theme 2 Flashcards
what are ‘aggregates’?
refers to ‘totals’
eg: total unemplyment
total spending on goods/services -rather than the spending on a particular good
coz MACRO - so overall picture
what are some particular aspects of the economy which must be monitered?
- inflation rate (stable economic enviroments allow markets to operate effectivley)
- unemployment (indication as of if resources are being used to full potential)
- international trade
- economic growth
what is the importance of data?
monitor the performance of the economy.
according to thi observe and judge as to weather performance is satisfactory , and if theories are true
what is the function of index numbers?
makes unwieldy data easy to understand
How do you calculate index numbers?
what is total GDP?
Gross Domestic Product:
the total value of national output of goods and serives produced in a year
what is economic growth?
- an increase in the real GDP (value of goods and services) produced in the economy
- long run increase in productive potential of an economy
what is nomianl GDP?
the final value of goods/ services within an economy without adjusting for inflation
what is real GDP?
the value of final goods/services within an economy adjusting for inlation
real/nominal
EXAM TIP
if ask to evaluate nominal daat, say that you cannot be completelt sure of impact on economy , as real data would be more useful and accurate
How do you calculate a price index?
If the nominal increase in personal salary was 4% and the inflation rate is 3%, then what is the real increase in salary?
real = nomial- rate of inflation
4 - 3 = 1%
Why does the graph look like this?
In 2020 the nominal value doesn’t take into account the inflation rates that increaed
How is the GDP per capita calculated?
GDP/ country population
what is GDP per capita?
- shows how many goods/ srvices can be enjoyed per person / average output per person
- can be used as a comparison for standards of living in countries
*
what is gross national income (GNI)?
The value of goods and services produced ina given time period** plus net income from overseas** (final value of income flowing into the UK)
more accurate
what is one of the main measures of economic growth?
the rate of change of real GDP
What is the value and volume of GDP?
value: what certain goods/services are worth
volume : number of goods/services produced
GNI vs GDP
GNI is better to use for standard of living (more accurate )
* GNI calculates income rather than output
what is GNI per Capita?
the total real GNI/ Population
takes the population into account
what must you account for when comparing data for growth rates between countries?
- real better than nominal (infaltion)
- GDP per capita is better than GDP , population taken into account
what is gross national product (GNP)?
the value of goods/ services overtime through labour or property supplied by citezens of a country both domestically and overseas
value of goods made by people whether they live in the country or not
what is economic welfare?
growth in living standards (more goods produced, more things for people)
what is the problem when comparing GDPS?
- volatile exchange rates
- price levels vary (how much you can buy from each thing)
What is a purchasing power parities
How much of a currency is needed buy a basket of goods compared to another currency
* allow international comparison
a ratio of currency excahage
What is the Big Mac index?
🍔 how much a Big Mac costs around the world, and how many can be bought using the real GDP per Capita
what are the limitations of real GDP used to measure living standards?
- ignores population changes
- ingores income distribution
- ignores type of goods
- ignores the underground economy
- ignores the subsitance economy
why is the fact that real GDP not taking into account population matters?
if population is grwoing faster than real GDP, then GDP per Capita will be decreasing and so everyone will be worse off than GDP suggests
why does the type of good purchased incraese GDP but not living stnadards?
because the goods being produced have negative externalities which actualy decrease living standards
What are negative externalities
external costs that affect others
eg:
* death
* pollution
* heart disease
what is the underground economy?
a.k.a the black market
* transactions made for illlegal things (prostitues, drugs, ) which will not be included official data (GDP) therefore it is inaccurate to measure living standards by it
* payments made in cash- private tutors
what is the subsistence economy?
- people who produce their own food and consume it themselves
- since nothing is bought and sold it cannot be recorded for in the GDP
therefore GDP underestimates and canno br used to measure living stnadar
what is the easterlin paradox?
- initially as average income increases, hapiness increses to a point where people are able to live comfortably
- however the marginal hapiness from each £ of income then begins to fall as people spend money on things they do not need
what does “marginal” mean?
one extra unit
marginal hapiness= the hapiness gained from one extra unit of income
how is hapiness measured in the UK?
