The Macroeconomy Flashcards
National income and
National income statistics
Country’s total output
Measure of the country’s total output
GDP
The total output produced in a country
GNI
GDP plus net income from abroad
Net property income from abroad
Profits, rent and interest earned on ownership of foreign assets minus payments of profits, rent and interest to non-residents
Compensation of employees
Income of workers who work in another country for a short period of time
Gross national disposable income
GNI plus net transfer of incomes to relatives and from other countries
MNC’s
Firms that operate in more than one country
Circular flow of income
A simplified view of how income flows around an economy
Methods of measuring GDP
-Output method- By calculating the total production of goods and services of a country.
-Income method- By calculating incomes earned by producing country’s output.
-Expenditure method- By calculating all spending on country’s output.
Market prices and
Basic prices
Prices paid by consumers.(With account of indirect taxes and subsides)
Prices charged by producers before the addition of indirect taxes and deduction of subsides
Gross investment
Total spending on capital goods
NDP
GDP - depreciation
NNI
GNI - depreciation
Net investment
Additions to capital stock
Depreciation (capital goods)
Value of capital goods that have been worn out or out of date
Open economy
Economy open to trade
Closed economy
Economy not open to trade
Circular flow of income in both open and closed economy
Refer to textbook
Injections
Additions to the circular flow if income, includes I+G+X (Investment + Govt. spending + Export)
Leakages
Withdrawals from the circular flow of income, includes S+T+M (Saving + Taxation + Import
Equilibrium and Disequilibrium graph
Refer to textbook
Aggregate demand
The total demand for an economy’s goods and services at a given price level in a given period of time.
AG= C + I + G + (X-M)
Dissaving
Consumer expenditure exceeding income by people or countries withdrawing past savings or by borrowing
Why do AG and price level have a direct relationship
-Wealth effect
-International effect
-Interest rate effect
Aggregate supply
The total output that producers in an economy are willing and able to supply at a given price level at a period of time
SRAS
AS when there has not been enough time for the prices of factors of production to change
LRAS
AS when prices of factors of production have been fully adjusted
Reasons for SRAS positive effect
-Profit effect
-Cost effect
-Misinterpretation effect
Shifts in SRAS
-Change in price of factors of production
-Change in taxes on firms
-A change in factor productivity or quality of resources
-Change in quantity of resources
Supply-side shocks
Large and unexpected changes in SRAS
Types of LRAS curves
-Keynesians LRAS curve- People who agree w the views of John Maynard Keynes and give intervention is needed to achieve full employment. (Refer to TB)
-New classical economist curves-Economists who think that economy will move toward full employment without govt intervention.(Refer to TB)
Shifts in LRAS
-Net immigration
-Increase in retirement age
-More women entering the labour force
-Net investment
-Discovery of new resources
-Land reclamation
Economic development
Increase in the welfare and quality of life
Nominal and Real GDP
Nominal GDP is the total output measured in current prices
Real GDP is the total output measured in constant prices
Price index
A way of comparing the changes in price overtime
Causes and consequences of economic growth
-Increase in quantity of resources
-Increase in quality of resources
Benefits and Costs of economic growth
Benefits
-Increase in availability of goods and services
-Increase in tax revenue
-Increase in transfer of payments
-More job opportunities
-Increase in business investment
Cost
-Resources moved from producing consumer to capital goods
-Workers may have to learn new skills
-Depletion of natural resources
Unemployment
the state of being willing and able to work but not having a job
Labour force participation rate
The proportion of the population that are working age and who are either working or actively seeking work
Factors that contribute to the size of the labour force
-School leaving age
-Proportion of the women in workforce
-Retirement age
-no. of people who remain in full time education(above the school leaving age)
Unemployment rate
no. of people employed
_____________________________X100
no. of people in the labour force
Ways of measuring unemployment
Claimant count measure - a measure of unemployment based on those claiming unemployment benefits
Labour force survey measure - a measure of unemployment based on a survey that identifies people who are actively seeking a job
Frictional unemployment and its types
Unemployment that is temporary and is when workers are switching between jobs.
-Voluntary - Unemployed people choosing not to accept jobs at wage rate
-Search - When people take time looking for jobs they are willing to accept
-Casual - When people have left a short term job and before they take up another one
-Seasonal - Unemployment arising during particular times where demand for a product falls
Structural Unemployment and its types
Unemployment caused by the result of the changing structure of economic activity
-Regional - Arising from a decline in jobs from a particular area
-Technological - Caused by advances in technology
-International - When a country loses it international competitiveness in producing a product
Cyclical Unemployment
Unemployment that results from lack of AD
Underemployment
A situation where workers are working fewer hours than they like to or working jobs they are overqualified at
Price stability
A low stable inflation rate
Inflation
An increase in the economy’s price level over a period of time
Types of inflation
Creeping- A low rate of inflation
Hyperinflation- A very high rate of inflation, which may result in people losing confidence in the currency
Deflation
A fall in price level
Disinflation
A fall in inflation rate
Ways to calculate inflation
Annual average method- by calc inflation rate by comparing the average level of prices during one 12 month period to the previous 12 month period
Year on year method- by calc inflation rate by comparing the % change in price level for a given month and the same month of the previous year
Consumer price index(CPI)
A measure that shows the average change in prices of a representative basket of products purchases by households
How to calc CPI
1.Select base year
2.Find people’s spending patterns
3.Attach weights to different categories
4.Find out price change
5.Muliply weights by price changes
Cost push inflation
Inflation caused by increase in cost of production
Wage price spiral
Higher wages causing prices to rise, in turn, pushes wages up and so on
Demand pull inflation
Inflation caused by increase in
AG not matched by a equivalent increase in AS
Monetarists
Economists who consider that inflation is caused by a excessive growth in the money supply
Benefits and limitations of Inflation
Benefits
-Stimulates output
=Reduces the burden of debt
-Prevents some unemployment
Limitations
-Reduction in net exports
-Menu costs
-Fiscal drag
-Discouragement of investment
-Shoe leather costs
Factors that affect the consequence of inflation
-Cause of inflation
-Rate of inflation
-Accelerating or stable inflation
-Expected or Unanticipated
-Compared to others
