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Economics A1 > Macroeconomy > Flashcards

Macroeconomy Flashcards

1
Q

National Income

A

The total sum of value of goods and services manufactured by the country; especially within the given period of time (Usually a year)

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2
Q

How to calculate national income?

A
  • GDP is the total value of all goods and services produced within a country in a given period, usually a year.
    - Income Approach, Expenditure Approach, & Production Approach
  • NNP is GNP minus depreciation (the value of capital that wears out or becomes obsolete during the year). This measure accounts for the loss of value in assets and infrastructure.
    - NNP=GNP−Depreciation
  • GNI is the total domestic and foreign income earned by the residents of a country within a given period, usually a year
    - GNI=GDP+NetIncomefromAbroad
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3
Q

Adjustment of measures from market prices to basic prices

A

Market Prices: Include taxes and subtract subsidies.
Basic Prices: Exclude taxes and add subsidies.
Adjusting to basic prices removes distortions from taxes and subsidies to reflect the true value received by producers.

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4
Q

Adjustment of measures from gross values to net values

A

Gross Values: These include the total value of goods and services produced, without accounting for the loss of value of capital goods due to depreciation.
Net Values: These subtract depreciation from gross values to reflect the actual value retained after accounting for the wear and tear of capital goods.

Start with Gross Values: The total value of goods and services produced (Gross Domestic Product or Gross National Product).
Subtract Depreciation: Remove the value lost due to depreciation of capital goods.

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5
Q

Circular flow of income (Closed Economy)

A

NO Foreign Trade -> Economy has no exports or imports
Components -> Consumption (C), Investment (I), and Government Expenditure (G)

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6
Q

Circular flow of income (Open Economy)

A

Foreign Trade -> Economy has exports and imports
Components -> Consumption (C), Investment (I), Government Expenditure (G), and Net Exports (X)

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7
Q

Components of Different Economies

A

Simple Closed Economy -> Y = C + S
Closed Free Market Economy -> Y = C + I
Closed Mixed Economy -> Y = C + I + G
Open Economy -> Y = C + I + G + (X - M)

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8
Q

Leakages

A

Definition -> Reduce the circular flow of income
Leakage -> Income is not passed onto the circular flow of income
Main Outcome -> GDP’s value is reduced
Calculation -> Leakage = Savings + Taxes + Imports
Savings -> Part of household’s current income which is not consumed
Taxes & Imports -> Money flows out to other economies
Important Note -> Each type of leakage is opposite to one of the injections

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9
Q

Injections

A

Definition -> Money from outside the circular flow of income
Main Outcome -> GDP’s value is increased
Calculation -> Injections = Investment + Government Expenditure + Exports

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10
Q

Circular flow of income (Equilibrium)

A

Definition -> Economy is neither growing nor shrinking
J = W -> Leakages = Injections
Important Note -> Equilibrium is not the same as Full Employment Equilibrium
Price Level is NOT Increasing -> When resources are fully employed
J = W Says Nothing About Employment or Inflation
Important Note 2 -> Economy can be in Equilibrium while dealing with Unemployment or Prices Increasing

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11
Q

Circular flow of income (Disequilibrium)

A

Definition -> Economy is either growing (J > W) or shrinking (J < W) in size
Greater Injections -> Economy is increasing in size; J > W
Greater Leakages -> Economy is shrinking in size; J < W

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12
Q

Measurement of Economic Growth

A

Different Methods -> Either in GDP or GNP
Economic Growth -> Percentage rate of increase in Real GDP, assuming the effects of inflation
Comparison -> Economic Growth is used for comparison; eg. Either the same economy over time or between different countries
GDP Per Capita -> Most popular measure for comparison, although it’s a simplistic method (does not reflect the realities of the entire population)
Different Population Sizes → Must be taken into account when comparing countries/periods of time with GDP Per Capita

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13
Q

Economic Growth

A

Increase in production potential or real level of output of an Economy

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14
Q

Real v/s Nominal GDP

A

Nominal GDP -> Total value of goods/services at current prices
Real GDP -> Nominal GDP adjusted to changes in inflation
Alias -> “GDP at Constant Prices”
Positive Inflation -> Nominal GDP is greater than Real GDP
Negative Inflation -> Real GDP is greater than Nominal GDP
GDP Deflator -> Transforms from Nominal to Real GDP
Purpose -> Measures price changes from a base year
Constant Prices -> Will be indicated; eg. “2018 = 100” or “at 2018 prices

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15
Q

Causes of Economic Growth (AD)

