Module 11 – Macroeconomics Overview Flashcards
Define Capital Stock?
Ntural and man made resources
Define Labor force
…that part of the population willing to work
Define National Output
National Output = Capital Stock + Labor
What does Purchasing Power Parity (PPP) allow?
Purchasing Power Parity (PPP) allows the comparing of countries national output by comparing the cost of a basket of goods
If part of the ___ and part of the___ is idle then the national output will ___
capital stock (e.g. factories); labor force; be less than its potential
Describe Potential output growth?
Potential output is not static, it normally grows due to the:
- growth in the quality and quantity of labour
- growth in the quality and quantity of capital stock
- technological advances
What is Gross National Product (GNP)?
The actual output of an economy is known as the Gross National Product (GNP)
GNP is the value of all final goods and services produced in the economy in a year:
GNP = apa + bpb + cpc + … p
where p = price of that goods or service and a,b,c… is the quantity
Households give ___ to firms and in return receive an ___
resources (labour);income (Gross National Income=GNI)
GNI=___= ___
GNE;GNP
What is GNE?
Gross National Expenditure. Gross National Expenditure alue of total spending by households.
What is GNI?
Value of the services of the factors of pproduction hired by the firms
Define microeconomics?
Microeconomics attempts to explain relative prices
Explain macroeconomics?
Macroeconomics explains behaviour of level of prices of all goods/services taken together
- Inflation/deflation
Also concerned with behaviour of total income and total output, unemployment
GNP = ___
C (Consumer goods produced) + I (Investment/capital goods produced)
Define Entrepreneurs/managers
combine capital and labour to produce goods and services
Discuss Long-term solution to poverty?
Long-term solution to poverty is not transfer of food and clothing – rather assistance in establishing capital stock and labour force In the short run there is virtually nothing a nation can do to internally acquire resources but it can avoid wasting them
GNI = ___
C (Consumer goods purchased) + S (Savings)
If consumer goods produced exceed consumer goods planned for purchase then?
- Unsold goods will increase inventories
- Firms will begin to produce fewer goods
- Firms will require fewer resources
- Household income will fall
- Households will purchase fewer goods
Gap will widen until inventories fall below desired levels then process will be reversed
These processes called “Business cycle”
- Creates waste
- Government has tools to alleviate tendency
Aggregate demand consists of expenditure from 4 groups:
- Consumers (households)
- Firms
- Government
- International (households, firms and governments)
Each of these groups’ expenditures can be affected by governmental policies; consequently the policies enacted by government can influence aggregate demand.
Discuss Actual output
- Gross National Product (GNP) = Sum of prices of all goods produced
- Gross National Expenditure – value of total spending by households
- Gross National Income – value of services of factors of production hired by firms
- GNP=GNE=GNI
GNP = C (Consumer goods produced) + I (Investment/capital goods produced)
GNI = C (Consumer goods purchased) + S (Savings)
State the macroeco-nomic relationships
Let the symbol Y stand for Gross National Product.
Thus GNP ≡ GNE ≡ GNI ≡ Y
(NOTE: ≡ indicates an identity, i.e. something that is necessarily true by definition.)
For a domestic economy, aggregate demand equals consumption expenditure (C) plus investment expenditure (I) plus government expenditure (G).
Thus domestical-ly GNP ≡ Y ≡ C + I + G
Notes:
Y (GNP) = C (consumption expenditure) + I (investment expenditure) + G (government expenditure in an international economy
However, in an international setting, part of a nation’s resources are allocated to the production of export goods (X) and simultaneously households, firms and govern-
ments may buy goods from foreign nations, in other words imports (Z).
Thus internationally Y ≡ C + I + G + X ― Z
This last equation is known as the national income identity, and policy makers must never lose sight of it.
Notes:
Y = C + I + G + X (export) – Z (import)
Define Fiscal policy
– control of government expenditure and tax rates
- Income taxes, sales taxes, customs, excise taxes, corporation taxes
Define Monetary policy
Supply of money which directly affects interest rates
Explain Output gap / employment gap
- aggregate demand is less than potential output
– idle labour and unused capacity in capital stock
Explain Inflationary gap
- Aggregate demand is higher than potential output
- prices rise, marginal buyers drop out of market
Potential output (Q) expands regardless of government action due to supply-side factors:
- Growth in quality and quantity of capital stock
- Growth in quality and quantity of labour force
- Technological change
Government has three mechanisms to affect equivalent growth in aggregate demand (Y). Explain.
- Increase government expenditure
- Reduce tax rates
- Increase disposable incomes
- Increase money supply
- Decrease rate of interest (R)
Macroeconomics goals generally accepted as desirable are:
o Low inflation
o Low unemployment
o Balanced budget
o Positive balance of trade
o Stable currency
Inflationary bias of market economics
- At full employment inflation rate is positive
- Zero inflation might require a very high unemployment rate
Explain full-employment rate of unemployment
Known as the natural rate of unemployment and this rate varies according to the socio-economic
characteristics of each nation’s labour force
Explain full-employment rate of down-time
unused capacity
Discuss Gross domestic product (GDP).
GDP defines the economy as existing within the country’s
borders
GDP measures the output of an economy based on location
Explain Gross National Product versus Gross Domestic Product
- We have already defined GNP as the value of all final goods and services pro-
duced in the economy in a given period, and GDP measures the same thing - The difference is that GDP defines the economy as existing within the country’s
borders, while GNP defines the economy according to the ownership of factors of production - While GDP measures the output of an economy based on location,
GNP measures the output of an economy based on ownership - GNP = GDP + Net Income from Abroad
What doe sit mean if we assume potential output in the short run is fixed?
The ability of a government to affect aggregate demand means that government policies can affect the
unemployment rate and the inflation rate.
Probelm with policies:
- Time lag
- Moving target (output continuously increasing)
- Households and firrms:
- Households expenditure is variable and unpredictable
- Firm expenditure even more volatile
- Depend on managers long-term expectations
- Exogenous shocks (e.g. oil price spikes, ooil cartel)
Name the policies categories that gorment has control fall into
fiscal policy and monetary policy
Explain inflationary gap.
But what happens if households, firms and governments combined (the aggre- gate demand) attempt to buy more than the economy can produce.
The answer is that prices will rise and we will have what is known as an inflationary gap, the extent of the gap and therefore the inflationary forces being dependent upon by how much aggregate demand exceeds full-employment output. Prices will rise, marginal buyers will drop out of the various markets, and the economy will return to full-employment equilibrium but at a higher price level. Why, you might ask, cannot this excess aggregate demand be satisfied with imports? It can be, as long as your country is creditworthy abroad, i.e. as long as other nations are willing to loan you the use of some of their resources – the resources that produce the imported goods and services. The debt, of course, will have to be serviced regularly and be repaid in the future.
