Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economy HL > Macroeconomics (3.1 - 3.4) > Flashcards

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q
A

Shows the flow of money between shareholders of economy used to illustrate 3 methods of national income:

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the expenditure method?

A

Measures value of total expenditure by all stakeholders in the economy. Formula: Aggregate Demand (GDP) = Consumer expenditure + investments + government spending (Exports - Imports)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the income method?

A

GDP = Rent + Interest + Profit + Wage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the output method?

A

Measures value of all final goods and services in an economy which is the total value of goods and services.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is nominal gdp?

A

Measure the value of all final goods and services produced in an economy within a given period using current price levels. This means nominal GDP is not adjusted for changes in price levels over time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
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 -

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Real vs Nominal GDP?

A

Both real GDP and GNI measures economic activity calculated using constant prices meaning that values are adjusted for changes in price levels. Nominal GDP and GNI measures using current prices thus values don’t adjust for changes in price levels.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Total vs Per Capita?

A

Real GDP and real GNI values indicate overall size of the economy. Per capita values indicate the average income per person in the economy thus better indication of living standards

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is OECE better life index?

A

Based on 11 topics identified by OECD to be essential in terms of material living conditions and quality of life. Measures the following:
- Housing
- Income
- Jobs
- Community
- Education
- Environment
- Governance
- Health
- Life satisfaction
- Safety
- Work life

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the business/economic cycle?

A

Illustrates short term fluctuations of real GDP over time. Consists of Expansion, Peak, Recession, Trough.

Long term growth in business cycle illustrates potential GDP of economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is happy planet index?

A

Index of human well being and environmental impact. Measure of sustainable human well being to show how countries can achieve long, happy and sustainable lives. Effective measure of human wellbeing as it considers current and future prosperity of individuals and societies. 4 main components:
- Well being
- Life expectancy
- Inequality of outcomes
- Ecological footprint

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the happiness index?

A

Used to measure national income as a measure of wellbeing as participants asked to rate current lives from 1-10 in 14 different indicators. Typically takes into account the GDP per capita, social support, Healthy life expectancy, freedom to make choices, generosity, perceptions of corruption.A

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is aggregate demand?

A

Value of all goods and services demanded in an economy for a period of time, calculations as total amount of spending in a year.

Formula: AD = C+I+G+(x-m)
C= Consumption
I= Investment
G= Government spending
X-M= Net exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are changing factors in consumption?

A

Wealth
Income tax
Interest rates
Level of consumer confidence
Future price expectations
Level of household indebtness

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are changing factors in net exports?

A

Exchange rates
Trade policies
National income (Imports) / Foreign income (Exports)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are changing factors in government spending?

A

Political priorites

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are changing factors in investment?

A

Interest rates
Level of business confidence
Level of corporate indebtness
National income
Technology

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What are factors to shift the AD curve outwards?

A

Decrease in exchange rates
Decrease in price of exports
Increase in demand of exports
=
Increase in AD (Vice versa)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is aggregate supply?

A

Total amount of output of goods and services that firms within economy willing to supply at given time at at overall price levels.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is short run aggregate supply?

A

Relationship between average price levels and level of national output. We assume factors of production remain constant.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What does short run mean?

A

Where economy is functioning right now

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What does long run mean?

A

Set amount of capacity in the long run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What are factors of cost of production?

A

Labor costs
Raw material cost
Exchange rates
Interest rates
Beuacracy and administration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are factors of indirect taxes?

A

VAT/ GST
Environmental taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

New Classical View Factors and views?

A
  • Long run aggregate supply is perfectly inelastic thus no spare capacity
  • Independent of average price levels because level of national output represents maximum capacity that economy can produce
  • Potential output of economy determined by quality and quantity of factors of production and technology
  • Yf = national real unemployment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is the Keynesian view?

A
  • Economy doesn’t reach full employment level of output (Yf) even in the long run
    Steps:
    1. AS = Perfectly elastic | Lots of spare capacity, increase in AD doesn’t impact price levels
    2. AS = Slopes up / rises | Pressure on scarce resources as economy grows, price levels would incresae
    3. AS = Perfectly inelastic + No spare capacity so increase in AD would lead to inflation.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are assumptions of the Keynesian view?

A
  • Wage inflexibility as prolonged deflationary gaps
    1. Workers won’t accept wage reductions due to trade unions
    2. Minimum wage as its not legally possible
    3. Existing contracts
    4. Most firms rather fire employees than provide wage increase
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What are implications of Keynesian view?

A

Need for government intervention to run macro through use of monetary policy, interest rates and expansionary fiscal policies (reducing income taxes).

37
Q

What are assumptions of the new classical view?

A

Any unemployment at full employment deemed to be natural in long run
1. Full employment at level of real national output
2. Any fall in national output between macro assumed to be temporary, thus market wage rates and labor flexilbity lower.

38
Q

What are implications of the new classical view?

A

Demand side policies ineffective in long run due to not using government intervention. Supply side policies to shift LRAW to achieve growth in Long run.

39
Q

What is economic growth?

A

Sustianed increase in country’s GDP over time, represented as annual % change in real national output.

40
Q

What is negative economic growth?

A

Level of economic activity declines as associated with recession in the business cycle.

41
Q

What is actual output?

A

Current level in GDP in economy. When economy moves towards potential level of GDP by using more resources effectively.

42
Q

What is potential output?

A

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.

43
Q

Reasons for economic growth?

A

Increased demand for goods and services due to economic growth from increased GDP, higher income for consumption thus output and price levels increase.

44
Q

Advantages of economic growth?

A
  • 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
45
Q

Disadvantages of economic growth?

A
  • 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.
46
Q

What is employment?

A

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

47
Q

What is unemployment

A

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.

48
Q

What is formula for unemployment rate?

