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macroeconomics theme 2 Flashcards

1
Q

What is Macroeconomics?

A

The study of the economy as a whole

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2
Q

What is the definition of economic growth?

A

Measure of the change in national output of all goods and services produced in a country

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3
Q

What does Gross Domestic Product (GDP) mean?

A

the value of all final goods and services produced in an economy in a year

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4
Q

What does GDP per capita mean?

A

GDP per capita gives us an average measure of individual income in the economy.
total GDP/population

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5
Q

what is GNI (gross national income)? (& equation?)

A

total income generated by countries factors of production regardless of where Factors of production are located.

GNI=GDP+ Net factor income

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6
Q

what is GNP (gross national product)?

A

market value of goods and services produced over a period of time through the labour or property supplied by the citizens of a country, both domestically (GDP) and overseas.

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7
Q

what are the benefits GDP?

A
  • provide us of a measure of economic growth
  • provides a measure of living standards
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8
Q

what are the limitations of GDP?

A
  • risk of double counting- inflate the final figure of GDP
  • informal activity- black market or DIY work
  • chance of error is large
  • Negative externalities not included (e.g: cost of air pollution)
  • distribution of income not measured
  • kind of output produced not measured (e.g. if lots of capital is produced wont impact consumers).
  • level of healthcare not measured
  • individual income not measured.
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9
Q

What is the difference between nominal and real GDP?

A

Nominal GDP measures output using current prices and is unadjusted for inflation while Real GDP measures output using constant prices and is adjusted for inflation.

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10
Q

difference between value and volume?

A

value= what the good/services are worth

volume= number of goods/services that are produced

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11
Q

what are the costs of GDP per capita?

A
  • same issues as GDP
  • remittances are not measured: the money domestic workers/firms who work aboard send back isn’t consider (living standards would be higher if considered).
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12
Q

What are some benefits of economic growth?

A

Low unemployment rate> more people have income to spend> more people spending in the economy> more people paying taxes> more money invested in the production of public goods/service> increase in efficiency> increase in living standards

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13
Q

what is purchasing power parities (PPPs)?

A

exchange rate that compares the cost of living in each country.

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14
Q

Why is Purchasing power parities beneficial?

A

allows economies to compare productivity and living standards between countries

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15
Q

what is the relationship between real income and subjective happiness? ( low income and high income)

A

happiness and income positively related at low levels of income

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16
Q

what is inflation?

A

general rise in price

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17
Q

what is deflation?

A

general price level for goods and services falls and rate of inflation becomes negative

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18
Q

what is disinflation?

A

slow down or fall in annual rate of inflation

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19
Q

what is CPI ?

A

a measures inflation by sorting through large survey data from which basket of goods/ services are formed to reflect consumer habits.

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20
Q

how to calculate CPI?

A

1) base year is selected which as index number of 100.

2) weighted basket prices are converted into index numbers using formula- raw number/base year x 100

3) percentage change calculation done between each index number to work out annual inflation rate

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21
Q

Limitations of CPI?

A
  • not always reflect the consumer habits of all consumers in economy- not accurate for non-typical households
  • different consumer habits between low income and high income households.
  • gas and electric have price fluctuations which can distort the value of CPI
  • housing costs not included (e.g: rent, council tax…) use CPIH instead!!
  • time lag as it’s slow to respond to the new products and services.
  • prone to errors (sample errors).
  • prone to seasonal fluctuations that can drastically increase the price of key goods and services.
  • many of the services we consume in the digital economy doesn’t have a market price (e.g: Google searches, Instagram)
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22
Q

what is the similarities between RPI and CPI

A

Retail price index also measure inflation

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23
Q

what is the reasons for acceleration in inflation in the uk? (3 reasons)

A

1) rising costs of energy- rise in European wholesale gas prices due to Russian-Ukraine war causing supply shortage

2) Increase costs of food- rise in import prices and also links to rise in energy prices (causes a rise in costs of production) (could also link to previous weak exchange rate…)

3) Profit-push inflation from supplies- with prices going up firms are taking advantage of supply chain shortage by increasing their profit margin therefore increase price.

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24
Q

what are 4 economic problems associated with high inflation?

