Macroeconomics Flashcards
What are the 4 main microeconomic indicators
Rate of economic growth
Rate of inflation
Level of unemployment
State of the balance of payments
GDP
Change in national output over a period of time
Purchasing Power Parity meaning
The real value of an amount of money in terms of what you can actually buy with it. Exchanging the rate f money to US dollars
When and why is PPP used
When using GDP to compare living standards in countries that use different currencies,the exchange rate may not reflect the true worth of the 2 currencies
Limitations with GDP
Hidden economies
Public spending may vary
Income inequality
Negative externalities ignored
What is nominal GDP
Value of national output at current prices with no adjustment for the effects of inflation
Real GDP
Value of output adjusted for inflation and measured at constant prices
Limitations with GDP/capita
Influence of foreign companies included but money is sent back to the country
2 meanings of inflation
The rise in average price of goods and services over a period of time
Fall in the value of money
What is retail price index
Measurement used for inflation
2 surveys carried out
1st survey sent to 6000 households called living costs and food survey
Used to find out what people spend their money on and proportion of income spent to work out the relative weighing
2nd survey based on prices - measures change in price of basket of good
Price changes multipiled by weighings from 1st survey
What is counsumer price index
Same as RPI but : Mortgage intrest payments Council tax Larger sample of population used for the CPI Mainly used
Limitations of RPI and CPI
excludes all households in the top 4% incomes
Information given by households in living costs and food survey may be inaccurate
Basket of goods only changes once a year - might miss short term changes in spending habit
why is RPI and CPI important for governments
Deciding on increases in state pension and other welfare benefits
Used to measure UKs international competition - higher CPI means UK goods become less price competitive
unemployment definition
people out of work as a percentage of labour force
What are the 2 ways to measure unemployment
The claimant court
The labour force survey
What is the claimant court
Number of people claiming unemployment-related benefits
Advantages of claimant court
Data easy to obtain
Updated monthly, always current
Disadvantages of claimant court
Excludes people who are looking for work but aren’t eligible to claim benefits
What is the labour force survey
ILO uses a sample of a population and asks them if they are actively seeking work.Used to produce ILO unemployment count
Advantages of labour force survey
International agreed measure for unemployment - easier comparison
Disadvantages of the labour force survey
Expensive to collect
May be unrepresentative of the population
Affects of unemployment to the economy
Leads to lower income
less spending
companies sell fewer goods or need to cut prices and make less profit
Unused labour in the economy so fewer goods produced
What is balance of paymets
Refers to international flow of money
What does the current account do
Records international exchange of goods and services
4 sections to the current account
Trade-in goods called ‘visible trades’
Trade-in services ‘invisible trades’
International flows of income earned as salaries, interest, profit and dividends
Transfers of money from one person or government to another
What is surplus
Money flowing in exceeds money flowing out
What is deficit
Money flowing out exceeds money flowing in
Shows a country as uncompetitive
Why is there deficeit in the current account
As consumer spending increases,so does our demand for imported goods
Exhange rate is too strong - makes our exports less competitive
What is balance of paymets
Refers to international flow of money
What does the current account do
Records international exchange of goods and services
3 sections to the balance of payments
The Current Account
The Financial Account
The Capital Account
What is surplus
Money flowing in exceeds money flowing out
What is deficit
Money flowing out exceeds money flowing in
Shows a country as uncompetitive
Why is there deficeit in the current account
high propensity to consume imported goods,
Exhange rate is too strong - makes our exports less competitive
UK firms have become less competitive in the manufacture of goods.
What do injections do
come in the form of investment and government spending going directly into the firm and exports.
what do withdrawals do
Come in the form of imports, savings and taxes made by households and firms and import
What is aggregate demand
Total spending on goods and services
AD formula
Consumption+ Investment + Government spending + (exports - import)
What is consumption
Told amount spent by households on goods and services. Doesn’t include firms
Factors of consumption
Income Intrest rates - higher,less consumption Wealth effect Tax Unemployment Consumer confidence - eg in a recession,ppl scared to lose their job
What is investment
Money spent by firms on assets which they’ll use to produce goods and services
Factors of investment
Risk eg economic instablitly ,less investment
Government incentives and regulation
Interest rate and access to credit
Buisness confidence and animal spirits
What is government spending
Money spent by the government on public goods and services
What is GNP
value of all goods and services produced by domestic businesses both at home and abroad, so it includes overseas assets
What is GNI
the total level of income
Causes of inflation
demand-pull - excessive demand
cost-push - firms respond to rising costs of production by increasing prices to protect profit margins
growth of the money supply - measure of the amount or
the stock of money in the economy
Causes of demand-pull inflation
Reduced taxation
Lower interest rates
A weak exchange rate - boost export
Causes of cost pull inflation
Wage increases
Higher raw material costs
Higher taxes
Deflation meaning
the decrease in the general price level
Disinflation meaning
when the inflation rate is positive but falling
Causes of unemployment
structural unemployment
frictional unemployment - as workers move between jobs
seasonal unemployment
demand deficiency
cyclical unemployment
real wage inflexibility - real wage rates increase
Effects of unemployment
Lower living standards
Social costs - increase in illness
De-Skilling
Why is there a large surplus of trade in services in the UK
the shift towards tertiary sector employment, thus specialising in the provision of services
More competitive in services
How can the current account of balanced
Controlling consumer spending will reduce the
demand for imports.
Investing in the supply-side
AD equation
C + I + G + (X-M)
Factors affecting consumption (6)
interest rates consumer confidence wealth effects Disposable income Interest rates Personal debts
Marginal propensity to consume/save
how likely an individual is to consume or
save an extra £1 of income they receive
Influences on investment
The rate of economic growth - faster, sooner capital equipment wears out
Keynes and ‘animal spirits’
Demand for exports - encourage firms to invest in capital assets
Access to credit
Main influences on governemt expenditure
the trade cycle
fiscal policy
Factors influencing LRAS (5)
technological advances changes in relative productivity changes in education and skills - productivity inhanced changes in government regulations competition policy
What is short run supply
all factors of production are fixed,
with the exception of labour which can be hired to
cover increases in aggregate demand
Factors influencing SRAS
changes in costs of raw materials and energy
changes in exchange rates - makes purchasing raw materials cheaper
changes in tax rates
What does a closed economy assume
No foreign trade
No government influence
Only households and firms
Describe the circular flow of income
Firms provide households with goods and services
Households spend their income on the goods and services produced by firms
Households also provide firms with factors of production:
Land, Labour, Capital & Entrepreneurship
In order to pay for these factor services, firms pay households rent, wages, interest and profit
What does a circular flow of income assume
Households spend all their income on goods and services
Firms spend all their income on factors of production
There is no government
There is no foreign trade
How does increase in income impact wealth?
An increase in income will have a direct impact on wealth, providing finance for investment
Investing in the productive capacity of the economy will increase the stock of physical assets, therefore increasing wealth
This will lead to economic growth and higher income in the future
Net transfer meaning
Sum of payments made and received with no good or service in exchange
Problem with supply side policies
Time lag
Effectiveness of education depends on quality of education
Net transfer meaning
Current transfers between residents and non residents
Not in exchange for anything
What demand side policy did the government put during the financial crisis
VAT cut to 2.5%
Gov debt connection to budget deficit
Government borrows to fund budget deficit
Borrowing leads to higher levels of government debt