A

Formula = Unemployed / labour force * 100

labour force = employed + unemployed

Shows the number of people officially unemployed as a percentage of the country’s workforce

49
Q

What are low unemployment factors?

A
  • 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
  • Reduces financial burden on government as there is less need for tax payers to find social welfare benefits for the unemployed
50
Q

What is minimum wage?

A
  • Shows real wage unemployment
  • Real wages above market equilibrium due to imposition of minimum wage.
51
Q

Difficulty in calculating unemployment?

A
  • Lack of universally accepted definition / measure of unemployment of the workforce:
    1) Hidden unemployment: Technically unemployed but not included in measurement, discouraged workers who lost motivation
    2) People who choose not to go for full time employment
    3) Inadequately employment individuals (involuntary part time workers who can’t go full time)
52
Q

Causes of unemployment?

A

1) Cyclical unemployment: Results from a recession in the business cycle caused by a lack of AD and job loss and can affect every industry
2) Structural unemployment: Results from long term decline in demand for labor in a specific industry, arises from skills mismatch between jobs available in the economy and skills of the available workers in the labor market.
3) Seasonal unemployment: Results from regular and periodical change in demand for certain goods and services at different times of the year.
4) Frictional unemployment: When people are between jobs due to time delay from leaving a job and finding a new one. Time lag due to taking time for people to find and apply for the right jobs and for employers to recruit the right people

53
Q

Natural rate of unemployment

A

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

54
Q

Policies to combat natural rate of unemployment

A
  • 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
55
Q

Costs of unemployment

A

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

56
Q

What is inflation?

A

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

57
Q

How to measure inflation rate

A

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

58
Q

What is consumer price index (CPI)

A

Statistical weights to reflect relative importance of household spending on each item of expenditure in the representative list of G and S, revised periodically to reflect changes and trends.

59
Q

Which factors are involved when measuring CPI?

A
  • Volume of quantities purchased: more and grater the quantities purchased, the more important the item is to average household
  • Value of quantities purchased: More money an average family spends on product as proportion of overall spending, the more important product is to family
60
Q

What are limitations of CPI?

A
  • Atypical households
  • Regional and international disparities
  • Different income earners
  • Changes in product quality
  • Different patterns of consumption over time
  • Time lags
  • Volume / value of quantites purchased ambigious
61
Q

What are the costs of inflation?

A

Redistributive effects
Export competitiveness
Uncertainty
Savings
Economy growth dampened
Ineffecient resource allocation

62
Q

What is the deflationary spiral?

A

Falling demand -> Falling prices -> Debt defaults -> Bankrupcies -> Layoffs and wage reductions

63
Q

What are causes of deflation?

A
  • 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.
64
Q

What is deflation?

A

Persistent fall in general price level in an economy over time

65
Q

What is disinflation?

A

Fall in the rate of inflation but prices still rising but at a slower pace, can lead to deflation if not controlled effectively as well as drop in the standards of living.

66
Q

Costs of deflation?

A
  • 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
67
Q

Costs of unemployment?

A
  • Phychological costs
  • Social problems
  • Loss of households earnings
  • Higher government borrowing
  • Slower economic growth
  • Rising income and wealth inequalities
68
Q

Cost of inflation?

A
  • Increased cost of living
  • Deferred consumption and investment
  • Decline in international competitiveness
  • Uncertainty
  • Higher cost of production
69
Q

What is budget deficit?

A

Value of government spending to revenue per time period

70
Q

What is government debt?

A

Sum of all acumulated budget deficits from previous years, total amount of money owed to domestic and foreigners creditors.

71
Q

Why is sustainable level of national debt important

A
  • Economic Stability
  • Fiscal Sustainability
  • Inter generational equity
  • Monetary policy effectivness
  • External vulnerability
72
Q

What are pros and cons of running a budget deficit?

A

SR: Government spending leads to injections into circular flow of income which stimulates economic growth and maintains jobs
LR: But no government can spend more than it collects from tax revenue.

73
Q

How to measure government debt?

A

National debt expressed as a % of the GDP, the higher the ratio the more unaffordable the debt is.

74
Q

Costs of government debt?

A

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

75
Q

High economic growth vs low inflation?

A
  • Not mutually exclusive in objectives
  • Inflation not bad if controlled and predictable, can also be positive for economic growth
76
Q

High economic growth vs equity in income distribution?

A
  • Usually income inequality increasing
  • Doesn’t have to conflict if there is progressive tax, government can take tax and redistribute
77
Q

Equality in distribution of income?

A

Everyone earns same amount regardless of what skills are provided in the labour market

78
Q

Equity in distribution of icnoem?

A

Fairness in the distribution of income, can be achieved through macro policies that take place with higher tax rate on wealthy people and lower on lower income earners.

79
Q

What is unequal distribution of income?

A

When minority of society enjoys disporportionately high concentration of nation’s income

80
Q

What is unequal distribution of wealth?

A

Imbalance in the spread of the nation’s wealth among its citizens, wealth, stock / accumlation of assets

81
Q

What is poverty?

A

Inability to satisfy minimal consumption needs,

81
Q

What is absolute poverty?

A

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

81
Q

What is relative poverty?

A

When households in nation earns income that makes them poor relative to richer households in a nation

82
Q

Consequences of poverty?

A
  • Low living standards
  • lack of assess to sufficient healthcare
  • Low levels of education
83
Q

Cycle of poverty?

A

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

84
Q

Measuring economic inequality?

A

Measured by relative share of national income earned by given percentage of the population:

85
Q

What is lorenz curve?

A
  • Shows distribution of income
  • Possible changes in the distribution
86
Q

Difficulties in measuring poverty?

A
  • No clear or universally accepted definition
  • Achieving consensous of single indicator contested
87
Q
A

Economy HL (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions