Paper 2 Macro Flashcards
Equation for Aggregate Demand?
C+ I+ G+ (X-M)
C = Consumer Expenditure I = Investment G = Government Spending X = Exports M = Imports
What is Aggregate Demand?
Total Level of planned real spending on goods and services produced in the economy
How does a Change in Consumption affect aggregate demand?
Change in Personal Taxation –> Change in Disposable Income –> Change in Consumption
Change in Interest Rates –> Change in Levels of borrowing –> Change in Disposable income –> Change in Consumption
Decrease in Unemployment –> Increased Income –> Increased Consumption
How does a Change in Investment affect AD?
Change in business taxation –> Changes in retained profits –> Changes in investment
Changes in interest rates –> Change in levels of borrowing –> Change in retained profits –> Change in Investment
Increased Confidence –> Increased Borrowing –> Increased Investment
How does Government Spending affect AD?
Change in EG –> Change in Taxation Revenues –> Change in Spending on public and merit goods
Political Change –> Change in Government Spending due to differing political beliefs
How do Exports and Imports affect AD?
Depends on Relative Levels of inflation Level of trade barriers Exchange Rates Economic Growth Overall
Economic Growth?
The Percentage increase in real GDP over a period of time
Economic Cycle?
Refers to periods of time where economic growth fluctuates.
GDP?
Total value of output (G and S) produced in an economy over a period of time
Real GDP?
The amount of goods and services produced by an economy each year having been adjusted for inflation
Real GDP Per Capita?
Total Value of output produced in an economy over a period of time which is adjusted for inflation and expressed per head of population
Nominal GDP?
The amount of goods and services produced by a country in a time period
Total Growth in GDP?
Is Represented by the percentage change in the value of x over a period time
Human Capital?
refers to the skill level and education of the workforce
National income
The value of all income in the economy added together and includes income from wages, profits, royalties, dividends, interest and other income earned from abroas
What does it mean by a recession?
Negative real GDP for Two Consecutive Quarters
What does it mean when an economy is in a depression?
If Real GDP declines for eight consecutive quarters
Benefits of EG?
Increase Employment
Increased SoL –> EG means people have an average of higher incomes
Reduced Poverty –> Increase in EG –> More Jobs –> More income
Improved Government Finances –>
Improved Production Possibilities –>
How does EG lead to Increased Employment?
EG is the result of more output being produced –> Businesses are producing more –> Derived Demand for labour increases
How does EG lead to improved Government Finances?
Increased Profit for Firms –> Increased Tax Revenue –> Increased Government Budget
Less Expenditure on Unemployment Benefits
As Standards of Living Improve –. Gov dont have to invest as much on hospitals as people can afford them –> Increased Budget for Government
Problems caused by Economic Growth?
Unsustainable Growth
Environmental Damage
Regional Differences in inequality
Inflation
Inflation?
The Persistent rise in the general prices of goods and services over a period of time
Deflation?
Is a period of time where average prices are falling. This can be caused by a falling aggregate demand
Aggregate Demand?
The total demand of an economy, including the total demand from consumers, businesses, government expenditure and foreign buyers
CPI?
A system used to measure general price levels
RPI (Retail Price Index)?
A system used to measure the general price level which includes house prices and rates (council tax)
Demand Pull Inflation?
Inflation caused by too much demand in the economy, as a result of a lack of supply
Cost-Push Inflation?
Inflation caused by rising business costs
Interest Rates?
The Cost of borrowing and the reward for saving
Purchasing Power of Money?
The amount of G and S that can be bought with a fixed amount of income
Menu Costs?
The Costs to firms of having to update their catalogue /price lists due to repeated price changes
Shoe Leather Costs?
The Costs to firms and consumers when searching for new suppliers when prices are increasing due to inflation
Hyperinflation?
Very High levels of inflation when prices get out of control
Impacts of Inflation on the Balance of Payments?
If domestic inflation is higher than other countries –>
Domestic firms will find it harder to sell in overseas markets –>
The Price of exported G and S will be rising and therefore the demand for exports is likely to fall –>
The Balance of Payments will be Worse –>
A fall in demand for exports will cause a rising in unemployment and a fall in GDP
(Foreign Consumers wont buy domestic G and S)
Domestic Consumers will buy foreign goods and services because –> Current Account Deficit)
How does Inflation affect Unemployment?
If Domestic prices for G and S are Rising faster than international competitors
Decrease in demand for domestic G and S because
-As Prices increase people consume less because they have less income
OR
Some people save during Inflation
Decrease in Demand will lead to Unemployment as firms will not need to produce as many G and S and therefore less workers are demanded
Lay Off Workers?
Means to no longer employ someone because they are no longer needed and there is not enough work for them to do
What is the ILO’s Definition of an Unemployed Person?
Willing and able to work, activity seeking work but unable to find a job in the last 4 weeks and can start within the next two weeks OR out of work, have found a job and waiting to start within the next two weeks
Cyclical Unemployment?
Unemployment caused by falling demand as a result of a downturn in the economy
Structural Unemployment?
Unemployment caused by a fall in demand for products in an industry
Frictional Unemployment?
When workers are unemployed for a short period of time as they move from one job to another
Seasonal Unemployment?
Unemployment caused when seasonal workers, such as those in the holiday industry are laid off becaise the season has ended
Voluntary Unemployment?
Unemployment resulting from people choosing not to work
Income Inequality?
Differences in income that exist between different groups of earners in society, that is, the gap between the rich and the poor
Absolute Poverty?
Where People do not have enough resources to meet all of their basic human needs
Relative Poverty?
Poverty when relative to existing living standards of the average individual.
It can also be when a person earns less than 50% or 60% of the median income of that economy
