Macroeconomics (3.1 - 3.4) Flashcards
1
Q
What is national income accounting?
A
Used to measure nations level of economic activity. Refers to the money value of all goods and services produced in a country during a year. Can be expressed in 3 equivalent monetary terms:
- Total expenditure
- Total income
- Total output of goods and services
2
Q
What is the circular flow of income?
A
Shows the flow of money between shareholders in an economy as it is used to illustrate three methods of national income.
- Injections: add money to the circular flow of income and increase its size (Increased government spending, investment, exports)
- Leakages: add money to the circular flow of income and increase its size (Increased savings, taxation, import purchases)
3
Q
What is the expenditure method?
A
This approach adds up the value of all the expenditures in the economy in a year
Nominal GDP = Consumption + Investment + Government spending + (Exports - Imports)
4
Q
What is the income method?
A
This approach adds up the payments (rewards) for the factors of production in a year
National Income = Wages + Rent + Interest from capital + Profit from entrepreneurship
5
Q
What is the output method?
A
This approach adds up the value of all finished goods/services produced within the economy each year
6
Q
What is nominal gdp?
A
is the actual value of all goods/services produced in an economy in a one-year period. There has been no adjustment to the amount based on the increase in price levels
GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M)
If any of the components of GDP increase, then economic growth is likely to occur
7
Q
What is gross national income?
A
Measure the value of all income by country’s citizens including income from abroad.
GNI Formula = Nominal GDP + Income abroad
Net income from abroad = Income from abroad -
8
Q
Real GDP and GNI
A
Value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
9
Q
Real GDP formula
A
Nominal GDP / GDP Deflator * 100
The GDP deflator is used to convert nominal GDP/GNI from current prices to constant prices
10
Q
What is purchasing power parity?
A
Refers to amount of goods sand services bought with one unit of currency. Refers to exchange rate needed to buy the same basket of goods and services in different using same amount of money.
11
Q
What is OECE better life index?
A
Index which aims to measure the well-being of citizens in its 38 member countries: housing, income, jobs, community, education, environment, civic engagement, health, life satisfaction, safety, work life balance
12
Q
What is the business/economic cycle?
A
refers to the changes in real GDP that occur in an economy over time which is actual growth. The real GDP will fluctuate above and below the long-term trend rate of growth. Four points:
Expansion, Peak, Recession, Trough, Recovery
13
Q
What are benefits of OECD better life index?
A
- Allows comparison of key factors that can influence wellbeing and happiness of one person
- Takes into account more factors than just GDP, accurate representation of standard of living
- More informed about various factors that shape human well being
14
Q
What are limitations of OECE better life index?
A
- Narrow coverage, only 35 countries, limits usage when making international comparisons
- Valuations are subjective as 11 topics not ordered in priority system
- Not yet comparable over time
15
Q
What is happy planet index?
A
Attempts to measure sustainable wellbeing. Countries are ranked by how efficiently they deliver long, happy lives using the earth’s scarce resources in a sustainable way. Uses three variables:
- Wellbeing, Life expectancy, Ecological footprint
Formula: Wellbeing x Life expectancy / Ecological footprint
16
Q
ADV and DIS of happy planet index?
A
ADV:
- Aims to challenge other indices of country development such as GDP, measures different aspects of development in country
DIS:
- Ignores major problems that affects countries wellbeing / happiness
17
Q
What is the happiness index?
A
survey that measures happiness in 10 different areas of a persons life. Involves:
- Psychological Well-Being, Health, Time Balance, Community, Social Support, Education, Arts, and Culture, Environment, Governance, Material Well-Being, Work
18
Q
ADV of using happiness index?
A
- Measures wellbeing outside of purely monetary perspective
- Updated to reflect current changes in society
- Encourages businesses to measure success by bottom line and the environmental / social benefits they offer
- Helps track people really feel about changes in society
- Feelings and emotions valued in project management
- Mental heath seen as important as physical health.
19
Q
DIS of happiness index?
A
- People have different levels of happiness
- Doesn’t reveal true state of economic well being
- Too subjective
- Measures current well being, difficult to factor in previous measures of happiness
- Happy doesn’t equal economically well.
