Macroeconomics Definitions Flashcards
Macroeconomics
The branch of economics which studies the working of the economy as a whole. It involves aggregates that concern economic growth, unemployment, inflation, distribution of wealth and income and external stability.
Circular Flow of income
The flow of income between households (consumers) and firms. Expenditures on goods and services flow from households to firms, and income flows from firms to households. Leakages may flow out of the economy, but flow back in by injections.
National Income Accounting
Measuring an economy’s national income or the value of its output.
National Income Accounting: GDP
The (1) total market value of all (2) final goods and services produced in a country over a (3) given period of time, usually one year, before depreciation.
National Income Accounting: Net Domestic Product (NDP)
GDP adjusted for depreciation.
National Income Accounting: Gross National Income (GNI)
The sum total of all final goods and services produced by a country in a given period of time, usually one year, plus the value of net factor (property) income from abroad. (formerly known as Gross National Product (GNP))
National Income Accounting: Net National Income (NNI)
GNI adjusted for depreciation.
Methods of Calculating Gross Domestic Product (1): National Expenditure Approach
the total of all spending in an economy over one year by the four components of aggregate demand: C+I+G+X-M
Methods of Calculating Gross Domestic Product (2): National Output Approach
the sum total of all final goods and services added together over a time period of usually one year, calculated by summing up the value-added at each stage of production
• This avoids “double-counting intermediate goods”.
- It is important not to count intermediate goods and services, example steel that produces cars
Methods of Calculating Gross Domestic Product (3): National Income Approach:
The income accrued by a country’s residents for supplying productive resources, and is the sum of all forms of wages, rent, interest and profits over a given period of time
Depreciation (of fixed capital)
The wearing out of capital goods, also called capital consumption.
Factor Prices
the cost of all factors of production used in the production process, before the adjustment for taxes and subsidies.
GDP per capita
GDP divided by the population.
Green GDP
GDP/GNI that has been adjusted to take into account environmental destruction (loss of resources) and/or health consequences of environmental problems.
Purchasing Power Parity (PPP)
is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
• When you make two currencies equal to the value of one US dollar and compare prices and GDP.
The Business Cycle
The periodic fluctuations of national output around its long term trend. Often occurs at a generally upward growth path (productive potential).
• Economies tend to move through stages including “boom”
and “bust.
Marginal Propensity to Consume (MPC)
the percentage change in consumption brought about by an increase in additional income.
Marginal Propensity to Save (MPS)
the percentage change in savings brought about by an increase in additional income.
Multiplier effect
An initial change in aggregate demand can have a much greater final impact on equilibrium national income, OR It is the number of times a rise in national income exceeds the rise in injections of demand that caused it.
Aggregate Demand
the relationship between the aggregate quantity of goods and services demanded - or Real GDP - and the price level. (C+ I+G+X-M)
Investment
the business purchase of goods and services or ADDITIONS TO CAPITAL STOCK (new buildings, new plant, new vehicles, new machinery), and additions to inventory.
Price Level
the average of all prices, measured using an index. We use price levels to give us the ‘real’ total output or expenditure.
Aggregate Supply
The total supply of goods and services produced within an economy at a given overall price level in a given time period.
• describes the relationship between price levels and the quantity of output that firms are willing to provide.
Short-run
when prices of final goods and services change ( ∆ average price level), but factor prices do not – there is a time lag.
Long-run
when factor prices do adjust to final price changes ( ∆ average price level).
Business cycle
the fluctuations in economic activity over time. There are four stages of the business cycle: (1) recession, when economic activity slows down; (2) trough, when the recession is at its deepest; (3) recovery, when the economy begins to grow; and (4) peak/boom, when economic activity is high.
Natural rate of employment
Unemployment resulting from a situation where there is no cyclical unemployment, only structural, frictional and seasonal. It is seen as the rate of full employment where demand for labor equals the supply of labor.
• Full employment and the natural rate of unemployment are really the same thing.
• Increase in demand at this level will cause inflation.
Full Employment (Level of National Income)
This is the level at National Income at which everyone who wants to work is able to. It is the level of employment rates where there is no cyclical or deficient-demand unemployment.
• This is NOT 0% unemployment as there will exist frictional and some structural unemployment.
Long–Run Aggregate Supply
is the relationship between real output and the price level at full employment. It is defined as that period in time when all markets are in equilibrium, including the labor market. (The natural rate of unemployment).
Macroeconomic Equilibrium
Occurs at the price level where aggregate demand equals aggregate supply.
Keynesian Model (John Maynard Keynes)
Economic viewpoint: Economy is INHERENTLY UNSTABLE and can remain in a recessionary or inflationary period INDEFINITELY. The government NEEDS TO INTERVENE to correct this imbalance. How:
• During a recession/deflationary period the government needs to induce spending or “prime the pump” (aggregate demand). During an inflationary period the government needs to use measures to decrease spending (aggregate demand).