- ONS- Office of National Statistics conduct a national well being survey
- this data is compared to previosu periods of times
although is nominative an not completely accurate
bhutan
what may other countries be focused on apart from GDP?
- gross national hapiness
what is inflation?
a sustaned increase in the general price level
how is the rate of inflation measured?
- price level data is converted into consumer price index
index= current (price level) / base number (price level) - from this you can easily clauclate intrest rates change using the percentage change formula
calculating inflation rate
what is disinfaltion?
- infaltion rate is still incraesing (positive)
- BUT the rate is less than last year
- inflation rate is falling
the price level continues to rise but by a smaller percentage
what is deflation?
- where the inflation rate is negative
- price levels are actually going down
what are the three stages in calculating the UK’s price level?
- the ONS conducts it’s living costs and Food survey. This involves interviewing 7000 households to find 650 most common goods and services
- the ONS conducts a price survey where they collect the prices of these 650 goods from across the UK in order to find an average price level
- a weighted average of all the prices is calculated to find the price level
what are the problems with CPI as a measure of standard of living?
- unusual spending habits
- changes in quality
- lag time
- doesn’y include mortages
why are unusual spending habits a problem with CPI?
- the 650 basket of goods “most common goods and services” are only accounted for by the average consumer, not weirdos
- buying uncommon goods and services whicch may not be accounted for
why is time lag a problem with CPI?
- CPI basket is only updated every year
- therefore will not acknowlege price changes in new goods and services
- however consumer cost of living is imapcted almost immediatly
why are changes in quality a problem with CPI?
prices could be increaseing duento an increase in quality rather than inflation
what is the working age population?
people between 16 and 64 yeas
what is the difference between the inactive and active population?
aka economically inactive/active
inactive: are not able to work, are not activley seeking work (inheritance, uni students, disabled)
active: are able to work, are activly seeking for work, cureently working (workforce)
what is unemployment?
when someone is able to work and is activley seeking work but they are not currently working
how is the unemployment rate calculated?
the % of unempolyed people out of the active population
what is the unemployment level?
the number of people unemployed
how is the employment rate calculated?
number of employed people/ total working age population
how is the activity rate calculated?
or articipation rate
active population/ working age population
why would
* employment rates
* unemployment rates
fall
emplyment:
number of people emplyed decreased, working age population increased
unemployment rate:
number of people economically active increases, unemplyment decreases
what would the effect of an increase in immigration be on employment and unemployment level?
unemployment level would increase hoever the emplyment level may stay the same
describe the ILO Labour Force survey
International Labour orgainisation
- from 80,000 households ask if out of work for 4 weeks and are able to start week in next 2 weeks
- then they are classified as ‘unemployed’
- then use this data as a sample to estmate the unemplyment rate for UK
describe the claimant count
- measures how many people are claiming benefits through job seekers allowance
what are the limitations around the two measures of unemployment?
- **ILO Labour Force Survey: ** not a representative, as is just a sample
- Claimant Count: not everyone seeks benefits, if have big savings then not allowed (underestimates)
ILO is the official measurement
what is under employment?
when one is currently working however
* working fewer hours than they want to
* underusing their skills
what are the 5 different types of unemployment?
- real wage/ classical unemployment
- structural unemployment
- cyclical/demand unemployment
- frictional unemployment
- seasonal unemployment
what is the balance of payments?
- record of payments between one country and the world
- record of all money flowing in and out of the country
what are the two accounts within the balnce of payment?
- current account
- capital and finanial account
what does the current account consist of?
- trade in goods
- trade in sevices
- invetsment income
- current transfers
what is the trade in goods and services?
- imports: coming in from foreign
- exports: going from country (hand made)
what does the current account measure?
inflows and outflows of money paid and recieved
* all imports: withdrawal/ leakages (negative entry)
* out exports : injection (positive entry)
what is investment income?
- rent/profit made on an investment abroad
the income that you get from an investment, it will appear as a positive transaction, increasing the current account
investment in properties, companies
what happens if investment income is paid/ recived from foreign countries?
- paid: negative (decreases current account)
- recieved: postitve (increases current account)
what are current transfers?
when money is sent abroad without anything (goods/ services) in return
eg: remittance, foreign aid
what is remittance?
relatives working abroad transfering money back home to families
what is a current account deficit, surplus and equalibrium?