A
  • Government Expenditure -> Higher G
  • Investment in Infrastructure -> Eg. Roads, Rail and Power Supplies
  • Improved Transport -> Allows goods and people to flow more freely
    Main Outcome -> Productivity increases
  • Tax Cuts -> Higher C + I
  • More Disposable Income -> Allows individuals to spend more, firms can invest more
  • Depreciation of Currency -> Higher (X-M), due to exports becoming more attractive & imports more expensive
  • Lower Interest Rates -> Higher C + I, due to the cost of borrowing money being lower
  • Higher Real Wages -> Higher C
  • Financial Stability -> Individuals feel confident enough to spend more on goods and services
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16
Q

Benefits of economic growth

A
  • Rise in Standard Living -> Reduction of poverty, more consumer goods
  • Improved Health and Education -> Literacy rates rise, Infant & Death Rates fall
  • Increase in Tax Revenue -> More budget for infrastructure and benefits for the poor; Important Note -> Higher budget is the result of higher incomes and profits, not from higher Taxation
  • Increase in Business & Consumer Confidence -> A Positive view of the Economy leads to investing; consumers are more willing to spend
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16
Q

Shifters of AS to the Right

A
  • Increased Investment
  • Spending on Capital Goods -> Eg. Equipment and Machinery
  • Likely to Increase Output & Quality -> Leads to greater sales
  • Improved Technology
  • More can be Produced -> With the same quantity of capital
  • Improved Education & Training -> Affects quality and quantity of goods and services
  • Main Outcome -> More literate and skilled workforce
    Increase in Workforce
  • Main Factors -> Immigration or lower Minimum Labour Age Laws
  • Discovery/Development of Natural Resources -> Stimulates growth in countries
  • Examples -> Oil for Saudi Arabia, Copper for Zambia
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17
Q

Disadvantages of economic growth

A
  • Environmental Damage -> Pollution worsens, terraforming detriments the landscape, global warming, etc.
  • Opportunity Cost -> Country at maximum efficiency leads to the need to decide between capital or consumer goods; opportunity costs and tradeoffs become more eminent
  • Unequal Benefits -> Change in mechanisms, people will need to readapt to such abrupt changes
  • Lower Quality of Life -> Overcrowding in populated areas, inferior air quality, etc.; Opportunity Cost -> More income, but poorer life quality
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18
Q

Labour Force Survey v/s Claimant Count

A

Labour Survey -> Survey of a sample of households, unemployed are those seeking jobs without having one
Purpose -> Used for international comparisons
Weaknesses -> Sampling errors, make the calculation not fully accurate
Claimant Count -> Unemployed are those claiming unemployment benefits; those not eligible or registered are not included
Sampling -> Proportion of population is used as representative of the whole

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18
Q

Suitable Economic Growth

A

Resources -> Should be both used and conserved for future use
Demand for Resources -> Should be greater than the potential supply
Lack of Preservation Measures -> Resources would eventually perish and no longer exist
Governments → Manage growth while simultaneously preserving resources

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19
Q

Unemployment

A

Definition -> People of working age who actively seek work, at current wage rate that are unable to do so
Important Note -> Considers individuals who are willing and able to work, does not consider inactive individuals
Inactive Individuals -> Pensioners, full-time students, children-keepers (housewives)

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20
Q

Measurement of Unemployment

A

Unemployment Rate -> Percentage of the working population who are unemployed
Calculation -> (Unemployed) / (Working Pop) * 100
Various Different Methods -> Depend by country

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21
Q

Unemployment Measurement Issues

A

1)Inactive Workers -> Individuals that would work if their current situation changed; eg. Parents with young children
2)Discouraged Workers -> Individuals that are willing and able to work, but gave up due to not having found a job
3)Part-time Workers -> Considered as employed, but in reality are semi-employed
4)Unreported Legal Employment -> Individuals that register as unemployed to collect State benefits
5)Unreported Illegal Employment -> Individuals that register as unemployed, since they are involved in illegal practices like drugs or prostitution

22
Q

Causes of Unemployment

A
  1. Classical View -> Argues that unemployment occurs due to the trade or business cycle
    Business Cycle -> The market is capable of fixing it
    Monetarists -> Niche within classical view; argue that external interference produces disequilibrium (AS != AD)
    Example of Interferences -> Minimum wage laws, sindicates, corporate tax, unemployment benefits, etc.
  2. Keynesian View -> Argues that unemployment occurs due to the cyclical nature of unemployment and lack of AD for goods/services
    Proposed Solution -> Government Intervention to increase demand
23
Q

