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A Level Economics > PMT Macro > Flashcards

PMT Macro Flashcards

1
Q

What occurs when there is a rise in the value of Gross Domestic Product (GDP)?

A

Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP).

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2
Q

What does GDP measure?

A

GDP measures the quantity of goods and services produced in an economy.

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3
Q

What does a rise in economic growth indicate?

A

A rise in economic growth means there has been an increase in national output.

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4
Q

What are the benefits of economic growth?

A

Economic growth leads to higher living standards and more employment opportunities.

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5
Q

What is real GDP?

A

Real GDP is the value of GDP adjusted for inflation.

For example, if the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%.

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6
Q

What is nominal GDP?

A

Nominal GDP is the value of GDP without being adjusted for inflation.

In the above example, nominal economic growth is 4%. This is misleading, because it can make GDP appear higher than it really is.

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7
Q

What is total GDP?

A

Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period.

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8
Q

What is GDP per capita?

A

GDP per capita is the value of total GDP divided by the population of the country.

Capita is another word for ‘head’, so it essentially measures the average output per person in an economy. This is useful for comparing the relative performance of countries.

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9
Q

What is the volume of GDP?

A

Volume of GDP is GDP adjusted for inflation. It is the size of the basket of goods and the real level of GDP.

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10
Q

What is the value of GDP?

A

Value of GDP is the monetary value of GDP at prices of the day. It is the nominal figure and can be calculated by volume times current price level.

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11
Q

What is Gross National Product (GNP)?

A

GNP is the market value of all products produced in a year by the labor and property supplied by the citizens of one country. It includes GDP plus income earned from overseas assets minus income earned by overseas residents.

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12
Q

How does GNP differ from GDP?

A

GDP is within a country’s borders, while GNP includes products produced by citizens of a country, whether inside the border or not.

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13
Q

What is Gross National Income (GNI)?

A

GNI is the sum of value added by all producers who reside in a nation, plus net overseas interest payments and dividends.

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14
Q

What does GNI include and exclude?

A

GNI includes what a country earns from overseas and removes any money that is sent back home by foreigners in that country.

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15
Q

What is inflation?

A

Inflation is the sustained rise in the general price level over time. This means that the cost of living increases and the purchasing power of money decreases.

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16
Q

What is deflation?

A

Deflation is the opposite of inflation, where the average price level in the economy falls. There is a negative inflation rate.

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17
Q

What is disinflation?

A

Disinflation is the falling rate of inflation, meaning the average price level is still rising, but at a slower extent.

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18
Q

What does a 4% increase in the price level indicate?

A

A 4% increase in the price level indicates inflation.

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19
Q

What does a change from 4% to 2% represent?

A

A change from 4% to 2% is still inflation, but indicates disinflation where the price rise has slowed.

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20
Q

What does a -3% change in the price level indicate?

A

A -3% change in the price level indicates deflation.

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21
Q

How is the inflation rate calculated in the UK?

A

The inflation rate in the UK is calculated using the Consumer Prices Index (CPI), which measures household purchasing power.

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22
Q

What is the Family Expenditure Survey?

A

The Family Expenditure Survey finds out what consumers spend their income on, which helps create a basket of goods.

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23
Q

How are goods weighted in the CPI?

A

Goods are weighted according to how much income is spent on each item, with items like petrol having a higher weighting than tea.

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24
Q

How often is the basket of goods updated?

A

The basket of goods is updated each year to account for changes in spending patterns.

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25
Q

What is aggregate demand (AD)?

A

Aggregate demand is the total demand in the economy, measuring spending on goods and services by consumers, firms, the government, and overseas consumers and firms.

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26
Q

What is the equation for aggregate demand?

A

The equation for aggregate demand is C + I + G + (X - M).

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27
Q

What is consumer spending?

A

Consumer spending is how much consumers spend on goods and services. It is the largest component of AD and is significant to economic growth.

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28
Q

What percentage of GDP does investment account for in the UK?

A

Investment accounts for around 15-20% of GDP in the UK per annum, with about ¾ coming from private sector firms.

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29
Q

What is government spending?

A

Government spending is how much the government spends on state goods and services, such as schools and the NHS, accounting for 18-20% of GDP.

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30
Q

Are transfer payments included in government spending?

A

No, transfer payments are not included in government spending figures because they do not derive output.

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31
Q

What does exports minus imports represent?

A

Exports minus imports represents the value of the current account on the balance of payments, indicating a surplus if positive and a deficit if negative.

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32
Q

What is the significance of the UK’s trade balance?

