national income chapter 11 Flashcards
what are the 4 phases of the business cycle ?
what are the causes of expansion , boom/peak, contraction and trough ?
expansion/boom - peak - contraction/recession - trough - expansion
causes of expansion - 1.economic growth, 2.optimistic consumers and investors spend more time, increasing circular flow. 3.low interest rates encourage both consumption and investment
boom/peak - 1. inflation is high- demand pull - supply can’t increase as at full employment 2. asset bubbles emerge- speculation and investment has driven up prices 3.raising interest rates may help slow down the boom
contraction 1. negative future expectations - fall in investment/spending 2. credit can dry up- less loans means less investment/spending
trough 1.the lowest point of the downward movement- hard to identify at the time
what is national income ?
the income accruing to the permanent residents of a country from economic activity over a time period
what is economic growth ?
an increase in national income (GDP) over a time period
what is a recession ?
when national income (GDP) falls for two consecutive quarters
methods of calculating national income 1. the output method
involves adding the value of all output(goods and services) produced by all firms in the economy. it is important to avoid double counting. “double counting” occurs if the expenditure on intermediate goods is included in the calculation of national output.
higher output = higher standard of living
methods of calculating national income 2. the income method
involves adding up all the income earned (rent, wages, interest and profits) from supplying factors of production (land, labour, capital and enterprise) in a country in a period of time
methods of calculating national income 3. expenditure method
involves adding the total amount of money spent on (final) goods and services in the country during the year. this is taken from the amount spent by consumers, firms and the government, adding the value of exports and subtracting the value of imports.
this is the most important method for calculating national income and the most commonly used
what is economic growth ( a rightward shift of the AD curve
economic growth can also be represented graphically. if aggregate demand increases (consumer income increases) this leads to an outward shift in AD
as such, Real GDP increases but at the same time so does the price level( inflation)
aggregate demand (AD) - the total demand for an economy’s goods and services at a given price level at a given period
aggregate supply (AS) - the total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period
what are the positives of economic growth ? (5)
1.increased employment- if more goods and services are being produced, firms will have to hire more workers to create this output, increasing the number of people in work
2.imporved gov finances - gov revenue will increased from more direct taxes (PAYE) and indirect taxes (VAT) as a result of increased employment and production
- improved balance of payments - if an economy produces more goods and services, they will export more of their output, increasing exports/ B of P
- improved standard of living - an increase in AD will result in higher wages to workers, and thus higher disposable incomes, as firms profits will increase
- decreased emigration - reduced “brain drain” as there will be fewer residents feeling that they have to leave the country as there will be more job opportunities
what are the negatives of economic growth (4)
- inflationary pressure - as AD increases, this will lead to excess demand for all goods and services which pushes up the price level ( demand pull inflation)
- use of scarce resources - unsustainable practices such as consuming fossil fuels or other non-renewable resources may be needed for economic growth, damaging the environment
- increased demand for imports - if AD increases, consumers incomes will also increase. thus, they will import more goods and services (MPM)
- uneven distribution of wealth - as AD increases, firms will earn more in profit. however, this may not be passed on to workers proportionally leading to a growing divide between rich and poor.
the expenditure method - formula and explanation of each factor
AD/Y = C+I+G+(X-M)
C- consumer expenditure - consists of spending by households on goods and services know as consumption
I - investment - spending by the private sector on capital goods eg building
G- gov spending - gov spending on goods and services eg health
(X-M) net exports - the difference between the value of exports of goods and services and the value of imports of goods and services
the expenditure method - what factors impact C consumption
levels of incomes - as incomes rise, the level of spending tends to rise
MPC - the higher the MPC , the higher the level of spending
availability of credit - as credit becomes more easily available the level of spending will rise
rate of interest - higher interest rates means borrowing falling and spending
rates of taxation - if these increase, disposable incomes fall and so will spending
consumer confidence - the less confident consumers are about the future the less likely they are to spend
the expenditure method - what factors impact I investment
rate of interest/MEC - as interest rise, borrowing becomes more expensive and investments tend to fall
expectations of business people - are they optimistic about the future? does gov policy favour risk taking, are levels of taxation conducive to risk taking
the expenditure method - what factors impact G government expenditure
primarily depends on the political decisions of the government and the type of fiscal policy being pursued by the state.
the expenditure method - what factors that impact exports X
income levels in our export markets - if high then the demand for Irish exports may increase
competitiveness of Irish exports - levels of domestic inflation vs international rates. if our goods are competitive on export markets then demand may increase
value of euro in relation to other countries - eg the US dollor/ Pound sterling
the expenditure method - what factors that impact imports
levels of incomes - as incomes rise the level of spending on imports tend to rise
MPM - the higher the MPM the higher will be demanded for imports
value of euro in relation to other countries
what is the definition of gross domestic product
it is define as the total value of the output produced by the factors of production in the domestic economy irrespective of whether the factors are owned by Irish nationals or foreigners
what is the definition of gross national product ?
it is defined as the total value of goods and services produced by Irish owned factors of production in Ireland and elsewhere. it is a measure of the income accruing to a country’s residents
what is the difference between GDP and GNP
the difference between GDP and GNP in NFIA (net factor income from abroad)- income earned by Irish factors earned abroad sent home minus foreign income earned in Ireland repatriated out of Ireland - it is a large negative figure for Ireland
eg repatriation of profits by MNC’s
repayment of interest on national debt
remittance payments from immigrants in Ireland
what is gross national income (GNI)
it measures the total income earned by a country’s residents and businesses regardless of where that income is earned
it includes EU subsidies ( a source of income from abroad) and deducts EU taxes ( taxes paid by Ireland to the EU )
what is modified gross national income (GNI*)
it is an economic measure that takes into account certain adjustments to gross national income to provide a more accurate reflection of a country’s economic well-being
it removes the following figures (adjustments) that would otherwise distort and overestimate Ireland’s national income each year.
- factor income of redomiciled firms
- depreciation on R&D imports and trade in IP
3.depreciation on aircraft leasing
how are national income figures calculated ?
- gross domestic product (GDP) at current market prices (CMP)
+/- net factor income from abroad
| - gross national product (GNP) at current market prices
+EU subsidies
-EU taxes
| - gross national income (GNI) at current market prices
-adjustments
| - modified GNI at current market prices
the circular flow of income - households
households supply the factors of production (land, labour, capital and enterprise) to firms. Firms ay for these factors in the form of rent, wages, interest and profit. with this income Y households can now buy the output of firms
the circular flow of income - firms
firms supply employment for households in which they will be rewarded for their labour, in producing the output, through wages. this income Y can now be spent in the economy.