Type of Unemployment

A

1)Cyclical // Demand Deficient // General -> Unemployment that arises due to the trade cycle, occurring during the downside of the economy (Recession); Classic Keynesian Unemployment -> Suggests that Unemployment originates from a lack of AD in the Economy as a whole
2)Frictional -> Unemployment that can not be removed; considers individuals who are transitioning for one job to another, that have not yet started their new job
3)Seasonal -> Occurs in Specific Industries -> Demand for workers depends on the time of the year; Examples -> Agriculture, Construction, Tourism, etc.
4)Structural -> Unemployment that is the result of a permanent fall in demand for products of an industry; might occur because an industry is running out of resources or is losing its comparative advantage; Main Association -> Labour-intensive firms moving to low-cost countries, due to rising labour costs
5)Technological -> Type of Structural Unemployment; workforce is laid off because technology replaces labour
6) Classical Unemployment -> When wages are so high that employers can’t hire all the available workers

24
Q

Consequences of Unemployment

A
  1. Opportunity Cost -> Resources are wasted (not used efficiently); loss in the potential output of the economy
  2. NAIRU -> Specific level of Unemployment in an Economy; does not increase inflation
  3. Hysteresis Effect -> Tendency for Unemployment to lead to longer-term Unemployment
25
Q

Economic Consequences of Unemployment

A
  1. Labour Resources Wasted -> Output is below potential, investments in education & training is not capitalized (used)
  2. Fall in Standard of Living -> Less income = less consumption
    3)Lower AD -> Less consumption due to employment uncertainty, which leads to firms laying off workers, a vicious cycle, and a deflationary gap
    4)Rise in NAIRU -> Unemployed workers believe their skills are outdated, lose confidence in their skills, and become afraid to work, a hysteresis effect
    5)More Expenditure on Benefits -> Costs of taxpayers rise in order to fund bigger revenue expenditure; national budget deficit
    6)Regional Problems -> Often concentrated in specific areas; younger individuals move away to more attractive regional locations, which depresses the region even more; Main Outcomes -> Older population, lack of innovation & labour, etc.
    7)Income Inequality Widens -> Since more laid-off workers go into relative poverty
26
Q

Social Consequences

A

1)Health -> Loss of income makes it harder to provide medical care, mental health issues, and suicides
2)Education -> Children give up their education so as to save money and get introduced into the workforce earlier so as bring income
3)Family -> Pressure and stress may cause divorces and family breakups due to homelessness, higher crime rates, etc.

27
Q

Inflation

A

Definition -> Fall in the value of money, as general price level rises
Alias -> Low Stable Inflation
Good for the Economy -> Eg. Federal Bank (US) aims for 2.0% inflation rate
Rate > 0 -> Rate at which general level of prices rises over time, in annual rate
Cost of Living Increases -> Since it becomes more expensive to consume the same goods & services

28
Q

Hyperinflation

A

Definition -> Period of rapid and out of control increases in the general price level
In Practice -> Inflation rises at a rapid rate
Great Example -> Germany in the 1920s

29
Q

Deflation

A

Definition -> General price level falls, the value of money rises
Rate is Smaller than 0 -> Inflation is negative
Purchasing Power Rises-> Consumers can afford more goods & services for the same amount of money
Consumption May Fall -> Consumers may wait for even lower prices, assuming that deflation will accentuate further
Firms Sense Products Aren’t Selling -> Unemployment rises, deflationary gap

30
Q

Disinflation

A

Definition -> Slowing rate of inflation, general price level rises at a slower rate
Purchasing Power -> Starts falling at a slower rate
Associated With -> Periods of low inflation, eg. Many countries in 2018-2020

31
Q

Consumer Price Index (CPI)

A

Definition -> Measure of the weighted average prices of a basket of goods & services purchased by households
Base Year -> Year chosen as the point of reference for a price comparison between other years
Weightings -> Values given to items in an index, to show their relative importance
Items have Different Weighting Values -> Eg. Change in food price has more effect on household expenditure than a change in a cinema ticket
Calculation -> (Index for Year 2) / (Index for Year 1) * 100
Household Expenditure -> Total expenditure by consumers that reside in a country (home or abroad)
Minus // Excludes -> Expenditure by visitors on goods & services

32
Q

Development of the CPI

A

1)Base Year is Determined The base year is given a value of 100 basis points
2)Items for the Basket of Goods are Selected Items must be the ones bought by an average family; eg. bread, electricity, etc.
3)Each Item is Given a Weighting Weighting shows the relative importance of the item within the average family budget
4)New Price Levels are Sourced Across Country For each item in the basket, general price levels are determined by registering prices across the nation
5)Weighted Price Relative is Calculated Each item’s price is multiplied by its weighting; this determines the importance of the calculation within the broader development of the CPI
6)Sum of Weighted Price Relatives is Divided by the Sum of Weights (Items) The output of this calculation gives the change in the Price Index