- deficit: negative current account, more money leaving than entering
- surplus: positive
- equalibrium: zero
Describe the finaical and capital account
- balances the current account to equal 0
- money invested by banks back into UK as investment
what are the long term consequences to the economy of a capital and finacial account surplus?
- foreign investors buying UK assets/ shares
- future profits of firms will not go to UK but to foreign investors
- hurting economy in the long run
- aim to have current account equailibrium (capital and finanical account to be zero)
future earnings leaking out of the economy
what are the two methods to work out the GDP of an economy?
- expenditure method
- incnome method
what are the 4 components within the expenditure method?
- consumer spending
- investment
- goverment spending
- net trade (exports-imports)
describe the income method of calculating GDP
adding up all the icnomes within an economy
wages, intresr, profits, rent
What does the diagram for aggregate demand look like?
National income / real GDP/ national output /national expenditure
what is aggregate demand?
all the demand for goods and services in an economy
aggregate= added up
what is the formula for aggregate demand?
AD= C+ I + G + (X - M)
* consumption
* investment
* goverment spending
* exports- imports
what are the 4 components of aggregate demand?
- consumption (households- consumer goods)
- investment (firms demand- capital goods)
- goverment spending (goverment demand - schools/hospitals)
- net exports (exports foreigners demand, imports demands leaving economy )
calculate the percentage of each component:
what is gross investment?
the orginal value of a capital good
what is net investment?
gross investment - depreciation
what happens to aggregate demand when there are
1. increases in price level
2. decereases in price level
- contraction in aggregate demand (real GSP decreases)
- extension in aggregate demand (real GDP increases)
what is the share of each componenet of aggregate demand?
- consumption (60%)
- investment (14%)
- goverment spending (25%)
- exports minus imports (1%)
what factors cause shifts in AD?
- income
how does a decraese income impact AD?
- disposable icmome decreaes, so cosumers have less to spend, reducing consumption, decreasing AD, shifting curve to left
- Less disposable income means less spent on firms and businesses, so they will not be able to make as much investment
- less tax able to be collected by goverments- less to spend (tax revenue)
income tax, corporation tax, VAT
what is disposable income?
the amount of income left over after paying taxes, availiable to spend
what is the multiplier effect?
an initial increase in injections (consumption/ investment/goverment spending) lead to a larger increase in AD, leading to a bigger overall effect on the economy
describe the multiplier effecct
- jobs created
- spend more on firms
- firms have more to invest in capital
- employ more workers
- goverment get an increase in corporation, income and VAT (tax revenue)
- goveremnt re- investing starting, increasing goverment spending
- the ycle again
what is the downwards multiplier effect?
- more is saved
- less spent on firms
- laying off employees
- reducing income/ consumption
- less goveremnt revnue (VAT, Corporation, income)
what happens to AD when income increases?
- increase in consumption
- firms make more sales, more profit to invest
- goveremnt collects more income,
- increase in goveremnt spending
what are benfits?
payments made from the goveremnt to low income workers or umeployed
what component does benefits affect?
- not goverment spending (not acc spending),
- increase in consumption as those households will eventually spend the benefits
- overall increase in aggregate demand
however opportunity costs of other projects (decrease in G)
what does the intrest rate tell you
- savers: return upon savings
- borrowers: how much you will have to pay back- cost of borrowing
longer time= more intrest to pay
what is the impact of savings upon consumption?
- decreases consumption
- considered a withdrawal from the economy
- downward multiplier effect
what is the impact of intrest rates?
- more money for savers
- less money for mortage holders
- less money for firms who want to invest
what are the effects of intrest rates on AD?
- Consumers are encouraged to save more and spend less, less C
- consumers have to pay a higher mortage and would have less disposable income, less C
- firms are discouraged to invest, less I
- AD falls, shift in AD to the left
how does consumer confidence affect AD?
decrease in consumer cofidence, they save more,decreaing consumption, causind AD to shift to the left
how does an increase investor confidence impact AD?
aka high animal spirirts
- more investor confidence
- more investment
- shift in AD to the right
how does the wealth effect impact AD?
as assets value incrreases, wealth increases, so consumers are more confident, more household spending = more consumption
happens when house prices increase
what is the difference between the wealth effect in european countries and the US?
