Measuring the Macroeconomy

Question 1

Define ‘financial instruments’

Answer 1

Variables that policy makers can change directly, in order to achieve the govt’s targets

Question 2

Give examples of instruments

Answer 2

Bank rate (the central bank’s IR)

Govt spending

Tax rates

Legal control & regulations

Question 3

Give examples of targets

Answer 3

Economic growth

Unemployment

Income distribution

Balance of Payments (BOP)

Question 4

When is ‘barter’ an efficient form of exchange?

Answer 4

When there are very few individuals and goods

Question 5

What is the formula for household income and a firm’s output and what does this mean? (from the circular flow)

Answer 5

(Household income)
Y = C + S

(Firm’s output)
Y = C + I

Therefore S = I (if the economy only consisted of firms and households)

Question 6

What does the circular flow show?

Answer 6

Domestic incomes earned by households giving rise to spending > gives rise to the output of firms > creating income for households

Question 7

Define both ‘withdrawals’ and ‘injections’

Answer 7

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)

Question 8

State the 3 measures of national income and output that’re equivalents?

Answer 8

The income measure

The output measure

The expenditure measure

Question 9

What does the output method involve?

Answer 9

Adding up all the output produced by all of the firms in the economy

Question 10

What is the downsides of the output method?

Answer 10

Double counting (the outputs of some firms are inputs of other firms)

Question 11

How can the issue of double counting be solved?

Answer 11

Value added

Question 12

How do you calculate a firm’s value added?

Answer 12

The market value of its inputs - the market value of its outputs

Question 13

What does ‘value added’ measure?

Answer 13

It measures each firm’s own contribution to total output, i.e. the amount of market value produced by each firm

Question 14

How do we calculate the economy’s total output?

Answer 14

The sum of all values added in an economy, i.e. the gross value added (GVA)

Question 15

What does the Gross Value Added (GVA) measure?

Answer 15

It measures all final output produced by all productive activity in the economy

Question 16

What is the GVA & GDP measured at?

Answer 16

GVA = basic prices (bp)
GDP = market prices (mp)

Question 17

How do we go from GVA to GDP?

Answer 17

Add indirect taxes (VAT) and deduct subsidies on products by the authorities

Question 18

What is the formula for the GDP?

Answer 18

GDP (mp) = GVA (bp) + (taxes - subsidies)

Question 19

The income method is valid under what assumption?

Answer 19

The value of total output = the value of incomes received by households

Question 20

What are the 3 types of incomes that when summed, give us the GNI and define them?

Answer 20

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)

Question 21

What’re the drawbacks of GNI?

Answer 21

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

Question 22

Define ‘personal income’

Answer 22

Income paid to individuals before tax

Question 23

Define ‘personal disposable income’

Answer 23

Income after tax and NI contributions

Question 24

Define ‘consumption’

Answer 24

Spending on final goods & services produced during the year

Question 25

What are the 3 classes of goods households spend on?

Answer 25

Services, e.g. haircuts

Non-durable goods, e.g. flowers

Durable goods, e.g. cars, computers

Question 26

How do we calculate Personal Disposable Income? (PDI)

Answer 26

Personal income - (personal income taxes + NI contributions)

Question 27

What does the expenditure method involve?

Answer 27

Measuring the expenditures on the output of firms

Question 28

What’re the 2 main categories of govt spending?

Answer 28

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

Question 29

Define ‘investment spending’

Answer 29

Spending on the prod. of goods for future use rather than present

Question 30

What’re the 3 categories of investment spending?

Answer 30

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

Question 31

How do we calculate net investment?

Answer 31

Gross investment - depreciation (replacement investment)

Question 32

Define ‘net investment’

Answer 32

Addition to the capital stock

Question 33

Define ‘exports’

Answer 33

Goods & services produced by UK resident firms + sold abroad

Question 34

Define ‘imports’

Answer 34

Consumption & investment goods purchased by UK residents but produced overseas

Question 35

What’s the most common measure of GDP?

Answer 35

GDP (current market prices (mp))

Question 36

How do we calculate GNP?

Answer 36

GDP (mp) + NIA

*where NIA = net income from abroad

Question 37

How do we calculate net national income (NNI)?

Answer 37

GNP - depreciation