Theme 2 Flashcards
What are the 7 macroeconomic objectives
Employment Growth Sustainability Debt Balance of payments Inflation Inequality
How to calculate AD
C + I + G + (x-m)
What is consumption
Total spending by households
What are durable goods
Goods that are consumed over a long period of time
Eg car
What are non-durable goods
Goods that are consumed instantly
Eg ice cream
What is meant by the average propensity to consume
Proportion of total income spent by households
How to work out average propensity to consume
C / Y
What is meant by the marginal propensity to consume
The proportion of a change in income which is spent
How to calculate marginal propensity to consume
Change in C / Change in Y
What is meant by the consumption function
Refers to the relationship between consumption and the factors that determine it
Eg increase in Y, increase in C
What is saving
The part of income that is not spent
What is meant by the average propensity to save
The proportion of total income saved
How to work out the average propensity to save
S / Y
What is meant by the marginal propensity to save
The proportion of a change in income that is saved
How to work out marginal propensity to save
Change in S / change in Y
What is meant by the saving function
The relationship between saving and the factors that effect it eg interest rates
What is meant by the wealth effect
When there is a change in consumption following a change in wealth
What is meant by investment
Firms spending on capital stock eg factories
What is gross investment
Total value of investment
What is net investment
Investment - depreciation of capital stock
What is meant by the accelerator theory
That investment is linked to change in output/income
Eg if economic growth is rapid, firms have to invest, causing further growth
What is meant by the capital output ratio?
H
What is the accelerator coefficient?
H
What is government spending
Spending on an economy eg infrastructure
What is the net trade balance
The difference between exports and imports
Exports - imports
What does aggregate supply show
The productive capacity of the economy
What is the short run aggregate supply curve
The aggregate supply curve that assumes wages are fixed
What can cause shifts in the short run aggregate supply curve
Wage rates Raw material prices Taxation Exchange rates Productivity
What is a supply-side shock
A large change in one of the factors causing a shift in aggregate supply curve
What is a long run aggregate supply curve
The aggregate supply curve assuming wage rates are variable
examples of factors that could cause a shift in the long run aggregate supply
Technological advances
Improvements in education and skills
Migration
Etc.
What is meant by national income
Value of output/expenditure/income of an economy, over a period of time
What is meant by the value of national income
The monetary value
What is meant by volume of national income
National income is adjusted for inflation and expressed as an index number
What is the circular flow of income
Model of economy showing flow/movement of money
Draw the circular flow of income model
Withdrawals on left Income left of circle Firms at bottom, households at top Spending right of circle Injections on right
What does income include (in the circular flow of income model)
Rent, interest, wages, profit
What does spending include in the circular flow of income
Goods and services
What are injections
Spending not generated by households
Eg investment, gov spending, exports
What are withdrawals
Money leaving the circular flow of income
Eg saving, tax and imports
What is a closed economy
Has no foreign trade
What is an open economy
Includes trade with other countries
What is meant by the multiplier effect
Where an increase in investment or other injection leads to an even greater increase in income
What is meant by the multiplier
The figure used to multiply a change in an injection into the circular flow of income, to find the final change in output
How to calculate the multiplier
1 / 1-MPC
1 / (MPS + MPT + MPM)
1 / MPW
How to calculate MPC
Change in C/Change in Y
How to calculate MPS
Change in S/Change in Y
How to calculate MPT
Change in tax / change in Y
How to calculate MPM
Change in imports /change in Y
How to calculate MPW
Change in W/Change in Y
What is meant by GDP
Gross domestic product
Which is a measure of national income (output)
What is meant by GNI
Gross national income
Which is a measure of national income as well as overseas interest and dividend payments
What is meant by GNP
Gross national product
Measure of the value of goods and services
What is meant by standard of living
How well off an individual, household or economy is
What variables influence standard of living
Income Health Environment Happiness Political freedom Etc
What is meant by purchasing power parities
An exchange rate of one currency for another which compares how much a typical basket of goods costs in one country compared to another
What is meant by per capita
Per individual of a population
What is the trade/business/economic cycle
Shows regular fluctuations in the level of economic output
What are the 4 sections of the trade cycle
- Peak/boom
- Downturn
- Recession/depression/trough/slump
- Recovery/expansion
Draw the tradition diagram of a trade cycle
Peak Downturn Slump Recovery Output y Time x
What is meant by a mild trade cycle graph
Shows small fluctuations around the long run GDP growth path
Draw the mild trade cycle
Trend level like supply
Actual real GDP curving around it
Label output gap
What is an output gap
The difference between the actual real GDP and the productive potential level of the economy
What can cause changes in the trade cycle
Demand-side shocks
Supply-side shocks
What are demand-side shocks
Changes that have a sudden and large impact on AD
What are supply-side shocks
Changes that have a sudden and large impact on AS
What is a negative output gap
When actual GDP is below the productive potential of the economy
What is spare capacity
Exists when not all resources are employed (negative output gap)
What is a positive output gap
Where actual GDP is higher than the productive potential of the economy
Draw a positive output gap on a graph
