a period of time
What is the level of consumption dependent on?
The household’s income, interest rates, levels of personal debt, levels of personal wealth, confidence and marginal propensity to consume/save
What is the multiplier effect?
When an initial injection into the circular flow causes a bigger final increase in real national income
How do you find the multipliers effect coefficient?
Final change in real GDP ÷ Initial change in AD
How does the multiplier affect occur?
One agent’s spending is another agent’s income. When a spending project creates new jobs for example, this creates extra injections of income and demand into a country’s circular flow
How does a negative multiplier effect occur?
When an initial injection or leakage of spending from the circular flow leads to knock-on effects and a bigger final drop in real GDP
What is the accelerator effect?
It shows the relationship between GDP and the rate of investment. It states that a rise in GDP will lead to a proportionately larger increase in investment
Why might the accelerator effect take place?
If a firm sees that GDP and AD is increasing, it needs to be certain that this is going to continue. Initially the firm will use their existing capacity and make their existing capital and labour force work harder to meet the demand
What happens during the accelerator effect when the firm reaches full capacity?
If they believe that the growth will be sustained, they’ll invest in capital equipment to meet future anticipated demand. This increase in investment will boost AD further and assist yet more economic growth
What is government spending?
Tax revenue and borrowing spent by the government for the benefit of a country’s citizen
What affects how much we import and export?
UK productivity
Exchange rates
Economic growth in other countries
Extent of free trade
What is a high level of AD in an economy also linked with?
A high level of economic growth
What is the formula for the multiplier effect?
K = Change in Y ÷ Change in J
Y = Real National Income
J = Injections
How is a negative multiplier effect formed?
Cuts in spending and increases in taxes. It will also lead to a fall in gdp
What is the size of the negative multiplier dependent on?
The marginal propensity to consume
What factors affect the size of the negative multiplier effect?
Interest rates
Tax rates
Imports
Spare capacity
What happens if AD causes economic growth?
Price levels rise
What happens if AS causes economic growth?
Price levels decrease
What must occur to allow long-run economic growth?
An increase in the productive capacity of the economy
What could make LRAS increase?
A change in quantity or quality of the factors of production
Why is it important that the government find a balance between SR + LR economic growth policies?
High levels of inflation are likely to occur if you only stimulate the demand side. If you focus on the supply side, you’ll suppress the demand side
What is an economic cycle?
Variations in the level of productive capacity of an economy over time
What is a boom and what is linked with it?
When the economy grows faster than average rates.
High levels of economic growth, high demand, low unemployment, inflationary pressure, labour skill shortages, high confidence, high capital investment
What is a recession and what does it come with?
When the economy starts slowing down. GDP falls for 6 months straight
Economic growth falls, demand falls, unemployment rises, firms go out of business, low confidence, less investments
What is a slump and what comes with it?
When economic growth is at its lowest .
Low or negative growth, low demand, low inflation, high unemployment, low confidence, high bankruptcy rate
What is recovery and what does it come with?
Economic growth starts to increase.
Economic growth rises, demand increases, demand increases, unemployment falls, rising inflation, confidence rises, capital investment rises
What is a demand-side shock?
An unexpected change in the economy that directly impact on AD
What is a supply-side shock?
An unexpected change in the economy that directly impacts AS. It will often refer to the size and productivity of the workforces and firms ability to produce goods and services
Why is the use of money better than barter?
A medium exchange
A store value
A unit of account
A standard of deferred payment
What are the issues with the claimant count?
Not everyone bothers to claim it
Under 18s and over 60s don’t count
The criteria for it always changes
Some people claim without looking for a job
Some people have black economy jobs and still claim it
What two factors affect the consequences of unemployment?
Rate of unemployment and duration of unemployment
What is another word for de-skilling?
Hysterisis
What is the current account made up of?
Trade in goods
Trade in services
Investment income
Transfers
What is trade in goods?
Measures the net exports of visible goods. The UK has traditionally run a large deficit on the trade of goods component due to the reduction in its manufacturing sector
What is trade in services?