A

1) fall in real disposable income> goods and services become more expensive

2) widening inequality levels between high income and low income households- lower standards of living

3) redistribution of income and wealth- people who hold cash or fixed income assets lose out while people who have assets that rise in value with inflation can benefits. relative poverty increases

4) uncertainty and impact of investment- high and volatile inflation makes it difficult for business to plan> fall in investment> fall in AD

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25
what are 3 reasons why inflation can have regressive effects?
- low income households spend larger proportion of income on necessities (inelastic demand goods) such as food which become less affordable when inflation rises - Real wage cuts- high inflation can lead to job losses and real wage not increasing in response to high prices. low income households more likely to be in jobs with low unionisation - low income households exposed to high interest rates on loan> more expensive to borrow money
26
what is the difference between RPI and CPI?
housing costs are measured in RPI.
27
why does raising interest rate have a limited impact on lowering prices/ lowering inflation?
- most of the surge in inflation has come from external shocks over which the central bank has no direct control - time lag involved- interest rate takes around 18 months to have an effect
28
Effect on inflation on consumers?
if income doesn’t rise with inflation then goods/services will be seen as expensive> cannot afford what they usually by> fall in living standards> fall in econ development
29
effect of inflation on firms?
if inflation in UK is high than other countries> UK goods and services will be more expensive on global scale> less competitive> fall in exports> worsen the balance of payments. - inflation difficult to predict for firms - inflation causes a loss of consumer confidents> fall in consumption> fall in firm revenue - changing menu prices is expensive
30
effect of inflation on government
if gov fails to change excise taxes in line with inflation then real gov revenue will fall
31
what are the benefits of low inflation?
Low inflation> increase in consumption> increase in standard of living> increase in employment> increase in collection of indirect tax
32
What can high inflation lead to?
high prices> less consumption> less competition> less spending in the economy> imports increase
33
What is the definition of aggregate demand?
The total spending on all goods and services in the economy.
34
What are the components of AD?
Consumption, investment, government spending and net exports (X-M)
35
What is consumption?
The total amount spent by households on goods and services
36
What is investment?
The money spent by firms on assets which they will use to produce goods and services.
37
What is government spending?
Money spent by the government on public goods and services.
38
What is net exports?
Export minus imports (X-M)
39
What is interest rate?
reward for saving and cost of borrowing money expressed as a percentage of the money saved or borrowed.
40
How does rise in interest rate effect consumption?
rise in interest rate> expensive to borrow funds> consumers will be less likely to spend money on assets> fall in consumption> consumption is a component of AD> AD shift left
41
How does fall in interest rate effect consumption?
fall in interest rate> cost of borrowing decreases> more likely to borrow from UK banks> increase in consumer's disposable income> high marginal propensity to consume> increase in consumption> consumption is a component of AD> AD shift right
42
How does rise in interest rate effect investment?
rise in interest rate> more costly for firms to borrow funds and rewarding to save> fall in investment> investment is a component of AD> AD shift to the left
43
How does fall in interest rate effect investment?
Fall in interest rate> cheaper for firms to borrow funds and less of a reward to save> increase in investment> investment is a component of AD> AD shift to the right.
44
What is budget deficit?
when government expenditure exceeds government revenue.
45
What is budget surplus?
when government revenue exceeds government expenditure.
46
What is Marginal propensity to consume (MPC) and calculation?
Change in disposable income leads to willingness to spend. Calculation: change in consumption/change in income.
47
What factors affect consumption?
Income, interest rate, consumer confidence, wealth effect
48
What is the definition of investment?
Investment is money spent by firms on assets which they will use to produce goods or services.
49
What factors affect investment?
Corporation tax, business confidence, price of capital, level of competition, interest rate and spare capacity.
50
what factors influence government spending?
country population and external shocks
51
How does high population effect government spending?
high population>more people to care for>high level of gov spending required> increase in government spending> gov spending is a component of AD>AD shift right
52
What factors effect Net exports?
Real disposable income earned abroad, exchange rate, real disposable income earned in the UK and government restriction on free trade
53
How does strengthening in value of pound effect net exports?
Value of pound becomes stronger>foreign good will seem cheaper for UK citizens>more money spend abroad>more imports> decrease in net exports> net exports is a component of AD>therefore AD curve shift to the left (decrease).
54
How does weakening of the pound effect net exports?
If pound drops in value>UK goods will seem cheaper to foreigners> foreigners are more willing to spend money in the UK>exports in the uk increase >increase in net exports>net exports are component of AD> therefore AD curve shift to the right (increase).