LRAS, equilibrium of SRAS and AD to the right
Draw a negative output graph
LRAS, equilibrium of SRAS and AD to the left
What is meant by hysteresis of the trade cycle
Where after a few fluctuations in the same direction, the long term trend changes in that direction also
What is meant by export-led growth
Growth due to increase in exports
What is meant by sustainable growth
Growth in the productive potential of the economy for today that does not lead to a fall in the productive potential for future generations
What is meant by inflation
Persistent general tendency for prices to rise
What is deflation
Persistent general tendency for prices to fall
What is disinflation
A fall in the rate of inflation
What is hyperinflation
High rate of inflation
How is inflation measured
Consumer price index
Retail price index
Explain the consumer price index
Looks at the change in prices of goods in a basket, and goods are weighted
What is the formula for measuring consumer price index
Cost of basket in current period/cost of basket in base period x 100
What is demand pull inflation
Caused by excess demand in economy
What is cost push inflation
Caused by increase in the costs of production in the economy
What is indexation
Adjusting the value of economic variables eg wage rates, interest and welfare payments in line with inflation
What is anticipated inflation
Was predicted
What is unanticipated inflation
Not predicted
What is underemployment
Includes those who would work more hours if available and those in jobs below their skill level
What’s meant by labour force/active population
All people in or available for work
What’s meant by population of working age
People between school leaving age and state retirement age
What is meant by inactivity (employment)
Not working and not seeking work
What is meant by unemployment
Without a job but seeking one
What is meant by short term unemployment
up to a year
What is meant by long term unemployment
More than a year
What is hidden unemployment
Includes underemployed people and people who want a job but are not seeking one
What is frictional unemployment
Those who lose their job but move into a new one quickly
What is seasonal unemployment
Unemployment at certain times of year
What is structural unemployment
Demand for labour is less than supply in a specific market
What is cyclical/demand-deficient unemployment
Lack of demand for labour in whole economy eg in a recession
What is real wage/classical unemployment
When real wages are too high so employment is lower
2 methods of measuring unemployment
Claimant count
LFS/ILO unemployment
How does the claimant count measure unemployment
Measures number of people claiming benefits
Why may claimant count be inaccurate
- People scared to claim
- Wives don’t qualify if husband earns too much
- May include people earning from black market
What do LFS and ILO stand for
Labour force statistics
International labour organisation
How is LFS/ILO measured
44000 households with over 100000 individuals are surveyed
Why may the methods of measuring unemployment show underestimations
- Don’t consider underemployed
- Doesn’t include people on government training schemes
- Some people would take a job but aren’t seeking one
- Doesn’t include disability and sickness benefit claimants
Why may the methods of measuring unemployment show overestimations
Some people may be considered as unemployable for example if they are ex-criminals, mentally/physically disabled, or lack qualifications
What is the balance of payments account
Has record of all financial dealing over a period of time between one country and all others
What is a current account
Where payments for purchase and sale of goods and services are recorded
What are capital and financial accounts
Part of balance of payments account where flows of savings, investment and currency are recorded
How does inflows and outflows effect balance of payments
Inflows are positive, outflows are negative
What are visibles
Trade in goods
What are invisibles
Trade in services, transfers of income and other payments and receipts
What is meant by balance of trade
Value of visible exports - visible imports
What is meant by current balance
Difference between value of total exports - total imports
What is meant by trade deficit
Visible imports greater than visible exports
What is meant by trade surplus
Visible imports less than exports
What is meant by current account deficit
Total imports greater than exports
What is meant by current account surplus
Total exports greater than imports
What are the demand side policies
Monetary
Fiscal
What is monetary policy
Manipulating demand through use of interest rates, QE and credit availability
What is fiscal policy
Manipulation of demand through taxation and government spending
Explain the process of QE
BOE credits their own account, buys bonds from commercial banks, have more money for credit availability etc
What is expansionary and contractionary
Expansionary is increasing demand
Contractionary is decreasing demand
What is neutral fiscal policy
Changes in gov spending and tax doesn’t change overall budget deficit
What is meant by a liquidity trap
Where lowering interest rates has no effect on aggregate demand
What are supply side policies
Government policies designed to increase the productive capacity of an economy
What are interventionist policies
Gov supply side policies designed to correct market failure
What are the 2 types of supply side policies
Capital
Labour
What do capital policies include
Subsidies Business parks Research and development ICT Grants
What are examples of labour policies
Education Training schemes Minimum wage Benefits Immigration Healthcare
Wha is the poverty/earnings trap
When an individual is hardly better off or is worse off when gaining an increase in wages due to increase in tax and inflation
What is HDI
The human development index
What are the 3 elements of HDI
Health (lift expectancy at birth)
Education (mean expected years of schooling)
Income (GNI per capita)
How do interest rates impact strength of pound
Hot money flows
What is meant by the black market
Economic activity where trade takes place unreported to tax authorities and so national statistics
What is Philips curve
Research this