• Note: The aggregate supply curve goes from horizontal to vertical!!!!
Neo-Classical Model (New Classical Model)
Economic Viewpoint: The economy is inherently stable, and although there may be periods where the economy slows down, it will self-correct. The government should intervene as little as possible.
• Markets operate more efficiently when the government stays out of the economy.
• Note: According to this model the SRAS curve is upsloping!!
• Flexible prices, wages, and interest rates
Recessionary Gap (or Deflationary Gap)
Where an economy is operating below its full employment equilibrium. There are unemployed resources!
• Under this condition, the level of real GDP is currently lower than its full employment, which puts downward pressure on prices in the long-run.
Recession
a business cycle contraction, a general slowdown in economic activity; by definition, two or more quarters of negative growth in Gross Domestic Product.
Growth Recession
slow growth, lower than the long-term average growth trend and not enough to accommodate full-employment.
Inflationary Gap
A macroeconomic condition that describes the distance between the current level of real GDP and the full employment (long run equilibrium) real GDP. Real GDP is higher than full-employment GDP and there is upward pressure on prices.
Spare capacity
a situation when some factors of production are unemployed
Labor Force
people who are 16 years or older (may be different in some countries), and are working or who are actively seeking work
Unemployment
occurs when there are people actively looking for work at the equilibrium wage rate but are not able to find work
Unemployment benefits
regular payment made by the government to those who are unemployed. (most developed countries automatically give benefits to those that are laid-off, but NOT to those who are fired)
Unemployment Rate
The number of unemployed expressed as a percentage of the labor force
Demand deficient or cyclical unemployment
Unemployment caused by the business cycle where the slowdown in economic activity with falling aggregate demand is the cause of unemployment.
Frictional unemployment
unemployment as a result of people who are between jobs, or are entering, or reentering the job market ( labor force).
• It often takes time for workers to find jobs, even though there are jobs. It is often seen as a healthy for an economy to have workers move into areas of need.
Structural unemployment
unemployment caused by a change in the demand for skills as the nature or structure of the economy changes (dynamic economy).
• So there is a mismatch between qualifications, skill-sets and characteristics of the unemployed and available jobs. Example: Car workers, steel workers in the US.
Seasonal unemployment
unemployment associated with industries or regions where the demand for labor is lower at certain times of the year.
Real-wage unemployment
disequilibrium unemployment being driven up above the market clearing rate. It is caused my non-market forces entering the labor market such, as Government imposed minimum wage, or labor unions pushing up wages.
Discouraged worker
is someone who has left the labor force because they cannot find work. In other words, discouraged workers are unemployed people that were looking for work but have given up and therefore are NOT in the labor force.
• Discouraged worker may distort unemployment statistics
Underemployment
A situation where a country there are highly skilled workers but working in low-paying jobs, and/or workers who are working part time but would prefer full-time work.
• example: people in part-time work who would like to work more. This is seen as a problem in China, the Philippines, Mexico, etc. Someone working under their education level, or selling fruit on the streets would be considered underemployed
Hidden unemployment
the number of people who do not have work but who are not counted in government reports, for example, people who have stopped looking for a job (discouraged workers) and people who work less than they want to (part time)
• Usually mean “real unemployment rates” may be much higher than government claims.
Inflation
Inflation is the sustained (persistent) upward movement in the average level of prices.
Rate of Inflation
The percentage increase in the price of goods and services, usually annually. Most commonly associated with the Consumer Price Index
Consumer Price Index
Measures the change in purchasing a fixed basket of goods and services from one time period to another. A price index measuring average prices over time!
Price Stability
When the average level of prices is moving neither up or down.
Money illusion
the idea that people consider the nominal value of money rather than its real value thus ignoring the purchasing power of their income. People therefore have an unrealistic picture of their income and wealth.
Demand Pull Inflation
Inflation induced by a persistence of an excess of aggregate demand in the economy over aggregate supply. Can be looked at as too much money chasing too few goods and services.
The Quantity of Money Theory (excess monetary growth)
claims that in the long-run an increase in the quantity of money causes an equal increase in the price level
Cost Push Inflation
the situation in an economy where there is sustained prices rises because of production costs increasing, example wages, imported materials, interest rates and rents.
Supply-side shocks
occurs when there is an unexpected change in the supply of a f actor of production resulting in a sudden change in its price
Deflation
A sustained (or persistent) decrease in the general price level (Japan, Hong Kong) where the rate falls below zero.
The Phillips Curve
strong inverse relationship between inflation and unemployment.
Long-Run Phillips Curve
In the long run this trade-off between inflation and unemployment does not tend to occur. Unemployment will gravitate toward the natural rate of unemployment.
Stagflation
occurs when an economy experiences a period of increasing inflation, negative or zero economic growth and rising unemployment.
