Theme 2 Flashcards
What is GDP?
Gross Domestic Product- Measure of growth, value of an economies goods and services produced in a year
What is the difference between real and nominal GDP?
Real GDP is adjusted for inflation
What is GDP per capita?
Average output per person
What is Gross National Product (GNP)?
Gross National Product- The total spending and output of an economy including citizens/businesses operating abroad
What is Gross National Income?
Total incomes received by an economy, home and abroad
Is GDP used to compare countries?
Yes
What is Purchasing Power Parity (PPP)?
What is inflation?
General increase of prices of products or services in an economy
What is deflation?
Decrease in the prices of products or services in an economy
What is disinflation?
Decrease in rate of inflation
What is CPI (Consumer Price Index)?
Way of measuring inflation - 650 goods in the basket and change in price is measured of all goods finding a figure for inflation
What is Retail Price Index?
CPI but including mortgage interest rates
How to measure CPI?
What is demand pull inflation?
When an increased demand for products leads to firms putting prices up and inflation
What is cost push inflation?
When cost of production increases firms increase prices of products
What is the claimant count?
Measures the amount of people eligible to claim job seekers allowance (now universal credit)
Criteria for claiming JSA
Out of work, actively seeking employment, available, aged 18-66, excludes various people (those with savings)
Positives of the claimant count
-Up to date
-Cheap to construct
-Easy to understand and compare
Negatives of claimant count
Misses out on people (those not entitled to benefits)
Some people refuse to claim benefits
Ignores some ages
Not used in Europe
What is the International Labour Organisation (ILO) and Labour Force Survey?
LFS is a survey of 80000 people across society to measure unemployment
Benefits of Labour Force Survey
Used in Europe so good for comparisons
Considered more accurate
What is under-employment?
When someone doesn’t use their skills education and experience at a job
What is structural unemployment?
Skills are no longer relevant
What is frictional unemployment?
Unemployed for the short term
Cyclical unemployment
Being unemployed for economic reasons
Seasonal unemployment
Parts of the year where there is no work in your job
What is the balance of payments?
A record of all the transactions that the UK makes with the rest of the world
What is the current account?
Balance of trade (imp and exp)
Net income (investment income from overseas and employee wages)
Net transfers (sums sent home from migrant abroad)
What is the capital account?
Capital transfers (purchase and sale of fixed assets such as real estate)
What are the components of Aggregate Demand?
C+I+G+(x-m)
What are the factors affecting what products to buy?
-Price of substitutes
-Is it necessity
-Durability
-Social trends
-Environment
-How much you earn
What are factors affecting consumption?
-Availability of credit
-Interest rate
-Disposable Income
-Wealth effect
-Expectations
-Composition of households
-Unemployment
-Determinants of saving
What is the wealth effect?
As you’re assets increase in value, your spending increases
What is availability of credit?
How much you can borrow (big purchases means more borrowing leading to further spending)
What is Gross Investment?
The total amount an economy spends on new capital (machinery)
What is net investment?
Increase in number of machines
Factors influencing investment
-Interest and availability of credit
-Retained profit
-Expected profits
-Actual and expected demand
-Accelerator effect
-Business confidence
-Quality of machines & substitutes
-Price of machinery
What is the accelerator effect?
When an increase in GDP leads to rise in investment
What is fiscal policy?
Using/changing Government Spending and Taxation to stimulate economic growth or control inflation
What happens in expansionary/loose fiscal policy?
It aims to stimulate economic growth by increasing Government spending and decreasing Taxation
What happens in contractionary/tight fiscal policy?
Aims to control inflation by decreasing government spending and increasing taxation
Macroeconomic impacts of loose fiscal policy
-Increased economic growth
-Increased employment
-Decreased sustainability
-Increased inflation
-Less inequality but larger gap
-Balcance of payments (m>x)
Macroeconomic impacts of tight fiscal policy
-Decreased inflation
-Decreased economic growth
-Increased unemployment
-More sustainable
-More inequality but smaller gap
Influences on net trade balance
-Real income
-Exchange rates
-State of the world economy
-Degree of protectionism
-Non-price factors
What is the trade balance?
Difference between value of exports and value of imports
What is a trade surplus and deficit
Surplus=when exports exceed imports
Deficit=when imports exceed exports
What is a fixed exchange rate?
Where a the value of a country’s currency is fixed at certain amount by a monetary authority eg bank
Benefits of fixed exchange rates
-Price stability
-Reduced exchange rate risk
-Discipline on monetary policy
-Encourages foreign investment
Negatives of fixed exchange rates
-Lack of flexibility
-Balance of payments issues
-Speculative attacks
-Dependence on reserves
What is a floating exchange rate?
Where the value of a currency changes on its own based on the value of other floating currencies
What is a managed-floating exchange rate?
When a central bank intervenes with a floating exchange rate to change its value
Negatives of floating exchange rate
-Leads to uncertainty
-Fluctuates daily so hard to keep up with
-More exchange rate risk
Positives of floating exchange rate
-Less power for central banks as changes on its own
-Allows for greater change of internal policy
Factors influencing a shift in SRAS
-Wage costs
-Labour productivity
-Prices of raw materials and components
-Business taxes
-Cost of imported materials
-Supply shocks eg hurricane or pandemic
What does a Keynesian LRAS curve look like?
Straight then a steep curve upwards (see book)
What does a traditional LRAS curve look like?
A vertical line upwards
Factors influencing LRAS
-Higher productivity of labour and capital
-Growing population and increased labour market participation
-Innovation and enterprise
-Improvements in infrastructure
-Capital investment
-Stock of natural resources
-Education
What is SRAS line like
Normal AS line
What is LRAS?
Maximum output when all FOPs are utilised
What is SRAS?
At least one FOP is fixed
What is a supply side shock?
Affect SRAS and sometimes LRAS eg a pandemic, natural disaster or steep rise in prices of an industry
What are the macroeconomic objectives?
-Economic growth
-Unemployment
-Sustainability
-Inflation
-Inequality
-Balance of payments
-Deficit
What is the difference between income and wealth?
Wealth is income plus value of assets
What is the circular flow of income?
SEE DIAGRAM, shows how income travels around government, consumers and producers
What are injections and examples
Injections is sources of money entering the circular flow of income eg:
-Investment, government spending and exports
What are withdrawals and examples
Money leaving circular flow of income eg:
-Taxes, imports and savings
What is the multiplier?
Where an initial change in spending leads to a bigger increase in total output
What is a negative multiplier?
Decrease in total output
How do you calculate the multiplier in closed economy?
MPS
How do you calculate the multiplier in open economy?
MPS+MPM+MRT
What are MPM and MRT
MPM=Marginal propensity to import
MRT=Marginal rate of taxation
When is the multiplier value high
-lots of spare capacity in the economy
-MPM and MRT Is low
-MPS is low
When is the multiplier value low
-Economy is close to full capacity
-MPM and MRT is high
-MPS is high
What is monetary policy?
Its all to do with controlling the supply of money
What are the 4 tools of monetary policy
- Interest rates
- QE
- Credit availability
- Exchange rates
What is the transmission mechanism (monetary policy)?
Factors considered by Bank of England when setting interest rates?
-GDP and spare capacity
-Bank lending and consumer credit figures
-Equity markets
-Confidence
-Growth of wages, average earnings and unit labour costs
-Unemployment figures
-International
Loose monetary policy
Aims to stimulate GDP by decreasing interest rates and QE
Tight monetary policy
Aims to control inflation by increasing interest rates
