Macroeconomics Flashcards
Index Numbers
A way of expressing economic data. An index number is a figure reflecting price or quantity compared with a base value.
Index Number Formula
Current Price / Base Price x 100
Inflation
A sustained increase in the general price level in an economy.
Real GDP
The true sum of all products produced by a country adjusted for inflation.
GDP Formula
GDP = Consumption + Investment + Government Expenditure + (Exports - Imports)
GDP = C + I + G +(X-M)
Real GDP Formula
Nominal GDP x (100/General Price Index)
Injections
Money which enters an economy (government spending, investment and exports).
Withdrawals (Leakages)
Money which leaves the economy (taxes, savings and imports).
Injections>Withdrawals
National Income will increase and vice versa.
Factor Services
Land
Labour
Capital
Enterprise
Factor Incomes
Wages/Salaries
Interest
Profit
Rent
Aggregate Demand (AD)
The total demand for goods and services produced in an economy at a given price level and in a given period of time.
What influences exports/imports?
Disposable income abroad
Disposable income at home
Exchange rate
Tariffs
Economic Shocks
Unexpected events that affect the economy and shift AD
Internal Shock examples
Pound drops in value Terrorist attack Increased VAT Civil War Rise in the minimum wage Fall in house prices
External Shock examples
Stock market crash Hurricane Foreign war Tariff policy Sanctions Major business goes bankrupt
The Multiplier Effect
A change in one or more components of AD will lead to a greater final change in AD and Real GDP (National Income).
Multiplier Effect formula
Change in NI/ Initial change in Government Spending
ΔY / ΔG
Marginal Propensity to Withdraw (MPW)
The proportion of additional income spent on withdrawals to the circular flow of income (MPS + MPT + MPM).
Marginal Propensity to Consume (MPC)
The proportion of money people spend on consumption after tax and imports.
The Accelerator Effect
Assumes an increase in AD will cause an increase in business investment as firms invest in order to produce more output.
Aggregate Supply (AS)
The total supply of all goods and services in the economy.
National Output
Measures goods and services produced by an economy.
National Income
Incomes received by labour and other factors of production.
National Expenditure
The total spending on goods and services in an economy.
Economic Growth
In the short-term, an increase in Real GDP, and in the long-term an increase in productive capacity.
Trend Growth
The expected increase in potential output over time.
Sustainable economic growth
Economic growth that can continue over time and does not endanger future generations’ ability to expand productive capacity.
Output Gap
A measure of the difference between the actual output (Y) and the potential output (Yf).
Negative Output Gap
There will be unemployment, low growth and/or a fall in output. A negative output gap will typically cause low inflation or even deflation.
Positive Output Gap
Occurs when economic growth is above the long run trend rate (e.g. during an economic boom). It will involve firms asking workers to do overtime.
Unemployment
When someone is willing and able to get a job, but does not currently have a job.
0 hour contracts
Where workers aren’t given a minimum hours a week but have to be available.
The Labour Force Survey
A survey of those actively seeking employment.
Claimant Count
The total number of people claiming Jobseekers Allowance (the benefit paid to people seeking employment)
Frictional Unemployment
A brief period of unemployment experienced by people moving between jobs or into the labour market.
Structural Unemployment
Caused by the decline of certain industries/occupations due to changes in demand/supply.
Cyclical Unemployment
Unemployment caused by a lack of job vacancies; and inadequate level of AD. Commonly occurs during recessions.
Seasonal Unemployment
When people are unemployed at certain times of the year, because they work in industries where they are not needed all year round.
Geographical Immobility
Workers are unwilling or unable to move from one area to another in job search.
Occupational Mobility
Workers unwilling or unable to move from one job to another in search of work.
Voluntary Unemployment (free market economist views)
Workers choose to remain unemployed and refuse job offers at current market wage rates.
Involuntary Unemployment (Keynesian view)
Workers are willing to work at current wage rates but there are no jobs available.
Real Wage
The value of wages adjusted for inflation.
Real Wage Unemployment
When wages are set above the equilibrium level causing the supply of labour to be greater than demand.
Natural Rate of Unemployment
The rate of unemployment when the labour market is in equilibrium.
Costs of Unemployment
Harder to get a job if unemployed for a long period of time, as skills are lost
Lost productivity
Firms can force wages down as higher demand for jobs
Hyperinflation
Very high and usually accelerating rates of inflation.
Deflation
A sustained fall in the average price level of the economy.
Disinflation
A fall in the rate of inflation.
Stagflation
A situation with persistent high inflation combined with low economic growth.
Consumer Price Index (CPI)
The average price level of goods and services in the UK. A basket of the average goods that a household buys, around 650 products, are taken every month. The target is 2%.
Retail Price Index (RPI)
A measure of the average price level of goods and services in the UK. Normally higher, as includes: Mortgage interest, Payment, and council tax.