20
Q
What is aggregate demand?
A
is the total demand for all goods/services in an economy at any given average price level. If AD increases then economic growth has occurred and vice versa
Formula: AD = C+I+G+(x-m)
C= Consumption
I= Investment
G= Government spending
X-M= Net exports
21
Q
What are changing factors in consumption?
A
Consumer confidence
Interest rates
Wealth
Income taxes
Level of household indebtedness:
Expectations of future price levels
22
Q
What are changing factors in net exports?
A
Exchange rates
Trade policies
National income (Imports) / Foreign income (Exports)
23
Q
What are changing factors in government spending?
A
Political priorites
24
Q
What are changing factors in investment?
A
Interest rates
Level of business confidence
Level of corporate indebtness
National income
Technology
25
What are factors to shift the AD curve outwards?
Decrease in exchange rates
Decrease in price of exports
Increase in demand of exports
=
Increase in AD (Vice versa)
26
What is aggregate supply?
total supply of goods/services produced within an economy at a specific price level at a given time
- The short run is a period in which wages and other factor prices are inflexible
- The long run is a period in which there is full wage and factor price flexibility
27
What are factors of cost of production?
Labor costs
Raw material cost
Exchange rates
Interest rates
Beuacracy and administration
28
non price determinants of SRAR curve
Changes in costs of raw materials / energy
Changes in indirect taxes
29
What is economic growth?
Sustianed increase in country's GDP over time, represented as annual % change in real national output.
30
What is negative economic growth?
Level of economic activity declines as associated with recession in the business cycle.
31
What is actual output?
Current level in GDP in economy. When economy moves towards potential level of GDP by using more resources effectively.
32
What is potential output?
Possible level of real GDP of economy if all resources used efficiently, associated with quality and quantity of factors of production in the long run.
33
Reasons for economic growth?
Increased demand for goods and services due to economic growth from increased GDP, higher income for consumption thus output and price levels increase.
34
Advantages of economic growth?
- Creation of new jobs and lower unemployment
- Reduction of absolute poverty
- Increased profits and capital investment expenditure as firms look to increase scale of their operations
- Increased tax revenue thus more spending on public / merit goods
35
Disadvantages of economic growth?
- Greater spending on demerit goods thus increased welfare loss to society in the long run
- Excessive AD so risk of inflation, higher cost of living and decline in international competitiveness
- Air pollution, road congestion, land erosion and climate change can lead to market failure from resource depletion
- Greater disparities in distribution of increase in income and wealth, not everyone will benefit from economic growth.
36
What is employment?
Refers to the use of factors of production as it refers to use of labor resources. Governments aim to ensure everyone willing and able to work is able to find employment
37
What is unemployment
Unemployment refers to when people are willing and able to work and actively seeking employment but cannot find work. Exists when labor market forces of demand and supply in disequilibrium resulting in efficiency in economy's potential output.
38
What is formula for unemployment rate?
Formula = Unemployed / labour force * 100
labour force = employed + unemployed
Shows the number of people officially unemployed as a percentage of the country's workforce
39
What are low unemployment factors?
- Complements economic growth (higher market expenditure -> higher income from unemployment)
- Improves social and economic wellbeing and standards of living
- Increase tax revenue -> government expenditure on merit / public goods
40
What is minimum wage?
minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.
41
Difficulty in calculating unemployment?
Underemployment: Workers who are underemployed do not appear in unemployment statistics as they want to work more hours or work that requires lower skills.
Hidden employment: when workers lose their jobs and then attempt to get a new job, usually for a very long period of time, after which, they give up
Unemployment disparities: The headline unemployment rate is an average. It does not provide insight into ethnic, regional, gender or youth unemployment disparities which may exist in an economy
42
Real Wage unemployment
occurs when wages are inflexible at a point higher than the free-market equilibrium wage
- Usually caused by the existence of minimum wage laws
- The higher wage creates an excess supply of labour
- This excess supply represents real wage unemployment
43
Natural rate of unemployment
Equilibrium rate of unemployment measured by level of unemployment when economy operates at its full employment level of national output. Some unemployment exists at the full employment level of real GDP.
NRU = structural unemployment + frictional unemployment + seasonal unemployment
44
Policies to reduce natural rate of unemployment
- Reforms to the welfare benefit system: unemployment benefits may incentivize people to be voluntarily unemployed
- Reforms to trade unions: reduce collective bargaining power so that labor markets equilibrium
- Reduce barriers to labor mobility: People can find jobs in different industries to reduce NRU
- Personal income tax reduction: Improves incentive to work
45
Costs of unemployment
1) Personal costs: stress, low self esteem, poverty, family issues
2) Social costs: Crime, increased indebtness, social deprivation
3) Economic costs: Loss of gdp, loss of tax revenue, increase costs of unemployment benefits, loss of income for individuals, greater disparities between income and wealth
46
What is inflation?
Sustained rise in the average price level in the economy over time:
- Cost of living rises because households and firms need to spend more money to buy the same amount of goods and services as before
- Inflation reduces country's international competitiveness
47
How to measure inflation rate
Using consumer price index which is weighted index of the average consumer price of goods and services over time. Common method used to measure inflation for average household in the economy
48
What is consumer price index (CPI)
A 'household basket' of goods/services that an average family would purchase is compiled on an annual basis
- Goods/services in the basket are weighted based on the proportion of household spending
- prices for these goods/services are gathered from many locations across the country. These prices are averaged out
49
How is CPI Calculated?
The price x the weighting determines the final value of the good/service in the basket
CPI = Cost of basket in a year / Cost of basket in base year * 100
The percentage difference in CPI between the two years is the inflation rate for the period
50
What are limitations of CPI?
The CPI does not capture the quality of the products in the basket with quality changing over a period of time
The CPI only measures changes in consumption on an annual basis as changes can occur more frequently
The CPI is prone to errors in data collection with small sample and no incentive to fill in accurately and carefully
51
What is the deflationary spiral?
Falling demand -> Falling prices -> Debt defaults -> Bankrupcies -> Layoffs and wage reductions
52
What are causes of deflation?
- Continual deflation in AD (malign deflation): Associated with economic recession and rising levels of unemployment, generally harmful to economy and causes worry
- Increase in SRAS (bengin deflation): Economy is able to produce and boost real GDP and employment without increasing general price levels, allows households to have cheaper access to greater number of G and S as well as exports being more competitive.
53
What is deflation?
Occurs when there is a fall in the average price level of goods/services in an economy. Deflation only occurs when the percentage change in prices falls below zero %
54
What is disinflation?
Occurs when the average price level is still rising, but at a lower rate than before
55
Costs of deflation?
- Deferred consumption
- Uncertainty
- Association with higher level of cyclical unemployment and bankruptcies
- Redistributive effects
- Increase in real value of debt
- Inefficient resource allocation
- Policy ineffectiveness
56
Cost of inflation?
- Increased cost of living
- Deferred consumption and investment
- Decline in international competitiveness
- Uncertainty
- Higher cost of production
57
What is budget deficit?
A situation where government expenditure exceeds government revenue within a fiscal year.
58
Sustainable level of government debt
Refers to a situation where the government's borrowing and debt levels are manageable and they are able to manage repayments without placing their economy at risk. Considered a macroeconomic objective because the level of government debt can have wide-ranging impacts on the economy as a whole
59
Why is sustainable level of national debt important
- Economic Stability: stability in base rates, exchange rates,
- Fiscal Sustainability: Ensures resources can be put towards public investments and social programs
- Inter generational equity: fair distribution of costs across generations and avoids burdening future taxpayers
- Monetary policy effectivness: avoids upward pressure on interest rates
- External vulnerability: reduces vulnerability to external shocks and political control
60
Government Debt
refers to the total amount of money that a government owes to creditors, including domestic and foreign entities
61
How to measure government debt?
commonly measured as a percentage of GDP to assess the relative size of the debt in relation to the country's overall economic output
Formula: Debt to GDP ratio = Total government Debt / GDP * 100
62
Budget Deficit
occurs when a government's total expenditures exceed its total revenues within a specific fiscal year. Represents the shortfall between the government's spending and its income from sources such as taxes and other revenue streams
63
Relationship between government debt and budget deficit
- deficits contribute to the accumulation of government debt by borrowing money to cover the shortfall
- surpluses can help reduce government debt by repaying outstanding debt
- Persistent or large budget deficits can lead to a significant increase in government debt over time
- High levels of government debt may mean that financial markets view offering any new loans to a government as risky leading to higher interest rates
64
Costs of government debt?