33
Q

Difficulties in the CPI Measurement

A

Base Year -> Must not have unusual flucuations in price, since it may mislead the calculations
Basket May not be Representative -> Different groups have different basket of goods they consider “essential”
Outdated Basket Representation -> Goods & services may not represent expenditure patterns in actuality
Eg. Cellphones -> Nowadays cellphones have replaced multiple other goods that were considered essential, such as mail services, telephones and even computers
Change in Quality/Type of Good -> Eg. Phones have much more features than 10 years ago
Importance of Goods & Services May Change -> Weights will need to be readjusted accordingly
Different Measures -> RPI & CPI

34
Q

Causes of Inflation

A

2 Main Causes of Inflation -> A)Demand-Pull Inflation & B)Cost-Push Inflation

34
Q

Nominal v/s Real Data

A

Nominal Data -> Figues are expressed in current prices
Aliases -> Money Data, Money Values
Eg. Money Wages -> Show the money people get, not what that amount can actually buy
Real Data -> Figures are adjusted for the change in the value of money (inflation)
Eg. Real Wages -> Show what that money can actually buy
Example -> If inflation rose 5% and wages rose 6%, real wages just rose 1%
Calculation -> Real Data = Wage Rise % - Inflation Rise %

35
Q

Demand-Pull Inflation

A

Definition -> Occurs when total AD exceeds total AS
Usually Occurs -> Near Full Employment Level
Scarcity -> Resources become unable to supply sufficient goods to meet the rising AD
Price Level is Forced Upwards -> This brings AS and AD back into equilibrium

36
Q

Monetarists

A

Alternative View Upon Inflation -> They argue the only cause of inflation is the excess in money supply, assuming the velocity of money
Quantum Theory of Money -> Gives a strong basis for monetarism
Main Argument -> They defend that both Demand-Pull & Cost-Push Inflation are solely a result of excess money supply
If Money Supply Hike is Greater than Real Output -> Excess money is “soaked up” by a raise in the general price level (inflation)
Consequences

36
Q

Cost-Push Inflation

A

Definition -> Occurs when the cost of supplying goods & services is increased, which rises the cost of final prices
Different Causes -> The following 3 causes end up raising the costs of production
Rise in Raw Materials’ Cost -> Eg. Oil, as it becomes scarcer, its price rises significantly
Powerful Trade Unions -> Worker Associations may exploit firms by pushing up wages in excess of actual productivity gains; raises production costs
Monopolies -> May raise prices indefinitely since there is a lack of competition
Producers may Justify Hike in Prices -> By saying they had to rise wages demanded by trade unions
Wage-Price Spiral -> Rising wages = rising prices = higher wage demands; vicious cycle

37
Q

Consequences of Inflation

A

1)Deflation Leads to huge world problems; Example -> World Economy in 1920’s and 1930’S
2)Income Distribution Issues Borrowers Gain -> Pay back less interest in terms of the real value fo money; Lenders & Savers Lose -> Their money becomes worth less; Fixed Incomes Lose -> Their income can buy less; Trade Union Members -> Can exploit wage increases in excess of actual inflation
3)Labour Market Problems If Inflation is Greater than 5% -> Workers will demand more than this, so as to maintain their living standard; Employers Face a Fall in Sales -> Due to inflation, so firms won’t be willing to pay their wage increase; Potentially Leads to Labour Strikes
4)International Competitiveness Higher Inflation -> Goods & services become expensive compared to foreign alternatives; AD Falls -> Since Exports become less competitive, and Imports become more attractive (Net Exports fall)
5)Unemployment Stagflation -> Fall in Sales = More Workers Unemployed; vicious cycle
6)Investment Inflation Causes Uncertainty -> Firms end up investing less; Lower Future Economic Growth
7)Unanticipated Inflation The rate of inflation can not be predicted; leads to uncertainty
8)Shoe Leather Costs If Prices Keep Rising -> Consumers & businesses will waste their time trying to find the cheapest price
9)Menu Costs Volatile Prices -> Administrative costs for firms rise; eg. Constantly adjusting prices, vending machines, inventory, etc.
10)Fiscal Drag People Demand Higher Incomes -> As inflation rises; If Tax Brackets Don’t Change -> People can get dragged into higher tax bands, thus pay more tax overall