A

The UK has a relatively large trade deficit, which reduces the value of aggregate demand, making it the most insignificant part of AD.

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33
Q

What is consumer spending?

A

Consumer spending is how much consumers spend on goods and services. It is the largest component of AD and makes up just over 60% of GDP.

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34
Q

What is disposable income?

A

Disposable income is the amount of income consumers have left over after taxes and social security charges have been removed. It is what consumers can choose to spend.

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35
Q

What are the sources of consumer income?

A

Consumer income might come from wages, savings, pensions, benefits, and investments, such as dividend payments.

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36
Q

What is the marginal propensity to consume?

A

A consumer’s marginal propensity to consume is how much a consumer changes their spending following a change in income. Consumers on low incomes are more likely to spend.

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37
Q

What is the marginal propensity to save?

A

A consumer’s marginal propensity to save is the proportion of each additional pound of household income that is used for saving.

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38
Q

What is the relationship between marginal propensity to consume and marginal propensity to save?

A

A consumer’s marginal propensity to consume added to the marginal propensity to save is equal to 1.

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39
Q

What happens to consumer income that is not spent?

A

Consumer income which is not spent is saved.

40
Q

What happens to consumer spending when interest rates are lowered?

A

Spending increases because it is cheaper to borrow and reduces the incentive to save.

There are time lags between the change in interest rates and the rise in consumption.

41
Q

How do lower interest rates affect household disposable income?

A

Lower interest rates decrease the cost of debt, such as mortgages, increasing effective disposable income.

42
Q

What is the impact of consumer confidence on spending?

A

Higher consumer confidence leads to increased spending as consumers are less concerned about future difficulties.

43
Q

What factors affect consumer confidence?

A

Consumer confidence is affected by anticipated income and inflation.

44
Q

What happens to consumer spending when there is fear of unemployment or higher taxes?

A

Consumers may feel less confident about the economy, leading to decreased spending and increased saving.

45
Q

What is the effect of decreased consumer confidence on large purchases?

A

Decreased confidence delays large purchases, such as houses or cars.

46
Q

What does the AS curve represent?

A

The AS curve shows the quantity of real GDP supplied at different price levels in the economy.

47
Q

Why is the SRAS curve upward sloping?

A

The SRAS curve is upward sloping because at a higher price level, producers are willing to supply more to earn more profits.

48
Q

What is the short run in economics?

A

The short run is the period of time when at least one factor of production is fixed.

49
Q

What is the long run in economics?

A

In the long run, all factors of production are variable.

50
Q

What does the short run aggregate supply curve (SRAS) represent?

A

The SRAS shows the planned output of an economy when prices change, while keeping the cost of production and productivity constant.

51
Q

What happens to the SRAS curve when there is a change in production costs or productivity?

A

A change in production costs or productivity will result in the shift of the SRAS curve.

52
Q

Why is the SRAS curve upward sloping?

A

The curve is upward sloping because supply is assumed to be responsive to a change in aggregate demand (AD), which is reflected in the price level.

53
Q

What does the long run aggregate supply curve (LRAS) show?

A

The LRAS shows the potential supply of an economy in the long run, when prices, costs, and productivity of factor inputs can change.

It can show the economy’s productive potential, similar to the PPF.

54
Q

What is the shape of the LRAS curve in the classical model?

A

The LRAS curve is vertical in the classical model because supply is assumed not to change as the price level changes.

55
Q

What does the basic model of a two-sector economy include?

A

The basic model includes households and firms as the two sectors.

56
Q

What do households provide to firms?

A

Households provide land, labour, and capital to firms.

57
Q

What do households receive in return for providing resources?

A

Households receive rent, wages, interest, and profits.

58
Q

How do households use the money they receive?

A

Households use the money to buy goods and services produced by firms.

59
Q

In the model, how does money flow?

A

Money flows in one direction (green arrows) and goods, services, and factors of production flow in another (orange arrows).

60
Q

What are the three ways to measure economic activity in the model?

A

The three ways are national output, national expenditure, and national income.

61
Q

What is the relationship between national output, national expenditure, and national income in the simple model?

A

In the simple model, national output equals national expenditure equals national income.

62
Q

What is a limitation of the two-sector model?

A

The two-sector model is too simplified to represent the actual economy.

63
Q

What role does the government play in the economy according to the model?

A

The government takes money out through taxation (T) and adds money by spending (G).

64
Q

What happens if the government spends more than it takes away?

A

If the government spends more than it takes away, it can increase the flow of income.