1) Debt servicing costs: Compound interest on government borrowing adds to national debt, large opportunity costs created
2) Credit ratings: Measures borrower's ability to repay a loan, higher interest rate will lead to not being able to secure a loan
3) Impacts on future taxation and government spending: Can lead to cut back in government spending and increased taxes
65
Economic growth vs inflation
- Increasing economic growth causes the economy to move closer to full employment
- Prices for remaining resources are bid up leading to inflation which may outpace the target inflation rate of 2%
66
Economic growth vs enviornmental sustainability
- Economic growth often increases pollution, negative externalities and the depletion of non-renewable resources
- The higher the growth, the faster the depletion
67
Equality in distribution of income?
Income equality would mean everyone, irrespective of their job, is paid the same
68
Equity in distribution of icnoem?
fairness in the wage differentials that exist in society. Those with higher qualifications or skills are paid more than those with less
69
What is unequal distribution of income?
refers to differences in the amount of assets that households own
70
What is unequal distribution of wealth?
Imbalance in the spread of the nation's wealth among its citizens, wealth, stock / accumlation of assets
71
What is poverty?
Inability to satisfy minimal consumption needs,
72
What is absolute poverty?
When household earns an income that is below the level that allows them to buy basic necessities of life such as food, shelter, clothing, education and health
73
What is relative poverty?
When households in nation earns income that makes them poor relative to richer households in a nation
74
Consequences of poverty?
- Low living standards
- lack of assess to sufficient healthcare
- Low levels of education
75
Cycle of poverty?
Consequences leading to low levels of human capital and makes people that are poor continue to be so making situation cyclical:
- Poor so have low levels of education
- Unlikely to find work and only have access to low income jobs
- They remain poor
- Generational cycle
76
How to measure poverty
- International Poverty Line (IPL): absolute minimum level of income that a person must receive in order to meet the basic needs required for human survival
- Minimum Income Standard (MIS) : ) identifies the lowest amount of income needed for what society views as an acceptable standard of living in the country. The value differs from region to region as adjustments are made for those living in urban versus rural areas due to the different costs of living associated with each
-
77
What is lorenz curve?
visual representation of the income inequality that exists between households in an economy
- Data is commonly presented in quintiles or deciles
78
Difficulties in measuring poverty?
- Poverty is multi-dimensional concept and difficult to quantify
- measured through self reported surveys and this gives rise to multiple discrepancies in - and between - countries
- Poverty data for different ages, gender and disabilities is not easily available
- Households who identify as poor may exhibit very different characteristics from each other
79
Real GNI formula
Real GDP + Net income from abroad
80
Real GDP per capita formula
Real GDP / population
It shows the mean wealth of each citizen in a country based on the value of GDP
81
Real GNI per capita formula
Real GNI / the population
It shows the mean wealth of each citizen in a country based on the value of GNI
82
Positive vs negative output gap
Positive: identified as the growth of real GDP that is above the trend
Negative: identified as the growth of GDP that is below the trend
There is often a natural flow through the different stages from boom to slowdown to recession to recovery
83
Characteristics of a recession
- two or more consecutive quarters of negative economic growth
- Increasing/high unemployment
- Increasing negative output gap and spare production capacity
- Low confidence for firms/households
- Low inflation
- Greater budget deficit
84
Characteristics of a Boom
- Increasing/high rates of economic growth
- Decreasing unemployment and increasing job vacancies
- Reduction of negative output gap or creation of a positive gap.
