Macroeconomics AS Flashcards
What is the circular flow of income
The movement of spending and income throughout the economy
What are the two markets of the CFOI and describe them
Factor market - Using household skills to demand resources
Product market - Households demand products from businesses
What are injections and leakages?
Injections - Spending that flows back into the economy through government spending, export rev and investment
Leakages - spending that does not flow back from households to firms through imports, taxes or savings
What is the multiplier effect
Process by which any change in a component in AD results in a final greater change in GDP
1/1-MPC or 1/MPW. MPW=MPS+MPT+MPM
Immobility of labour
Occupational - lack required skill set and training to switch profession therefore out of work
Geographical - Unable to move to another area for work as may have to look after family member, Cost of moving too high or education reasons
Cyclical and Structural unemployment?
Cyclical - unemployment caused by a lack of AD
Structural - decline of industries due to changes in demand supply
-Technological - new tech causes redundancies
-Regional - unemployment focused in one geographical area
Frictional and classical unemployment?
Classical - Wages driven up to cause surplus of labour
Frictional - Workers between jobs
-Search - spend time unemployed looking for job
-Seasonal - Labour demanded at certain times of year
-Casual - Out of work in between irregular periods of unemployment
Resource function, amenities function and absorber of waste function?
Resources - provision of resources for production process, e.g oil, electricity
Amenities - Households get utility from visiting clean places, enjoyment of clean air improves living standards
Absorber of waste function - Environment provides a means to absorb firms and households waste
Support for the resources function
More sustainable agriculture
more renewable resources
conservation of ecosystems
Support for the amenities function
Stricter littering policies
Reduce sewage in sea
Increase wildlife reserves
Absorber of waste function
Reuse
Recycle
Reduce
HDI and its problems
HDI - statistic to measure various countries levels of social and economic development
Uses life expectancy from birth, years and expected years of schooling, and GDP per capita
Ignores cultural factors
Ignores pollution
Doesnt measure extent of inequality in gdp per capita
Benefits of economic growth
Better standard of living
Higher consumer confidence
Unemployment levels fall
More leisure times
Higher tax = higher g
Problems of economic growth
Pollution
Damage to environment
Poor distribution of income
Consumption of demerit goods
Bad sustainability
Stress on labour force
What is economic growth in SR and LR
SR - rise in AD or SRAS
LR - Increase in LRAS
Causes of econ growth
Rise in demand for exports
Rise in birth rate
Fall in energy costs
Improvements in infrastructure and education
Fall in APS
Increased immigration
Rise in investment
APC, MPC, APS, MPS
APC/S proportion of income that is saved/consumed
MPC/S proportion of next pound earned that is saved/consumed
formula = consumption/saving / total income
The Keynesian LRAS curve
Betwen 0-Y
Y-Yf
Output levels > Yf
0-Y - Resources underemployed, more can be supplied without extra costs - Significant Spare Capacity
Y-Yf - Demand for resources rise, so to increase supply, firms will have to pay higher costs so prices rise - Limited Spare Capacity
Output levels > Yf - operating at full capacity (employment) , supply cannot increase regardless of higher price levels - Full Capacity
The output gap
Output gap - measure of spare capacity available in economy
Actual output < potential output (Yf) = negative output gap
Actual output > potential output (Yf) = positive output gap
Causes of NOB - AD falls, shifts left, or SRAS falls, shifts left
Why is classical LRAS vertical
All factor markets move to equilibrium in LR
No markets in surplus or shortage in LR
Unemployed workers must accept pay cuts so wages decrease in LR until D=S
So in LR, firms supply max potential output
True at whatever PL
Actual output vs potential output
Actual output - Output of economy in SR, can be above at or below Yf
Potential output - Maximum output level in the LR, when all factors of production are being utilised
What causes shifts in the SRAS
Change in costs
Factor productivity
Wage rates
Unit cost
Raw material price
Producer tax/subisides
What is in the current account of the BOP
Trade in goods/services
Primary income
Secondary income
Capital and financial account
How is inflation measured using CPI
Identify stable base year to be 100
FES to find out commonly bought items
Shopping basket created
Weights attached to different categories
Weight x new price index = CPI
Problems of CPI
Improvements in quality may cause price increase
Baskets to not allow for changes in peoples buying habits
Unemployment
Unemployed - fit and able to work but out of work
Rate of unemployment = unemployment level / labour force x 100
Working age population - population of 15 - 64 year olds, econ active and inactive
Labour force - econ active (unemployed and employed)
Labour force parcipitation rate - econ active/working age pop x 100
Cost Plus and Demand Pull Inflation
Cost plus - Rising costs force firms to push up their prices to maintain their profit margin.
Demand pull - Too much expenditure leads to a level of demand that cannot be matched by supply, AD rises faster than AS, so firms increase prices to cover rise in costs.
Consequences of Unemployment in Economy
Less tax revenue
Fall in AD
Fall in demand for imports as lower incomes
Consequences of Unemployment for businesses
Can hire workers for lower wages
Lost human labour shifts SRAS left
Workers have lower job security so less effective
Consequences of unemployment for individuals
Depression due to low confidence
Increased poverty means increased crime
Skills will erode therefore less unemployable