- in the US where most people are homeowners the wealth effect takes place
- in euopean countries half th epeople are saving up to buy and house and are renting, so the increase in house perices actually cancels out the wealth affect to 0%
how does a decrease in pension affect AD?
- people will have to save more for future, spending less and reducing cosmption, causing AD to shift left
- those currently retirred have more to spend,
what happens when goverment spending increases?
- increase in goverment spending
- incresae in consumption from new jobs that have been created
what is the impact of an increase in the value of the pound?
appreciation
- imports get cheaper
- exports are more expensive, foreigners need more foreign currency
SPICED
how does the exchange rate affect AD?
appreciation
- demand for imports will increse as they are cheaper (increasing import expenditure)
- demand for exports will decrease as they are more expensive (decrease in export revenue)
- overall AD will decrease
what causes impacts to net trade?
- changes in national income abraod
- chnages in exchange rates
- changes in the level of trade protection
What does short run mean?
At least one factor of production is fixed
What does a short run aggregate supply curve look like ?
Why does the short run aggregate supply curve slope upwards?
Overtime
What is aggregate supply?
The total amount produced in an economy
What are the two types of long run aggregate supply (LRAS) curves?
- Neoclassical
- Keynesian
describe the keynesian LRAS curve
- at the start nothing is being produced, loads of resources are availible to it is easy to increase output
- as more is produced, resources run out, so it is harder to increase output
- economy cannot produce anymore because all resources are used up
draw the keynesian curve
sick back flip
what is spare capacity?
when an economy is producing below it’s maximum potential output
factors of production are not fully utilised
what is a bottleneck?
when an economy is nearly producing at it’s maximum potential output
what is the neoclassical long run aggregate supply model?
- always at full employment
- in the long run always time to have fully use up all it’s resources
neoclassical curve
similar to PPF
what causes the shifts in the two types of Agreggate Supply?
- LRAS: change in quanity of factors of productivity or productivity
- SRAS: changes in cost
for suppliers
show shifts in the LRAS diagrams
how do oil prices (commodities) affect AS curve?
- an increase will increase transportation/production costs
- increase in costs
- cannot afford to produce as much
- decrease in SRAS
what are some commodities?
affect macro markets
- oil,coal, gas : transportation
- wheat, corn: all food
- steel: electronic devices, skyskrapers
commodities: commony used
how do natural resources affect Aggregate Supply?
- an increase in natural resoucres is an increase in land
- increase in factors of production affect the LRAS
- shift in LRAS
how will investment impact aggregate supply?
- increase in investment
- increase in productivity of factors of production
- shift in LRAS
Model an economies short run equilibrium
Model an economies long run equilibrium (Keynesian)
Model an economies long run equilibrium with the neoclassical model
What would the effect of a decrease in incomes have on an economies equilibrium?
what evaluation can be used with keynesian curves?
However, the effect is dependant on where along the LRAS the econpmy is. If our initial equilibrium is at spare capacity (Y1,PL1), a decraese in AD from AD1 to AD2 will not affect the price level, only the real GDP will decrease
How will the dot com bubble impact the economy equilibrium
How will an increase in VAT impact the economy?
what is income?
measures the flow of money a person or economy recieves each year
payslip/rent
what is wealth?
the sum/stock of all your assets added up
assets are items that you own
what are some examples of income?
- salary
- intrest on savings
- dividends
- unemployment benefits
- rental income
things that you recive on a daily basis
what are some examples of using wealth to generate income?
- dividend payments from shares
- intrest payments on savings
- rental income from mahcinary
draw the simple circlular flow model
- assumed that all factors of production are owned by households
- factors of income: rent & wages
why does national output=national expenditure=national income?
- the spending from households come from the income that they earn
- and expendiyure = ouput as households spend on the output of goods and services
what is the circular flow equation?
national income= national expenditure= national output
what is the defeinition of factor incomes in the circular flow of income?
money paid by firms to households in return for factors of production
how could national income be measured?
