Macroeconomics key terms Flashcards
Nominal Value
based on current prices taking no account of changing prices through time (not adjusted to inflation)
Real Value
Value of an economic variable taking account of changing prices through time (adjusted for inflation)
Index Number
A device for comparing the value of a variable in one period or location with a base observation (e.g. measuring the average level of prices relative to a base period)
Consumer Price Index (CPI)
A measure of the general price level in the UK adopted as the UK’s inflation target since December 2003
Inflation
A sustained rise in the general price level
Costs of Inflation
Reduced standard of living
Risk of hyperinflation
Menu Costs
Shoeleather Costs
Uncertainty
Retail Price Index (RPI)
A measure of the average level of prices in the UK. Measure the average level of prices relative to a previous (base) year
Cost-Push Inflation
Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials.
Demand Pull Inflation
Inflation initiated by an increase in AD
Aggregate Demand
Total spending in an economy over a given period of time
Deflation
A sustained fall in the general price level
CPI
Measure of inflation. Used both in the UK and in other countries, useful for international comparisons. Seen as better at measuring the effectiveness of macroeconomic policy.
Menu costs
The cost of having to constantly having to reprint and change prices
Shoe Leather Costs
Shoe-leather cost is the time and effort you spend to minimize the effect inflation has on your finances.
Economically Inactive
Those people of working age who are not looking for work, for a variety of reasons (e.g students/elderly)
Discouraged Workers
People who have been unable to find employment and who are no longer looking for work, seen as economically inactive.
Workforce
People who are economically active- either in employment or unemployed
Unemployed
People who are willing and able to work but do not have a job.
Full Employment
When people who are economically active are able to find work
Claimant Count
Number of people claiming job seekers allowance each month
The labour force survey (ILO)
Percentage of workforce who are available for work (willing and able) but are without jobs
Problems of Measuring the Claimant Count
Only finds those who are eligible for JSA. so excludes people with a valid excuse e.g. people returning from raising children or those on Government training schemes etc
Problems of Measuring Labour force survey
Based on sample evidence therefore not completely accurate doesn’t show people who would be willing to work at their desired wage
Frictional Unemployment
Unemployment associated with the job search; people between jobs
Structural Unemployment
Unemployment arising because of the changes in the pattern of economic activity within an economy. unemployment due the loss/decline of entire industries e.g. coal mining
Cyclical Unemployment
Unemployment that arises from a lack of AD (for example, during the down turn of a economic cycle such as a recession)
Demand Deficient Unemployment
occurs when there is not enough demand for goods and services in the economy, leading to a reduction in production and a corresponding reduction in employment.
Seasonal Unemployment
Unemployment that arises in seasons of the year when demand of the good/service is relatively low
Voluntary Unemployment
A situation that arises when a individual decides not to accept a job at the going wage rate
Involuntary Unemployment
Situation arising when an individual who would like to accept a job at the going wage rate cannot find employment- rely on social security payments
Long Run Economic Growth
An increase in the productive potential of an economy/increasing the quantity or quality of the factors of production
Short Run Economic Growth
An increase in real GDP/actual output/AD
Labour Productivity
Output per worker per period of time
Capital Productivity
Output per unit of capital per time period
Total Factor Productivity
The average productivity of all factors, measured as the total output divided by the total amount of inputs used
Investment
The addition to the capital stock of the economy through expenditure by firms
Capacity Output
When all factors of production are fully and efficiently optimised
Human Capital
The stock of skills and expertise that contribute to a workers productivity; can be increased through education and training
Economic Growth on PPC Curve
outward shift indicates economic growth in long run (increase in productive capacity curve). Short run economic indicated through a movement toward full capacity but not in the productive capacity curve itself.
Productivity
Output per input over a period of time
Economic Growth through Labour
Another key driver of Growth is the skilled labour needed to operate the high-tech equipment. Can increase supply of labour through immigration policies. Investment in Labour will also increase the productivity of the economy, education + training are merit goods.