38
Q

Components of AD

A

AD = C + I + G + (X-M)
C -> Consumption; households & consumers
I -> Investment; by firms and companies
G -> Government Expenditure; consumption by the Government
(X-M) -> Net Exports; the difference between total exports and imports

38
Q

Aggregate Demand (AD)

A

Definition 1 -> Total amount of goods and services demanded in an economy

39
Q

Nature of the AD Curve

A

Downwards Slope -> Rising price levels
If Inflation Rises -> Real Output Falls
A)Foreign Trade Effect -> As price level drops, exports become more attractive to foreign buyers; domestic goods become more attractive
B)Wealth/Real Balances Effect -> As price level drop, the value of wealth rises
Eg. 5000andPriceLevelFalls−>5000 can now purchase more goods and services
C)Interest Rate Effect
Lower Price Levels -> Encourage savings, results in lower interest rates
Higher Price Levels -> More money needed to purchase, borrowing rises = interest rate rises

40
Q

Determinants of AD

A
  1. Interest Rates -> Affects Consumption (Households/Consumers) and Investment (Firms)
    If Rates Fall -> Firms are more likely to invest, investment increases; Consumers can borrow money for a lower cost, consumption increases
    Overall Effect -> AD Rises/Shifts to the Right
  2. Income & Wealth -> Affects Consumption
    If Consumer’s Incomes Rise -> They are likely to spend more, consumption increases
    Overall Effect -> AD Rises/Shifts to the Right
  3. Inflation Expectations -> Affects Consumption
    If Inflation is Expected to Increase -> People are likely to spend now, consumption increases
    Overall Effect -> AD Rises/Shifts to the Right
  4. Currency Exchange Rate -> Affects Net Exports
    If Native Currency’s Value Rises -> Imports Increase since they become cheaper, net exports fall
    Overall Effect -> AD Falls/Shifts to the Left
41
Q

Consequences of Rising Price Levels

A

Nominal Interest Rates Rise -> This leads to a fall in demand for goods/services, due to a fall in consumption
Purchasing Power is Reduced -> Leads to a fall in consumption and investment
Domestic Goods become more Expensive -> Leads to a fall in exports and rise in imports; fall in net exports

42
Q

Determinants of AS

A
  1. Production Costs -> If wages rise, costs rise; AS is likely to be reduced
  2. Tech Innovations -> Increase in productivity of labour and capital, AS increases
  3. Production Taxes -> If taxation increases, costs of production rises, AS decreases
  4. Subsidies -> If subsidies increase, costs of production decrease, AS increases
  5. Quality of Labour & Capital -> Improvement in Education, Training, etc. results in a increase in productivity, AS Increases
42
Q

Long-Run AS Curve (LRAS)

A
  • When AS Reaches Full Capacity -> All resources are fully employed
  • Long-Run -> No ability to increase output
  • Any Increase in Demand -> Solely results in a rise in prices
42
Q

Rise in SRAS

A

1)Decrease in Production Costs
2)Cut in Indirect Taxes
3)Increase in Subsidies
4)Positive Supply Shocks → Eg. discovery of new raw materials, technological breakthroughs, etc.
5)Improvements in Productivity

43
Q

Aggregate Supply (AS)

A

Definition 2 -> Total value of goods and services produced in an economy

44
Q

Short-Run AS Curve (SRAS)

A
  • Definition -> Quantity of Real GDP (Output) supplied in an economy at different price levels
  • Upwards Sloping -> As general price level increases, more will be supplied
  • Even Though Costs Rise -> A rise in prices will be more than enough to cover those costs
  • Example -> Firms need to pay workers overtime to produce more
45
Q

Fall in SRAS

A

1)Increase in Production Costs
2)Increase in Indirect Taxes
3)Cut in Subsidies
4)Negative Supply Shocks → Eg. war, explosions, natural disasters, etc.

46
Q

LRAS Shifts to the Right

A

-> Improved Education, Increase in Capital Equipment, Improved Productivity
A)Increase in Output
B)Fall in Unemployment
C)Fall in Price Level
Important Note -> AS curve only shifts if productive capacity of the economy is increased

47
Q

Rise in LRAS

A

1)Increase in Size of Workforce (Immigration, Lower Labour Minimum Age)
2)Increase in Capital Stock
3)Higher Quality Education
4)Increase in Productivity
Main Outcome -> More can be produced with the same inputs

48
Q

Fall in LRAS

A

1)Decrease in Size of Workforce (Brain Drain / Emigration from Domestic Country)
2)Destruction of Capital Assets
3)Negative Supply Shocks -> Eg. war, explosions, natural disasters, etc.

Economics A1 (3 decks)

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