Spec point 2 Flashcards
Circular flow of income
Exchange of money between consumers and producers e(conomic agents)
In a closed economy it has no injections into the economy.
The open economy has injections, leakages and interactions between global economies
Injections into the Circular flow of Income
Government Spending
Investment
Exports
Three measures of GDP
Output, income and expenditure. The three measures allow a more accurate value to be calculated
GDP
total value of goods and services produced in a country
Real values and Nominal values
Real values refer to the value of a good, adjusted for inflation
Nominal values refer to the value of a good not adjusted for inflation
(55,000) new income after a pay rise (50,000) before
5,000 would be the nominal value for the increase
2,000 would be the real value, adjusted for inflation
GNI
A measure of economic growth
Gross National income is a measure of a countries economic activity that focuses on income generated by residents regardless of where it was made. Like income from abroad.
Purchasing Power Parities (Advantages and Disadvantages)
A measure of economic growth
PPP’s are exchange rates of currencies which compare the value of baskets of goods from different economies
Advantages -
+ Provides a more accurate comparison of living standard than nominal values. It reveals an economies true economic scale unlike nominal GDP values
Disadvantages -
- Depends on accurate price data. Consumers might pay different amounts for the same goods
- It doesn’t represent income inequalities
- Excludes black market incomes
Inflation
An increase in the general price level of goods and services in the economy over time
Deflation
A decrease in the general price level of goods and services in an economy over time
Disinflation
A slowdown in the rate of inflation. A fall in inflation relative to the previous record
CPI (Consumer Price Index)
Limitations
Measure of Inflation
Average change in the basket of goods over time.
(Cost of basket in given year/Cost of basket in base year) *100
Limitations of CPI
- CPI does not include mortgage interest payments
- CPI is updated annually so doesn’t reflect short term changes in price
- Assumes that all consumers buy the same goods
RPI
Measure of Inflation
Retail price index is an alternative measure of inflation
- It gives a higher value
- Less favourable due to it having methodological flaws
Causes of Inflation
- Demand-Pull Inflation occurs when aggregate demand exceeds aggregate supply
Caused by Tax cuts, government spending and Exports. (An increase of components in AD) - Cost-Push Inflation. When there is a rise in production costs as a result of an increase in the price of raw materials or FoP
- Growth of the money supply, Occurs when the central bank prints too much money and erodes the value of currency
Effect of Inflation on Consumers, Firms, Government and Workers
Consumers - Reduces purchasing power of their money
Firms - Increased costs and fall in profits creates investment uncertainty
Government - Lower tax revenues. Increase in demand for subsidies and Benefits
Workers - Erodes real income
Measures of Unemployment
(Definition)
(Measures)
Unemployment is where individuals actively search for jobs but cannot find jobs
Claimant count of JSA was previously used but it ignored certain individuals like women who had just given birth.
ILO was then used, Labour force survey
Underemployment
Where individuals are over qualified for the jobs that they do.
Frictional Unemployment
- Temporary period of unemployment where people transition from one job to the other
Seasonal Unemployment
When people are out of jobs due to seasonality of their jobs. Examples could be tourism and agriculture
Unemployment effects on Consumers, Workers and Firms
- Consumers would have less disposable income to spend
- Workers would have to rely on benefits and would have no real income
- Firms would have lower wages to pay so lower costs, but their productivity is negatively impacted
Current Account Surplus and Deficit
The Current Account measures a countries economic transactions over time
- A current account surplus would mean that there is more money coming in than going out
- A current account deficit would mean that there is more money going out than going in
Aggregate Demand
(Shifts and Movements)
Aggregate demand is the total level of spending in the economy at any given price level.
Aggregate demand is composed up of Consumption, Investment, Government Spending and Net Exports
Consumption makes up the most of AD
Net Exports makes up the least of AD
Movements along the AD curve are caused by changes in price level
Shifts of the AD are caused by changes in the components of AD
Components of AD
Consumption - Amount that consumers spend on goods and services
Government Spending - Spending by the government on the public sector. Use fiscal policy (use of government spending and taxation to control the economy )
Investment - Spending by firms on capital goods
Net Exports - Exports-Imports
MPC
The amount of additional income spent on consumption
MPC = Consumption/Change in income
Aggregate Supply
(Shifts and Movements)
Level of output in the whole economy at any given price
Movements in Aggregate Supply is caused by changes in price level
Shifts in Aggregate Supply is cause by changes in costs of production
SRAS
Short run aggregate supply is the total amount of goods and services that firms are willing to produce at a certain price level, assuming all factors are fixed
LRAS
Long run aggregate supply is the total amount of goods and services the economy can produce using all factors of production and the economy is at full employment. Output doesn’t change as the price level increases.
Shifts in LRAS are caused by changes in economies efficiency. The capacity of the economy
Classical Model of LRAS and Keynesian
Classical Model
- Perfectly inelastic and the output doesn’t change as the price level increases
- Assumes that the economy is always at full employment
Keynesian
- Three parts and the economies take time to reach equilibrium
Part 1 is a recession where despite changes in price, output doesn’t increase. Unemployment of FoP
Part 2 is upward sloping where there is more use of FoP and they become more scarce
Part 3 is the vertical segment and increases in demand cause higher price levels. Perfectly Inelastic. All FoP are utilised
The Multiplier
(Calculation)
(Effect on Aggregate Demand)
When an injection into the circular flow of income (such as gov spending, exports or consumption) causes an increase in economic activity and RNI.
The Multiplier =
1/1-MPC
Because the multiplier is caused by an injection (which composes AD) and amplifies the effect of it
Factors that affect Economic Growth
Increased Investment
Technological advancements
Increases in FoP
Labour force growth
Government Subsidies
Actual Growth and Potential Growth
Actual growth is the change in quantity of goods and services produced by an economy
Potential growth is a change in productive capacity of the economy over time
Actual Growth Rates
Change in a countries GDP
Positive and Negative output Gaps
(What it looks like on a graph)
Positive output gaps is when the actual growth is higher than the potential growth
Negative output gaps is when the potential growth is lower than the actual growth
The X axis is Real GDP. The Y axis is Price level. Negative output gaps have the SRAS and AD meet before LRAS
The positive output gaps have the SRAS and AD meet after the LRAS, above the potential amount of output
The LRAS represents potential output
Difference between Income and Wealth
Income is the flow of money received by an individual or household
Wealth is the stock of assets owned by the person
Trade Cycle
Fluctuations in economic activity over time
1) Boom - When the country is working beyond full employment
2) Slowdown
3) Recession - When there is high unemployment and low economic activity, low consumption
4) Recovery
MPC Calculation
Change in Consumption/Change in income
Index numbers
Used to condense long numbers
Allow for quick and easy data comparison
Raw Number / Base year Raw Number = Index Number
Difference/Original *100
New-Original = Difference
Withdrawals from the Circular Flow Of Income
Savings
Taxes
Imports
