Theme 2 Flashcards
How do we calculate GDP?
Consumer spending + Investment + government spending + (exports-imports)
Definition of GDP?
The total value of all final goods and services produced within the borders of a country in a given time period
Definition of wealth?
Value of capital assets owned
Definition of income?
Amount made in a certain period
What are some possible macroeconomic objectives?
-economic growth
- low unemployment
-low and stable rate of inflation
- balance of payments equilibrium on current account
-balanced government budget
-protection of the environment
-greater income equality
What are the indicators of strong economic performance?
Trade
Inflation
Growth
Employment
Redistribution of income
Stability
Describe the objective for growth in the economy
Strong (high percentage) sustained (has continued for a reasonable amount of time, and is sustainable, e.g low rates of inflation and causes little to no damage to the environment
Describe the objective for employment in the economy
Low unemployment, high employment
Describe the objective for trade in the economy
Perfect balance between imports and exports
What is a trade deficit?
When the value of imports outweighs the value of exports
What is a trade surplus?
When the value of exports outweighs the value of imports
What is the goal for inflation in the economy?
2(+/-1)%
What is the goal for redistribution of income in the economy?
Fair- however this is a normative statement
What are the examples of leakages in the economy?
Savings
Tax
M imports
What are examples of injections into the economy?
X exports
Investments
Government spending
What happens if there are more investments than withdrawals
Economic growth
What happens if there are more withdrawals than investments?
The economy will shrink
What happens if injections and leakages are equal?
Macroeconomic equilibrium
What are the three methods of measuring GDP?
Income method: all factor incomes earned in a year
Expenditure method: Consumer spending, investment, government spending and (exports- imports)
Output method: all the value of the final products produced in an economy in a year
What is the purpose of using index numbers?
To make ugly numbers less ugly
To allow for quick and easy data comparisons
How to calculate an index value?
The base year always has a value of 100
Index number= raw number/ base year raw number X 100
What are the reasons why consumption may increase?
Rates of interest
Consumer confidence
Asset prices
Household debt
Level of real disposable income
Explain level of real disposable income as a factor affecting consumption?
This means the amount of money we have left after taxes, adjusted to be relative to consumption - higher = more consumption
May change if income taxes are cut or if income tax re allowance is higher
Explain interest rates as a factor affecting consumption?
If interest rates are lower, cost of borrowing decreases, incentive to borrow increases, people are more likely to spend on expensive items such as houses or cars
If interest rates are lower, incentive to save is lower so by default consumption increases
Explain consumer confidence as a factor affecting consumption?
Consumer confidence could be affected by expectations about job prospects, for example, those who are expecting a promotion would be more likely to spend
Unemployment affects consumer confidence because if it is high, people will be more uncertain they are able to keep their jobs, so consumer confidence will decrease
If consumer confidence is higher, consumption will be higher
Explain asset prices as a factor affecting consumption
Asset prices, such as houses, shares and bonds, affects how wealthy people feel. If people feel wealthier, consumption will increase
Describe household debt as a factor affecting consumption?
If household debt is higher, those who are in debt will have very low consumption, and those who aren’t willing have more uncertainty about the future so will still be less likely to consume
What are some concepts to include in essays about consumption?
Multiplayer effect
MPC (marginal propensity to consume) willingness to spend extra money
