Oct Test Flashcards
Macro-Economics Objective No.1
Stable prices; the Government’s inflation target is 2.0% for the consumer price index
Macro-Economics Objective No.2
Sustainable and stable economic growth and development:
Growth of real Gross Domestic Product (GDP), sustainable in keeping inflation low and reducing the environmental impact of growth.
Macro-Economics Objective No.3
Low unemployment: the government wants to achieve an increase in employment and eventually arrive at a situations where all those able and available can find meaningful work.
Macro-Economics Objective No.4
Balanced budget: the government wants to achieve a situation where total revenues are equal or greater than total expenses.
Macro-Economics Objective No.5
Greater income equality: the government wants to reduce the excessive gap between the rich and the poor, but still enough to create incentives to work.
Macro-Economics Objective No.6
Current account balance: the government wants to avoid “large” deficit on the current account balance of payments
Macro-Economics Objective No.7
Environmental sustainability: care for the environment means protecting it from misuse and overuse.
The environment is increasingly recognised an important asset that needs to be protected
Factor of Production
The inputs to the production process; land, labour, capital and enterprise.
Factor of Production No.1
Land: not only the land itself but all the natural resources below the earth, on the ground, in the atmosphere and in the sea.
E.g. gold deposits, rainwater, gold, oil, copper and natural forests.
Factor of Production No.2
Labour: the workforce of the economy.
E.g. doctors, policemen, and cabinet ministers.
The value of a worker is called their “human capital”; education and training will increase that human capital, enabling the worker to be more productive.
Factor of Production No.3
Capital; manufactured stock of tools, machines, factories, offices, roads and other resources which are used in the production of goods and services
Working / Circulating capital: stocks of raw materials, semi-manufactured and finished goods waiting to be sold.
Fixed capital: the stock of factories, offices, plant and machinery (fixed capital is fixed in the sense that it won’t be transformed into a final product as working capital will)
Factor of Production No.4
Enterprise; the seeking out of profitable opportunities for production and taking risks in attempting to exploit these.
Entrepreneurs are individuals who organise the factors of production (land, labour, and capital) and take risks with their own money and the financial capital of others.
Reward for Each Factor of Production
Land: Rent / the owners may receive a royalty (a share of the money raised in sales of the resource)
Labour: Wages / Salary
Capital: Rent + Interest
Enterprise: Profit
Circular Flow of Income Definition
A model of the economy depicting the flow of goods, services and factors and their payments around the economy.
Circular Flow of Income- National Output (O)
The value of the flow of goods and services from firms to households
Circular Flow of Income- National Expenditure (E)
The value of spending by households on goods and services
Circular Flow of Income- Households
Own the wealth of the nation. They own the stock of the land, labour, and capital used to produce goods and services.
They supply the factors in return for income which are rents, wages, interest and profits (rewards to the factors of production).
They then use this money to buy goods and services.
Circular Flow of Income- Firms
Produce goods and services by hiring factors of production from households, then selling them back to households
National Income (Y)
The value of income paid by firms (over a period of time) to households in return for land, labour and capital.
It is equal to National Output and National Expenditure
Circular Flow of Income- Injections
Spending which does not come from households:
Investment is spending by firms on new capital equipment like factories, offices and machinery. It is also spending on stocks (or inventories) of goods which are used in the production process.
Government Spending is spending by central and local government as well as the government agencies
Exports is spending by foreigners on goods and services made in the UK.
Circular Flow of Income- Withdrawal
Spending which does not flow back from households to firms:
Saving by households is money which is not spent by households. Equally, firms don’t spend all their money on wages an profits but save some of it.
Taxes paid to the government take money both from households and firms.
Imports from abroad are purchased both by households and firms. The money paid in tax then does not flow back round the circular flow of income.
Closed Economy
An economy where there is no foreign trade
Income
Rent, interest, wages and profits earned from wealth owned by economic actors
Open Economy
An economy where there is trade with other countries
Wealth
A stock of assets which can be used to generate a flow of production or income.
E.g. physical wealth such as factories and machines is used to make goods and services
Aggregate Demand
Consumer Spending (C) + Investment (I) + Government Spending (G) + (Exports (X) - Imports (M))