Measuring the Macroeconomy Flashcards
Define ‘financial instruments’
Variables that policy makers can change directly, in order to achieve the govt’s targets
Give examples of instruments
Bank rate (the central bank’s IR)
Govt spending
Tax rates
Legal control & regulations
Give examples of targets
Economic growth
Unemployment
Income distribution
Balance of Payments (BOP)
When is ‘barter’ an efficient form of exchange?
When there are very few individuals and goods
What is the formula for household income and a firm’s output and what does this mean? (from the circular flow)
(Household income)
Y = C + S
(Firm’s output)
Y = C + I
Therefore S = I (if the economy only consisted of firms and households)
What does the circular flow show?
Domestic incomes earned by households giving rise to spending > gives rise to the output of firms > creating income for households
Define both ‘withdrawals’ and ‘injections’
Withdrawals = income that isn’t passed on through spending
Injections = spending that doesn’t arise out of domestic incomes and thus is exogenous (has an external cause)
State the 3 measures of national income and output that’re equivalents?
The income measure
The output measure
The expenditure measure
What does the output method involve?
Adding up all the output produced by all of the firms in the economy
What is the downsides of the output method?
Double counting (the outputs of some firms are inputs of other firms)
How can the issue of double counting be solved?
Value added
How do you calculate a firm’s value added?
The market value of its inputs - the market value of its outputs
What does ‘value added’ measure?
It measures each firm’s own contribution to total output, i.e. the amount of market value produced by each firm
How do we calculate the economy’s total output?
The sum of all values added in an economy, i.e. the gross value added (GVA)
What does the Gross Value Added (GVA) measure?
It measures all final output produced by all productive activity in the economy
What is the GVA & GDP measured at?
GVA = basic prices (bp) GDP = market prices (mp)
How do we go from GVA to GDP?
Add indirect taxes (VAT) and deduct subsidies on products by the authorities
What is the formula for the GDP?
GDP (mp) = GVA (bp) + (taxes - subsidies)
The income method is valid under what assumption?
The value of total output = the value of incomes received by households
What are the 3 types of incomes that when summed, give us the GNI and define them?
Compensation of employees (wages and salaries + payment made to labour, i.e. NI contributions)
Operating Surplus (OS) (pre-tax profits)
Mixed Incomes (MI) (incomes earned by people selling their service/output and that’re self-employed)
What’re the drawbacks of GNI?
Not all income accruing (paid over time) to domestic residents come from domestic production
Some domestic prod. creates factor earnings (income from FoP) for non-residents who either do some paid work for UK resident firms/who have previously invested in the UK
Some UK residents earn income from work for overseas resident firms or on overseas investments
Define ‘personal income’
Income paid to individuals before tax
Define ‘personal disposable income’
Income after tax and NI contributions
Define ‘consumption’
Spending on final goods & services produced during the year
What are the 3 classes of goods households spend on?
Services, e.g. haircuts
Non-durable goods, e.g. flowers
Durable goods, e.g. cars, computers
How do we calculate Personal Disposable Income? (PDI)
Personal income - (personal income taxes + NI contributions)
What does the expenditure method involve?
Measuring the expenditures on the output of firms
What’re the 2 main categories of govt spending?
Individual final govt consumption > money spent on services consumed by individuals
Collective govt final consumption > public goods where spending can’t be attributed to individuals, e.g. national defence
Define ‘investment spending’
Spending on the prod. of goods for future use rather than present
What’re the 3 categories of investment spending?
Fixed capital formation > prod. of new capital goods
Change in inventories > stock of inputs/unsold output of firms
Net acquisition of valuables > goods that aren’t consumed or used in the prod. process, e.g. jewellery
How do we calculate net investment?
Gross investment - depreciation (replacement investment)
Define ‘net investment’
Addition to the capital stock
Define ‘exports’
Goods & services produced by UK resident firms + sold abroad
Define ‘imports’
Consumption & investment goods purchased by UK residents but produced overseas
What’s the most common measure of GDP?
GDP (current market prices (mp))
How do we calculate GNP?
GDP (mp) + NIA
*where NIA = net income from abroad
How do we calculate net national income (NNI)?
GNP - depreciation