Progressive Tax
system of tax where the percentage paid in tax increases as income increases.
-Used by most MDC’s as a form of income tax (direct) collection. (also an automatic fiscal stabilizer)
Regressive Tax
tax regime where the percentage of tax paid is lower the higher the income, so proportionally less tax is being taken from higher income earners. Sales tax is an example of a regressive tax
Proportional Tax
A tax which is levied at the same rate for all, regardless of income. Often called a flat tax.
-For example everyone might pay 15% of their income in tax.
Direct Tax
a tax leveled on factor incomes.
-Examples: tax paid by individuals on income, tax paid by companies on profit.
Indirect tax
taxes on the production, sale purchase or use of a good
– usually producer taxed so it passes (indirectly) onto the consumer -example sales tax on new cars.
Disposable Income
total income households receive from wages, salaries and transfers from governments less taxation
Discretionary Income
part of disposable income that is used to undertake new consumption expenditure
Transfer Payments
payments received by persons from the government in the form of social payments
i.e. social security payments, income support, subsidies) payments are being transferred from financial resources collected by one group in society and given to another group
Gini coefficient
a statistic used to measure the extent of equality in distribution, usually income and wealth. It is measured between 0 and 1 with 0 being perfect equality and 1 being perfect inequality
Demand-side policies
Government policy that attempts to alter the level of AD to complement government policy and stabilize the economy. Consist of Fiscal and Monetary policies.
Fiscal Policy (Budgetary policy)
Policy regarding the size and composition of government spending and revenue used to influence both the level and pattern of economic activity in a country. It can be either expansionary or contractionary to either increase or decrease economic activity and influence aggregate demand.
Expansionary Fiscal Policy
will involve increasing government expenditure or decreasing taxes (an injection in the circular flow) –will lead to increased AD and multiplied rise in AD.
Contractionary Fiscal Policy
cutting government spending and/or raising taxes (a leakage from the circular flow) –will lead to decreased AD and multiplied decrease in AD
Business confidence
is related to the expectations of businesses about the future of economic conditions, (which may be optimistic or pessimistic) and affects the level of investment.
Austerity Measures
Increasing taxes and cutting government spending in order to reduce a budget deficit. Has the effect of contracting the economy (even though tis may lead to an even worse economic situation).
i.e. Greece, Spain, Portugal, Italy 2012-2014.
Budget Surplus
The excess of central government tax receipts (revenue) over its spending for one year.
Budget Deficit
The excess of central government spending over its receipts (revenue) for one year.
Automatic fiscal stabilizers
Fiscal policy that works without using a discretionary government policy. The economy automatically contracts (slows down) during an inflationary period, and expands during a recessionary period.
- Progressive tax system will automatically increase the rate of taxation as income rises and thus slow down the potential rise in AD and decrease the rate of taxation as income rises increasing AD.
- Unemployment benefits, and other recessionary spending also act as automatic stabilizers.
Discretionary Fiscal Policy
deliberate changes in tax rates and government spending to influence level of AD
Crowding Out
A situation where government spending displaces (or crowds out) Private Investment. (The government is competing for the same money businesses and consumers want…it drives up the interest rate)
Note: Be able to show this graphically using a Loanable Funds Market Supply and Demand diagram!!!!
Monetary Policy
The central bank policy with respect to the quantity of money in the economy to affect the rate of interest and aggregate demand. Now broadly accepted as the primary determinant/weapon to influence of AD
Expansionary Monetary Policy (Easy Money)
An increase in the money supply in order to lower interest rates and increase Consumption and Investment. Used to counter or correct a recession. More recently known as QUANTITATIVE EASING (QE).
i.e. QE1 and QE2 were recently used in 2009 & 2011& 2013 in the United States by the Federal Reserve bank (the FED) in order to stimulate growth in the sluggish economy.
Contractionary Monetary Policy (Tight Money)
A decrease in the money supply in order to increase interest rates and decrease Consumption and Investment. Used to counter or correct inflation or inflationary pressure.
i.e. Used in China in 2010-2011 to try and contain inflationary pressure in the
economy
Supply Side Policies
Are mainly microeconomic policies designed to improve (incease) the supply-side potential of an economy, make markets and industry operate more efficiently, and therefore contribute to a faster rate of growth of real national output.
Note: May be Market-based supply side policies (no government intervention) or Interventionist supply side policies.
Capital Gains
income earned though the selling of an asset.
i.e. Selling stocks at a higher price than bought, or selling a house at a higher price.
Laffer Curve
A diagram the shows the relationship between government revenue and the % tax rate. At 0% tax rate and a 100% tax rate the government would be zero. At some percentage rate government revenue would be maximized. It is used to show that increasing marginal tax rates too much may discourage investment and work and will cause a decrease in government revenue.