- measuring national output, becuase national output= national income
- using real GDP
what are the withdrawals/leakages in the circular flow ?
things that stop the circulat flow of income (households spending all their income on firms)
* savings
* imports
* taxes
SIT
what is a leakage?
when money leaks out of the circular flow
what are savings within the circulr flow of income?
disposable income that is not spent by households (leakage)
what are imports in the circulat flow of income?
spending on foreign goods and services
what are taxes within the circular flow of income?
money paid to the goverment by consumers, firms, workers (leakages)
what is an injection?
when money is injected into the circular flow
what are the types of injections in the circular flow of income?
- goverment spending
- investment
- export
GIX
What is goverment spending within the circulr flow of income?
when the goverment injects money into the economy by spending on schools, teachers, hospitals, doctors….
what are exports iwthin the icrcular flow of income?
when firms export goods abroad, we recive money to money is injected into the economy
what is investment within the circular flow of income?
banks use our savings to invest into our firms, injecting money into the circular flow
draw the more complex circular flow of income model.
how do changes in injections and withdrawals affect the economy?
- leakages < injections, money coming into economy, GDP increasing
- leakages > injections money leaving the economy, GDP decreasing
- leakages= injections, same amount of money in economy, GDP stays the same
what is another formula for real GDP?
GIX- SIT
What is the calculation for the multiplier ratio?
what does the multipler ratio tell us?
how much GDP will increase following an initial injection into the economy
what does marginal propensity to consume mean?
how much consumers are willing to spend if given an additional £1
* if homeless man given £1 and spends 80p, them MPC is 0.8
* only consu,ption within our economy
the lower MPC means less likley to spend, more likley to save
what is the muliplier effect?
initial injections promote further rounds of spending, causing aggregate demand to increase by more thna the initial injection
what is marginal propensity to withdraw?
how much consumers are likley to save if given £1
* MPC+MPW=1
What are the four ways of calculating the muliplier ratio?
What is the calculation for the multiplier ratio?
what is marginal propensity to withdraw
- MPW=MPS+MPm(imports)+MPT
- Proportion of additional £1 spent on withdrawals(savings, imports,taxes)
Uk exports became cheaper, explain the multipler effect?
- demand for exports increases (injections)
- exports are component of AD, AD increases
- increase in number of people employed to export
- workers will spend, increasing consumption
- increasing AD
- firms with increased revneu from consumption may wish to expand and increase investment
- increasing AD
- this may emply more jobs, consumption…………….repeat
how could the multipler effect be made larger?
- if MPC was larger
- initial injection is larger
what is the difference between RPI and CPI?
- RPI includes mortgage repayments (unlike CPI)
what are the two types of inflation?
- demand pull
- cost push
What is demand pull inflation?
When AD increases, causing the price level to rise
what is cost push inflation?
when the costs of production increase –> SRAS shifts to the left
only occurs with SRAS (costs of production)
what is hyper inflation?
when demand reaches above 50%
what is a deflationary spiral?
- deflation occurs first, price levels decrease
- consumers delay their purchases and instead save- in hope for prices to drop even lower
- lack of consu,ption causes AD to shift to the left
- after repeated cycles of this, real GPD decreases and unemplyment increases
what are the causes of deflation?
- increase in AS
- decrease in AD
sustained decrease in general price level
how do inflation and deflation affect the value of money?
- inflation: decraeses the value of money (can buy less goods with £1)
- deflation: increases the value of the money (can buy more goods with £1)
what is nominal and real income?
- nominal: income in £ or $
- real: nominal income adjusted to inflation rate
how do you calculate inflation rate?
(new- original/original) 100
what are the 3 stages to calculating the UKs price level?
- Office of national statstics interviews 7000 households to find the 650 most common goods and services
- price survey is conducted to find the average price level
- a weighted price level of all the prices is calculated in order to find the price level
how do you calculate weighted average?
average price × % of total spending
what is the formula for consumer price index?
what is a price wage spiral?
- due to inflation prices rise
- cost of living rises
- workers demand higher wages
- increasing cost of production for firms–>SRAS shifts to the left
- increase in price level
eventually can lead to hyperinflation
what are the benefits of inflation?
- no risk of deflationary spiral
- reduces the real value of debt—> improves inequality (better for the poor)
what are the cons of inflation?
- risk of price wage spiral —> hyperinflation
- reduces the real value of savings