GDP
measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country.
Expenditure = Output = Income
Advantages of measuring GDP
Straightforward/understood
Internationally used so comparable with other nations
However different countries have different sized populations which isn’t taken into account
Importance of Economic Growth
Expanding the availability of resources (economic growth) in an economy enables the standard of living to increase. For any society economic growth is a fundamental objective perhaps the most important. Other policies may also be seen as subsidiary to it e.g. inflation control or full employment.
Economic Growth vs Basic needs provision
Growth objectives will eventually trickle down despite initial inequality of incomes and will tackle basic problems such as poverty. However people do still argue that basic needs should be catered for first, as people will gain human capital→can contribute to growth process.
3 measures of circular flow of income
Expenditure method = Output method = Income method
Average propensity to consume
calculated as C(household consumption)/Y(disposable income)
Marginal Propensity to Consume
calculated as Change in consumption( ∆C)/ Change in disposable income(∆Y).
The Multiplier
= 1/MPW(Marginal Propensity to Withdraw)
Or 1/MPS(Save)+MPT(Tax)+MPI(Import)
Why the demand curve is downward sloping (ALL ASSUME CETERIS PARIBUS)
1) Real Income effect
2) Wealth effect: if the price level is low then peoples assets will be worth more meaning they have more wealth→more willing to spend
3) Interest rates: prices low→interest rates low→discourages saving→more consumption and investment
Factors affecting the Position of the AS curve
1) Technology = Advances means firms can produce more with the same available resources.
2) Productivity = If workers become more skilled and thus productive, the capacity level of the economy will rise.
3) Factor mobility = I.e. how willing workers are to move around the country to fill job vacancies/retrain themselves for job mobility in other industries. It can overall increase output.
4) Enterprise = Encouraging people to become entrepreneurs and set up businesses will increase the capacity of an economy.
5) Economic incentives and attitudes = Government policy can affect LRAS; E.G. incentives in taxes and benefits, as well as legislation can affect the willingness of people to work and their motivation. (supply-side policies)
Comparative Static Analysis
When something is changed to examine its effects on the equilibrium
Different shapes of LRAS
Position of AD/AS equilibrium determines whether the economy is in full employment→ classical view that economy will always return to full employment. Keynesian→possible for equilibrium to settle below full employment in a long-run recession
Disadvantages of GDP
Income inequality distribution
Informal sector and accuracy of data
Social indicators
Economic growth (diagrams)
Expressed in terms of an outward movement of PPC curve. Long run→ shift right in long run AS curve→may be because of an increase in quantity in the factors of production.
Short run growth→shift in AD curve
Macroeconomic Objectives
Price Stability (low inflation), Full employment, Balance of payments, Economic growth, redistribution of income, environmental protection
Price Stability (low inflation) example
Govt tries to control inflation→controlling money stock→rise in money stock→rise in AD→rise in price level
Price Stability (low inflation) example
Govt tries to control inflation→controlling money stock→rise in money stock→rise in AD→rise in price level
Full employment
Full employment refers to a situation where all available labour resources in an economy are being used, and there is no significant surplus of unemployed workers.
Current Account Deficit (Issues)
ownership of UK assets sold to foreigners→long run effects on AS. Needs to be funded by a financial/capital account surplus to continue
Economic growth (as a policy Objective)
Long term aim→ to increase countries productive capacity→ by shifting LRAS curve
Monetary policy
Government policy that attempts to manage Ad by controlling monetary tools (interest rates/money supply or QE/exchange rates)
Monetary policy committee
Body within the bank of England responsible for the conduct of the monetary policy
Fiscal policy
Taxation and government spending to influence AD
Direct tax
A tax levied directly on income
Indirect tax (definition)
Tax on expenditure (for example, VAT)
Indirect tax (examples)
VAT Customs duties levied on imports, excise duties on production, sales tax
Education and training
Investment in human capital to improve productivity by teaching new skills.
