Macroeconomics: Chapter 8 + 9 Flashcards
What is true about the circular flow of income (income, expenditure, output) (3)
value of output produced in economy
= total income generated from producing output
= total expenditures to purchase the output
Leakages of the circular flow of income (3)
savings into banks
taxes to government
import revenue to foreign countries
Injections of the circular flow of income (3)
investment by firms to capital
government spending from tax revenue
export revenue from other countries
Savings as a leakage out of the circular flow of income (2)
consumer income not spent
money not contributing to flow of income, instead stays inside bank
Investment as an injection into the circular flow of income (2)
firms obtain funds from bank
used to purchase capital (contribute to output/income)
Taxes as a leakage out of the circular flow of income (2)
households pay taxes
do not use money to purchase products
Government spending as an injection into the circular flow of income (2)
spending on various activities
(e.g roads allow for firms to improve production)
Imports as a leakage out of the circular flow of income (2)
money used to buy foreign goods
generates revenue for firms outside of country (contributes to their economy)
Exports as an injection into the circular flow of income (2)
foreigners purchase domestic goods
more money enters economy + can circulated within economy
Size of circular flow in relation to size of leakages + injections (2)
leakages > injections –> money in circular flow decreases
leakages < injections –> money in circular flow increases
Impact of leakages being greater than injections in the circular flow of income (3)
fewer goods produced/consumed
firms purchase less FOPs –> increased unemployment
decrease income
Output method to measure national income (2)
measures value of final good/services produced over time period
useful to study performance of individual sectors
Income method to measure national income (2)
measures value of all income earned by FOPs in given time period
useful to study relative incomes of different FOPs
Expenditure method to measure national income (3)
measures value of all spending used purchase goods/services in given time period
C + I + G + (X-M)
useful to study the contributions of the of each GDP component
Define GDP (3)
gross domestic product
total value of all final goods/services produced in an economy in a year
GDP = C + I + G + (X-M)
Why is GDP useful (3)
asses economy’s performance over time
compare economies of other countries
allows policies to be made to meet economic objectives
Limitations of GDP
output of an economy can be produced by foreign FOPs
Define GNI (3)
gross national income
total income earned by country’s FOPs regardless of location of assets
GDP + net property income from abroad (income from abroad - income sent abroad)
Nominal GDP/GNI (2)
measured based on current prices
do not account for price changes
Real GDP/GNI (3)
measurements that do not account for price changes
allow for meaningful comparisons between other years
focuses more on the quantity/quality of goods/services
Define GDP per capita
total GDP/population
Differences between using GDP per capital vs total GDP (2)
different countries have different populations - per capita corresponds better to income of each individual
distinguishes between GDP growth due to population or total GDP
Define purchasing power
ability of money to buy goods/services
Real GDP to nominal GDP calculation
GDP deflator = nominal GDP/real GDP x 100
Define aggregate demand
total quantity of output that all buyers want to buy at any given price level
Why aggregate demand is downwards sloping (3)
wealth effect - price level falls, real value of money increases –> people feel wealthier + buy more
interest rate - price level falls, less money needed for payments, saving increases, IR falls - cheaper borrowing, inreased investments
domestic prices fall, become cheaper relative to foreign goods –> exports increase, imports decrease –> increase AD
Shifts of AD by consumer expenditure (5)
consumer confidence - high consumer confidence = likely to spend more on goods/services
interest rate - changes costs of borrowing, influence consumer’s consumption levels
wealth
income tax - consumers have less disposable income –> spend less
expectations of future prices - if expect prices to fall –> wait for prices + not spend
Shifts of AD by investment spending (4)
business confidence - optimistic outlook to economy, spend more on investments
IR - cost of investments
technolgy developments - stimulate investment spending
corporation tax - more tax = less investment
Shifts of AD by government spending
change in political priorities
Shifts of AD by net exports (3)
national income abroad - foreign consumers will purchase more goods (increase export)
exchange rate
trade restrictions
Define aggregate supply
total quantity of goods/services produced in an economy at any given price level
Define short-run aggregate supply
total output firms willing/able to produce where costs of resources are inflexible/fixed
Why are wages “sticky” in SRAS (2)
labour contracts allow for fixed wages
trade unions resist wage cuts
Why is aggregate supply positive sloping
price level increases –> output prices increase + resource prices stay constant –> firms profits increase
Factors that shift SRAS (5)
wages - firm’s coss
non-labour resource prices - firm’s costs
indirect taxes - raise firm’s costs
subsidies - reduce firm’s costs
supply-shocks
Limitations of national income statistics (2)
inaccurate - information can come from a wide range of sources
un(under)recorded economic activity - national income only records official economic activity