(In current account terms)
Measures the net exports of visible items such as banking, insurance and tourism. The UK has traditionally run a large surplus on the trade in services component
What is investment income?
The profits and dividends that are received are sent to the UK and count as credit items of investment income
What is transfers?
Payments made or received usually by the government to or from other countries. The main transfers include EU membership and foreign aid
What is Keynesians idea?
In recessions governments should intervene through expansionary fiscal policies with higher spending and borrowing
No crowding out
Multiplier effect is significant
Reducing unemployment > controlling inflation
LRAS can be horizontal
Generally advocate fiscal policy
What is monetarists idea?
The economy is inherently stable and markets work efficiently with minimal intervention
Government spending crowds out private sector investment
Control of monetary supply is crucial for low inflation
Low inflation > control unemployment
LRAS is steep
Generally advocate monetary policy
What is the Quantity Theory of Money?
Explains the link between the supply of money and the general level of prices
What is the equation for Fishers equation of exchange?
Money Supply x Velocity of Circulation of Money = General Price Level x Output produced in an economy
What do monetarists believe inflation is caused by?
Changes in the money supply
What do monetarists believe about Money Supply and Velocity of Circulation of Money?
They are both stable and that any deviations from the stable trend are considered temporary
What do economic agents do if inflation has been stable for a long period of time?
They’ll factor it in to future spending decisions, wage bargaining or investment plans and they’ll be able to anticipate and predict the level of inflation in the future
What do economic agents do if inflation is volatile and unpredictable?
Disrupted consumer spending decisions, workers wage bargaining or firms investment plans
What are the consequences of Inflation?
Wage-Price Spirals - Higher wage demands increase inflation further
Shoe Leather Cost - Uncertain inflation increases search cost
Menu Costs - Costs to a firm of changing pricing information
International Competitiveness - Lower exports
Investment - Worth less
Fixed Incomes - Need to be correctly indexed-linked (pensioners etc.)
Savings - Worth less
Income Redistribution - Create a regressive effect, hitting the poor more
What are the consequences of Deflation?
Delayed purchases and consumer spending
Wages and Unemployment - Can’t bargain for higher wage
Debts - Worth more
Lower Confidence
International Competitiveness
Real Interest Rates - Increased costs of borrowing
Entrenchment - The continuous delay of consumption or investment
What does the Phillips Curve show?
The relationship between unemployment and the rate of change of money wages
What does the Phillips Curve suggest in the SR?
Changes in unemployment have direct and predictable effects on inflation
Why is the Phillips Curve important?
Established one of the key causes of inflation (excess AD)
High employment = demand-pull inflation
Low employment = cost-pull inflation
What are the flaws of the Phillips Curve?
Doesn’t apply to stagflation
Doesn’t recognise supply-side impacts
Only works for short run
What is Stagflation?
High unemployment and high inflation occurring together
What does NAIRU stand for?
Non-Accelerating Inflation Rate of Unemployment
What is NAIRU?
It’s the level of unemployment when there’s zero inflationary pressure
Why does NAIRU exist?
There’s a point where reduced unemployment doesn’t cause inflationary pressure due to supply-side slack. However, after this NAIRU point, inflation is created with more unemployment
Why does the long-run Phillips Curve exist?
It shows that trade-offs between inflation and unemployment aren’t possible
It accounts for expectations and assumes economic agents will adapt their behaviour
What does the long-run Phillips Curve assume?
Individuals base their expectations of future inflation on the current rate
Workers suffer from money illusion
What is Money Illusion?
Price inflation isn’t expected and when workers receive nominal wage increases they falsely believe that they’re better off
What are the costs of Economic Growth?
Negative Externalities
Inequality
Scarce Resources
Inflation
What are Asset Price Bubbles?
The price of an asset has significantly deviated from its intrinsic value and prices rise very quickly in the long term
What is Speculation?
The act of trading in an asset that has a significant risk of losing most or all of the initial outlay
What is Herding?
Irrational consumer behaviour which is predominantly characterised by a lack of individual decision making
