Theme 2 - Macroeconomic objectives Flashcards
what does TIGERS stand for
T - Balanced TRADE performance - not having a huge defect or surplus
I - Inflation , low and stable
G - Growth, strong and sustained growth
E - employment - low unemployment
R - Redistributing income
S - Stability in the ecobomy
how does the simple circular flow of income work
households provide benefits to firm in the form of labour or entrepreneurship, and they are rewarded in the form of income, which they then spend on goods and services produced by firms
what other things can affect EXPENDITURE and what are they called
- government spending (G)
- firm spending (i)
- spending by foreigners (X)
these are called INJECTIONS as they INJECT money into the economy
what affects INCOME in the circular flow of income and what are they called
- savings (S)
- tax (T)
- imports (M)
these are called leakages as money leaves the economy
if injections are greater than leakages….
there’s an increase in economic growth
if leakages are greater than injections…
there is a fall in economic growth
what factors can affect the SIZE of the circular flow
- amount of households
- if the quality or quantity of factors of production increase
methods to measure growth
- Output method - measuring the value of goods and services in real GDP
- the value added is calculated
- Income method - measuring the total income in the economy
- Expenditure method - measuring all the different types of spending in the economy ( C + I + G + ( X - M)
disadvantages of the output method
issue of double counting, hard to ensure that there isn’t double counting which would cause inflated figures
what is aggregate demand
the total level of planned real expenditure on the goods/services produced in an economy
why are national income statistics so useful for the government
- they provide a report card for governments to see how their economies are doing(measure economic performance)
- they allow governments to see if they are meeting their economic growth
- allows governments to evaluate policy
- allows economists/businesses to forecast expected growth
- help evaluate living standards
- allow for a comparison between different economies
what are national income statistics
measures of economic growth
what are the different measures of national income are there
- GDP
- GDP / capita
- GNI (per capita)
- Green GDP
what is GDP
GDP is the value of all final goods and services produced in an economy in a year
benefits of using GDP
Standardized Measure
- GDP provides a universal metric for comparing the economic performance of different countries, calculated using widely accepted methods.
- allows for consistent comparisons over time and across borders.
- enables policymakers and businesses to make informed decisions in global markets
Indicator of Economic Growth
- GDP measures the total value of goods and services produced within a country, reflecting its economic activity and growth over time.
- A rising GDP generally indicates an expanding economy.
- This data helps governments and businesses identify sectors driving growth and prioritize investment.
Policy Evaluation
- GDP allows policymakers to** evaluate the effectiveness of economic policies by tracking changes in output and income levels**. For example, if GDP rises after implementing tax cuts or infrastructure spending, it signals that the policies are working as intended.
- Governments can adjust their strategies based on GDP trends.
Attraction of Investment
- A high or consistently growing GDP signals a stable and expanding economy, which is attractive to both foreign and domestic investors. Investors often view GDP growth as a proxy for potential returns on their investments.
- This can lead to increased capital inflows, supporting infrastructure development, technological innovation, and job creation. For example, India’s rapid GDP growth in the 2010s attracted significant foreign direct investment in technology and manufacturing.
issues with using GDP
- GDP does not measure income distribution.
- GDP only captures the aggregate economic output and does not reflect how evenly income is distributed among a population.
- : A country with high GDP may still have significant income inequality, which could limit economic well-being for a substantial portion of its population. - GDP excludes non-market transactions and informal economy.
- Many transactions, especially in developing economies or household labor (e.g., childcare), are not recorded in GDP.
- This underestimates the true economic activity in countries with large informal sectors or high levels of unpaid work. - GDP ignores environmental degradation and sustainability.
- GDP only measures economic output without considering the environmental cost, so pollution, resource depletion, and waste are not deducted.
- A country might have high GDP growth at the expense of long-term sustainability, masking the environmental harm. - GDP may be distorted by inflation or exchange rates.
- Nominal GDP does not account for inflation, and international GDP comparisons are affected by exchange rate fluctuations.
- Real GDP or purchasing power parity adjustments are needed for accurate comparisons, adding complexity to GDP analysis.
what is double counting
when we include the value of output in the primary sector then include it again when the primary commodity has been manufactured into something in the secondary sector
what is GDP/ capita
an average measure of individual incomes in the economy
