Principles of Macroeconomics Flashcards
what are institutions?
the laws and informal rules that regulate social interactions among
people and between people and the biosphere, sometimes also termed the rules of the game
what are economic systems?
a way of organising the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning
what is capitalism?
an economic system in which the main form of economic organisation is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit.
what is private property?
when the person possessing it has
the right to exclude others from it, to benefit from the use of it, and to exchange it with others.
what are markets?
a way that people exchange goods and services by means of directly
reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit
why did capitalism lead to a growth in living standards?
-impact on technology
-specialisation
what does specialisation do?
increases productivity of labour because we become better at producing things when we each focus on a limited range of activities
what does a production function give?
maximum output for a given set of inputs
what are the key ideas of Malthus’ model?
- Population expands if living standards increase
- But the law of diminishing average product of labour implies that as more people work on the land, their income will inevitably fall
what are the 3 conditions required to stay in Malthus’ trap?
- Diminishing average product of labour
- Rising population in response to increases in wages
- An absence of improvements in technology to offset the diminishing average product of labour
what is gross domestic product?
the market
value of all final goods and services
produced within a country in a given
year.
what is national accounts?
system used to measure overall output and expenditure in a country.
what are green arrows?
show the flow of real resources
what are purple arrows?
show the flow of money
what does circular flow show?
- The market value of total output must
be equal to total spending. - Total spending must equal total
income.
what are the limitations to GDP?
- Prices are not values.
- Nonmarket activities —
including household
production — are excluded. - The shadow economy is
missing. - Environmental degradation
isn’t counted. - Leisure doesn’t count.
- GDP ignores distribution.
what does GDP only measure?
goods and services that
are sold in markets
what is the shadow economy?
the economic activity purposefully conducted out of view of the government, and, thus, excluded from GDP
what is nominal GDP?
adds up the market value of total production in a year using
the current prices prevailing in that year
what is real GDP?
excludes the effects of price changes, so it isolates economic
growth that’s due to changes in the quantity of output produced
what does real GDP allow us to do?
isolate growth in production that has
taken place
what is the consumer price index (CPI) ?
measures the overall cost of the goods and services bought by a typical consumer
what is the GDP deflator?
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
what does the GDP deflator reflect?
the prices of all goods and services produced domestically
what does the CPI reflect?
the prices of all goods and
services bought by consumers.
what does the GDP deflator tell us?
the rise in nominal GDP that is attributable to a rise in prices
rather than a rise in the quantities produced
what is indexation?
When some money amount is automatically corrected for inflation by law
or contract,
