macroeconomics Flashcards
what is the circular flow of income? what assumptions does it make?
a model that simplifies the macroeconomy- most simple form describes the domestic economy, and how the product market and factor market flow between households and firms.
ASSUMPTIONS:
1- households own all factors of production
2- firms produce all goods and services
3- all factors are used to produce G&S’s
4- all income goes to households and is spent on goods and services
how does the circular flow of income work in the factor market?
HOUSEHOLDS OWN ALL FACTORS
- they sell factors of production to firms
FIRMS PAY HOUSEHOLDS WITH INCOME
- capital- interest
- enterprise- profit
- land- rent
- labour- wages
how does the circular flow of income work in the product market?
FIRMS PRODUCE OUTPUT
- goods and services are produced by firms using factors of productio (CELL)
HOUSEHOLDS BUY OUTPUT
- consumption of goods produced gives firms profit.
how does the flow of income differ when considering extra factors?
–>consumption (c)–>
HOUSEHOLDS FIRMS
<– income (Y) <–
--> saving (S)--> -->investment (I)--> HOUSEHOLDS FINANCIAL FIRMS
-->tax (t)--> <-- tax (t) <-- HOUSEHOLDS GOVERNMENT FIRMS
<-- benefits (G)<-- --> gov spending (G)-->
--> import (m) --> --> export--> HOUSEHOLDS OVERSEAS FIRMS
what extra assumptions are made with this more complex model?
1- saving= investment
2- government spending= tax revenue
3- exports = imports
why does the economy stay the same size in this model?
if all injections (investment (i), government spending (g), and exports (x)) are equal to all leakages ( savings (s), taxation (t), and import (m)), then the overall value of output, income, and expenditure will stay the same due to the circular flow of income within the domestic economy !equitas parabus!
what is National Income? what does GDP stand for?
national income is the total value of activity (output/income/expenditure) in an economy in a given period of time.
National income can be measured as Gross Domestic Product.
How can total income be measured?
GDP can be measured by adding up the total value of all income in an economy in a given time period.
Y= rent+wages+capital+profit)
How can total expenditure be measured?
GDP can be measured by adding up the total value of all spending in an economy in a given time period.
Consumption + investement + gov. Spend. + exports- imports (net)
How can total output be measured?
GDP can be measured by adding up the total value of all output produced in an economy in a given time period.
Adding up value of FINAL PRODUCTS produced in a year- NO DOUBLE COUNTING
What is GNI?
gross national income is different to GDP because includes money spent/earned by citizens overseas
GNI= GDP+ net income from abroad (money earned- money spent)
what is real GDP?
real GDP is adjusted to account for inflation so that it is more accurate- some increase in value is only due to increase in price
Nominal GDP- inflation
how is GDP limited as a measure for standard of living?
GDP per capita is taken as a measurement for standard of living because a higher GDP equates to more income, more spending, therefore more satisfaction of the unlimited human needs.
X it does not account for income inequality- only a average therefore most income may only be held by some.
X does not take into account the Shadow Economy- transactions that aren’t recorded e.g. cash in hand.
what is aggregate demand?
total demand in an economy, a measure of GDP
AD=C+I+G+(X-M)
what is an AD curve? how does it move?
downwards sloping, shows inverse relationship between price level and real GDP.
An increase in one or more componenets causes a shift to the right.
a decrease will cause a shift to the left