65
Q

How are financial services incorporated into the model?

A

Financial services inject money through investment (I) and take money away when consumers or producers save (S).

66
Q

What is the effect of exports (X) on the economy?

A

Exports add money to the flow of the economy.

67
Q

What is the effect of imports (M) on the economy?

A

Imports take money away from the flow of the economy.

68
Q

What is the balance of trade?

A

The balance of trade is the difference between the level of imports and exports.

69
Q

What is the difference between wealth and income?

A

Wealth is a stock of assets, while income is a flow of money.

70
Q

What are examples of wealth?

A

Wealth includes things people own, such as houses and possessions.

71
Q

What are examples of income?

A

Income includes money received from work and interest from savings.

72
Q

Is there a correlation between wealth and income?

A

Countries with high levels of wealth tend to have high levels of income, but there is not a perfect correlation.

73
Q

What are injections in the economy?

A

Injections are monetary additions to the economy, including government spending (G), investment (I), and exports (X).

74
Q

What are withdrawals or leakages in the economy?

A

Withdrawals are where money is removed from the economy, including taxes (T), savings (S), and imports (M).

75
Q

What is the multiplier process?

A

The multiplier process is the idea that an increase in AD due to an increased injection can lead to a further increase in national income.

76
Q

How is the multiplier ratio defined?

A

The multiplier ratio is the ratio of the final change in income to the initial change in injection.

77
Q

What does the initial injection represent?

A

The initial injection represents an increase in spending that increases income for someone else, leading to further consumption spending.

78
Q

What is an example of the multiplier effect?

A

If the government spends £100m to create jobs, it could lead to an extra £90m being spent by those who have the jobs, and so on.

In this case, the MPC is 0.9 and the multiplier is 10.

79
Q

What determines the size of the multiplier?

A

The size of the multiplier is determined by how much of an increase in income people will spend, known as the marginal propensity to consume (MPC).

80
Q

How does the concept of circular flow relate to the multiplier?

A

The multiplier works due to the concept of circular flow, where one person’s spending is another’s income.

81
Q

What is the estimated multiplier in developed and developing countries?

A

The IMF estimates that the multiplier tends to be around 1.5 in developed countries and about 1.6 for developing countries.

82
Q

What is a negative multiplier effect?

A

A negative multiplier effect occurs when a withdrawal from the economy leads to a further fall in income, decreasing economic growth.

83
Q

What can government plans to cut deficits lead to?

A

Government plans to cut deficits can lead to an even further decrease in the economy.

84
Q

What does the multiplier effect mean for economic growth?

A

The multiplier means that growth can occur quicker, as any injections lead to a bigger increase in national income.

85
Q

How can injections be targeted to maximize the multiplier?

A

Injections can be targeted at those with the biggest marginal propensity to consume (MPC) in order to increase the size of the multiplier.

86
Q

Who does the government typically target to stimulate the economy?

A

The government will want to give more money to people with the highest MPC, such as those on low incomes.

87
Q

What is a challenge for governments when influencing macroeconomic performance?

A

It is impossible for the government to know the exact effect of their spending as it is difficult to know the size of the multiplier.

88
Q

What is a time lag in the context of economic injections?

A

There will be a time lag between the increase in income and the full effect of that increase as not everyone will spend the money straight away.

89
Q

What factors determine the overall effect on the economy?

A

The overall effect on the economy will depend on the change in aggregate demand (AD) and the elasticity of the aggregate supply (AS) curve.

90
Q

What is the marginal propensity to consume (MPC)?

A

The increase in consumption following an increase in income.

91
Q

What is the marginal propensity to save (MPS)?

A

The increase in savings following an increase in income.

92
Q

What is the marginal propensity to tax (MPT)?

A

The increase in taxation following an increase in income.

93
Q

What is the marginal propensity to import (MPM)?

A

The increase in imports following an increase in income.

94
Q

What is the marginal propensity to withdraw (MPW)?

A

The increase in leakages following an increase in income. MPW = MPS + MPT + MPM.

95
Q

How does the MPC affect the multiplier?

A

The multiplier is dependent on MPC and can change all the time.

96
Q

What factors can affect the marginal propensity to consume (MPC)?

A

Any factor that affects consumption as a component of AD will affect the MPC, for example a change in interest rates.

97
Q

What is the relationship between MPC and the multiplier?

A

The higher the MPC, the bigger the multiplier, as this means more money of income is spent, leading to more money transferred through the circular flow and less withdrawn.

A Level Economics (5 decks)

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