55
What is Aggregate supply?
The quantity of goods and services that producers in an economy are willing and able to supply at a given a level of price.
56
Explain what would happen to net export if there is a rise in interest rate using the concept of hot money flow
Increase in interest rate> more rewarding to save that borrow>leads to hot money flower where investors will chase the best interest rate to save their money> if there is a rise in people saving in UK banks>demand for pound will increase> there will be a fall in the supply of the pound> value of the pound will appreciate> rise in price of uk goods and services> Uk goods more expensive on the global scale> increase in imports decrease in exports> decrease in net exports> net exports is a component of AD> AD shift left
57
What is short run aggregate supply? Draw SRAS graph
SRAS is determine by cost of production in the economy. Increase in cost of production=SRAS will shift to the left. Decrease in cost of production=SRAS will shift to the right. (see diagram in diagram book)
58
What is Long run aggregate supply?
A change in the quantity and quality of the factors of production (land, labour,capital enterprise) and an improvement in productive efficiency. (see diagram in diagram book)
59
What factors effect short run aggregate supply?
cost of raw materials, wages, business tax, import prices and prices
60
How does fall in raw material prices effect short run aggregate supply?
Fall in raw material prices>fall in industrial costs>cost of production decreases>SRAS increases>SRAS shifts to the right
61
How does a increase in wages effect short run aggregate supply?
Wages increases>rise in household income>cost of production increase because more money is spent towards household income>SRAS decreases>SRAS shift to the left
62
What factors effect long run aggregate supply?
Labour productivity, quantity and quality of labour, investment, competition and investment in infrastructure.
63
how does increase in labour productivity effect long run aggregate supply?
Increase in Labour productivity> rise in improvement in productive efficiency > LRAS increases>LRAS shift to the right
64
How does decrease in competition effect long run aggregate demand?
decrease in competition> fall in productivity> fall in quantity and quality of factors of productions>LRAS decreases>LRAS shift to the left.
65
what is the difference between the keynesian interpretation LRAS diagram and classical LRAS diagram?
classical LRAS curve is perfectly inelastic (vertical) showing that the economy is at full employment at all times. While Keynesian shows that the curve is first elastic (horizontal) then moves to inelastic meaning that there is spare capacity in the economy and it gradually moves to full employment.
66
what does the multiplier mean?
When there is an injection into the circular flow of income which leads to economic growth which leads to further injection into the circular flow and further economic growth.
67
what is the calculation for working out the multiplier?
1/1-MPC (marginal propensity to consume) or 1/MPW (marginal propensity to withdraw)
68
When is there a high multiplier value?
economy has plenty of spare capacity to meet high aggregate demand.
69
What is a negative output gap? draw a negative output gap.
When actual output is less that potential output (full employment)
70
what is a positive output gap?
when actual output is greater than potential output (full employment)
71
what are the consequences of a negative output gap? (refer to the 4 macroeconomic objectives)
- Economic is at the recession (low economic growth) because actual output is lower than what could be produced. - As the economy is experiencing low economic growth, unemployment will rise. - high unemployment will cause firm to lower prices as there is not enough demand. fall in inflation - Uk goods may be cheaper for foreigners, this will increase Uk exports therefore improving the Balance of payments.
72
What are the consequences of a positive output gap?
- high economic growth as actual output is greater than potential output - high economic growth means increase in demand. there will be a fall in unemployment because labour is a derived demand. - firms will increase prices due to high demand, increase in inflation - Uk goods may be more expensive for foreigners, this will decrease net exports causing a balance of payment deficit.
73
What is demand pull inflation?
inflation caused by excess demand in the economy
74
What is cost push inflation?
inflation caused by increase in the cost of production in the economy
75
What is CPI and the limitations?
(consumer price index) measures inflation by sorting through large survey data from which basket of goods/ services are formed to reflect the consumer habits of the average family. limitations: - The basket of goods and services generated will not necessarily reflect the consumption habits of all consumers in the economy, - It is prone to errors because there will be issues with how quickly the basket of goods and services will change according to current consumption habits of a nation (slow to respond to new products and services).
76
What is fiscal policy?
changes to government spending and taxation in order to influence AD
77
what is monetary policy?
change in interest rate, exchange rate and money supply in order to influence AD.
78
What are the four microeconomic objectives?
Economic growth, low and stable inflation (2%), low unemployment and balance of the balance of payments.
79
What is a balance of payments deficit?
when imports outweigh exports
80
What is balance of payment surplus?
when exports outweigh imports.

Economics a level (4 decks)

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