- High confidence and more risky decisions taken
- Increasing rate of inflation
85
National income statistics
Useful for making comparisons between countries
- provide insights into the effectiveness of government policies
- allow judgments to be made about the relative wealth and standard of living
86
Limitations of comparisons between countries
- Lack of information provided on inequality
- Quality of goods/services
- Does not include unpaid/voluntary work
- Differences in hours worked
- Environmental factor
87
Factors that shift the Long run AS curve
Changes in the quality or quantity of the factors of production:
Technological advances
Efficiency improvements
Changes in institutions
88
Labour / non labour force
A country's population is divided into the labor force - and non labor force
- Labour force: consists of all workers actively working plus the unemployed
- Non labour force: includes all those not seeking work
89
Structural unemployment
mismatch between jobs and skills in the economy. Usually happens as the structure of an economy changes with specific type of worker no longer needed. Unless workers helped to retrain, often left unemployed.
90
Cyclical unemployment
caused by a fall in AD in an economy
-This typically happens during a slow down or recession
- The demand for labour is derived from the demand for goods/services
- As output falls in the economy, firms lay off workers
91
Seasonal Unemployment
occurs as certain seasons come to an end and labour is not required until the next season
92
Frictional unemployment
occurs when workers are between jobs
- This is usually short-term unemployment
- Workers have voluntarily left their previous job to search for another
93
Costs of unemployment
- Government's receive less tax revenue and have higher expenditures in the form of welfare payments
- Individuals suffer significant emotional, relational and financial consequences
- Firms may find it harder to find workers to employ (as they have moved on) once the economy starts to recover
- The economy contracts as there is a higher level of inefficient use of available resources
94
Causes of inflation
- Demand Pull Inflation: excess demand in the economy. If the Central Bank lowers the base rate, there is likely to be increased borrowing by firms and consumers, increasing C and I
- Cost push inflation is caused by increases in the costs of production in an economy
95
Impacts of High national debt
- Austerity Fiscal Policies: A contractionary government fiscal policy which raises taxes and reduces government spending in order to decrease a deficit or pay off national debt
- Reduced Fiscal Flexibility: limit the ability of a government to respond to a new crisis
- increased borrowing costs for the government from international markets
- Crowding out Private Investment: government borrowing results in competition with private firms in the economy. Causes real interest rate to rise and private investment to decrease
- Intergenerational Burden: higher taxes and/or reduced services
96
Economic growth vs Inequality
the profits the owners of the factors of production receive are disproportionate to any increase in workers' wages leading to greater inequality
97
Inflation vs unemployment
The closer an economy moves to full employment the less workers will be available for hire and wage inflation will help increase overall inflation
98
Short runs Phillp curve
observes that there may be a trade-off between unemployment and inflation
- Rising inflation is accompanied by falling unemployment
- Rising unemployment is accompanied by falling inflation
99
Long run Phillips curve
suggests there is no trade-off between inflation and unemployment in the long run. Based on idea of NRU
- represents the level of unemployment consistent with non-accelerating inflation, meaning that further reductions in the unemployment rate cannot be achieved without generating inflationary pressures
100
Gini coefficient
The Lorenz curve can be used to calculate the Gini Coefficient
Formula = A / A+B
- A represents the area between the line of equality
- B represents the area under the Lorenz curve
- 0 means absolute equality, 1 means perfect inequality
101
Causes of Inequality
- Differences in human capital: higher the skill level the higher the level of income
- Inequality of opportunity: Inequality in education and healthcare leads to inequality of opportunity in the job market
- Different levels of resource ownership: more equal asset ownership, less the inequality in income distribution
- Unequal status and power: strong trade union membership provide workers with more power and higher levels of income
- Government tax / policies: Progressive taxes allow income earners to contribute to public revenue according to their ability and range of unemployment benefits raise income of lower 20%
- Globalization: Countries which are more isolated will experience higher levels of wealth and income inequality
102
Costs of inequality
- Impact on economic growth: resources in the economy are not being used efficiently, unemployment payments and welfare benefits may increase, government tax revenue decreases
- Impact on living standards: , the rich get richer by better education and healthcare creating even less opportunity for poorer households in the future
- Impact on social stability: More equal societies tend to be more stable, tolerant and considerate with lower levels of crime and better standards of living
