macroeconomics theme 2 Flashcards
What is Macroeconomics?
The study of the economy as a whole
What is the definition of economic growth?
Measure of the change in national output of all goods and services produced in a country
What does Gross Domestic Product (GDP) mean?
the value of all final goods and services produced in an economy in a year
What does GDP per capita mean?
GDP per capita gives us an average measure of individual income in the economy.
total GDP/population
what is GNI (gross national income)? (& equation?)
total income generated by countries factors of production regardless of where Factors of production are located.
GNI=GDP+ Net factor income
what is GNP (gross national product)?
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.
what are the benefits GDP?
- provide us of a measure of economic growth
- provides a measure of living standards
what are the limitations of GDP?
- 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.
What is the difference between nominal and real GDP?
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.
difference between value and volume?
value= what the good/services are worth
volume= number of goods/services that are produced
what are the costs of GDP per capita?
- 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).
What are some benefits of economic growth?
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
what is purchasing power parities (PPPs)?
exchange rate that compares the cost of living in each country.
Why is Purchasing power parities beneficial?
allows economies to compare productivity and living standards between countries
what is the relationship between real income and subjective happiness? ( low income and high income)
happiness and income positively related at low levels of income
what is inflation?
general rise in price
what is deflation?
general price level for goods and services falls and rate of inflation becomes negative
what is disinflation?
slow down or fall in annual rate of inflation
what is CPI ?
a measures inflation by sorting through large survey data from which basket of goods/ services are formed to reflect consumer habits.
how to calculate CPI?
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
Limitations of CPI?
- 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)
what is the similarities between RPI and CPI
Retail price index also measure inflation
what is the reasons for acceleration in inflation in the uk? (3 reasons)
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.
what are 4 economic problems associated with high inflation?
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
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
what is the difference between RPI and CPI?
housing costs are measured in RPI.
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
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
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
effect of inflation on government
if gov fails to change excise taxes in line with inflation then real gov revenue will fall
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
What can high inflation lead to?
high prices> less consumption> less competition> less spending in the economy> imports increase