Difficulties in measuring inflation
CPI and other measures may not give a totally accurate picture
Doesn’t capture the value that comes with greater choice (only 650 items)
Prices may increase due to an improvement in quality.
Demand-pull Inflation
Too much demand chasing too few goods.
Cost-push Inflation
Rise in the general price level resulting from an increase of the cost of production (e.g. raw materials).
Inflationary noise
Inflation distorting prices.
Fiscal Drag
Amount of tax increases as wages go up.
International Trade
The exchange of goods and services between countries.
Free Trade
No restrictions on the flow of goods and services between countries.
Balance of Payments
Measures the difference between money flowing into and out of the country.
Current Account
Shows the trade in visibles (goods), invisibles (services) and investment (e.g. property).
Advantages and Disadvantages of International Trade
Advantages: Increased Income
Economic Growth
Competition and Innovation
Reduced prices
Disadvantages: Power of Multinational Companies
Unstable commodity prices
Can drive local companies out of business
Current Account Deficit
Exports being less than Imports.
Current Account Surplus
Exports being more than Imports.
Depreciation/devaluation
Fall in value of exchange rate (exchange rate becomes weaker).
Appreciation
Increase in the value of exchange rate (exchange rate becomes stronger).
Monetary Policy
The use of interest rates, money supply and exchange rates to influence economic growth and inflation. Controlled by the Central Bank of England.
Money supply
The amount of money in circulation in an economy.
Bank Rate
Short-term interest rates set the Monetary Policy Committee (MPC) of the Bank of England.
‘Conventional Monetary Policy’
Involves the Bank of England raising or lowering the Bank Rate in order to manage the level of AD in an attempt to control inflation.
‘Unconventional Monetary Policy’
Quantitative Easing - Adding more money to the money supply.
Forward Guidance - Bank of England attempts to send signals to financial markets, businesses and individuals about changes in interest in order to avoid an economic shock.
Fiscal Policy
Changes in taxation and government spending to influence the level and growth of AD output.
Demand-side Policy
Meant to increase or decrease spending in the economy. Fiscal and Monetary Policy are Demand-side Policies.
Types of Taxes
Corporation, Income, Inheritance, VAT, Council Tax, Tariffs, Road Tax, TV License, Royalties, Stamp Duty, Capital Gains Tax, Excise Duties, Business Rates, Betting Tax, Insurance Premium Tax, National Income Contributions, Congestion Charge, Airport Tax, Pigouvian Tax (Environment)
Direct Taxes
Paid directly to the government by the individual taxpayer.
Indirect Taxes
The supplier can pass on the burden of an indirect tax to the final consumer - depending on the PED of the product.
Progressive Taxes
Greater proportion of tax is paid by those with high incomes.
Proportional Taxes
An equal proportion of tax is paid by all incomes.
Regressive Taxes
Greater proportion of tax is paid by those with low incomes.
Capital Spending
Government spending on things such as roads, schools, hospitals etc.
Transfer Payments
Welfare payments (e.g. pensions, benefits etc.).
Automatic Stabilisers
Economic policies designed to offset fluctuations in economic activity without individual intervention from the government.
A ‘Good’ Tax
- Convenient and certain (i.e. people know what they will pay and how)
- Equity: Should be fair
- Efficiency: Achieves its objectives (i.e. redistribution of income/reducing negative externalities)
- Flexibility: Easy to change/collect
Crowding Out
When increased government spending fails to increase overall AD as higher government spending causes an equivalent fall in private sector spending and investment.
Cyclical Deficit
Takes into account fluctuations in tax revenue and spending due to the economic cycle (e.g. in a recession, tax revenue falls and spending on unemployment benefits increases)
Structural Deficit
This is the level of the deficit even when the economy is at full employment (the deficit that is not affected by economic performance).
Supply-side Policies
Policies that shift AS, they consider how to improve the productive capacity of the economy (increasing AS).
Supply-side Policy Examples
Education and training National Minimum Wage (NMW) Reduction in direct taxes Government assistance to new firms Deregulation Reduction of unemployment benefit Privatisation
Absolute advantage
A country has an absolute advantage if it can produce more of a good than other countries from the same amount of resources.
Bonds
Financial securities sold by companies (corporate bonds) or by governments (government bonds) which are a form of long-term borrowing. Bonds usually have a maturity date on which they are redeemed, with the borrower usually making a fixed interest payment each year until the bond matures.
Broad money
The part of the stock of money (or money supply) made of cash, other liquid assets such as bank and building society deposits, but also some less liquid assets. The measure of broad money used by the Bank of England is called M4.
Capital Markets
Where securities such as shares and bonds are issued to raise medium- to long-term financing, and where shares and bonds are then traded on the ‘second-hand’ part of the market, e.g. the London Stock Exchange
Capital Ratio
The amount of capital on a bank’s balance sheet as a proportion of its loans.
