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
what is aggregate demand
the total level of planned real expenditure on the goods/services produced in an economy
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
- the total output of the economy
benefits of using GDP
📈 1. Measures economic performance
→ GDP provides a quantitative measure of total output
→ Helps track economic growth over time
→ Policymakers and analysts can evaluate the health of the economy
→ Enables comparison across time periods and between countries
📊 2. Assists in policy formulation
→ Governments and central banks rely on GDP data
→ To decide on fiscal or monetary policy interventions
→ For example, low or negative GDP growth may trigger stimulus measures
→ Helps in targeting policies to improve employment and output
💷 3. Useful for international comparisons
→ GDP allows comparison of economies in absolute or per capita terms
→ Highlights disparities in income and standard of living
→ Attracts foreign investors by showcasing growth trends
→ Encourages global cooperation through benchmarking
🔁 4. Indicator for living standards (especially GDP per capita)
→ GDP per capita gives a rough estimate of average income
→ Higher GDP per capita may imply better access to goods and services
→ Can be linked with improved quality of life and development
→ Helps in tracking progress in low-income countries
issues with using GDP
🌍 Ignores Inequality
→ GDP measures total output, not how it’s distributed
→ A country could have a high GDP, but extreme income inequality
→ The average income might rise while many citizens see no improvement
→ This overstates living standards for the majority of the population
♻️ Ignores Sustainability
→ GDP counts all output, regardless of whether it’s sustainable
→ Exploiting non-renewable resources or polluting the environment boosts GDP
→ But this causes environmental degradation and resource depletion
→ Leads to future declines in welfare, which GDP doesn’t reflect
💼 Excludes Non-Market Activity
→ GDP only includes goods/services bought and sold in markets
→ Housework, volunteering, and informal work are excluded
→ These contribute to economic welfare but are not measured
→ This underestimates the true size of the economy, especially in developing countries
😔 Ignores Quality of Life
→ GDP focuses on quantity of output, not well-being or happiness
→ Fails to consider health, education, leisure time, or work-life balance
→ A rise in GDP might occur alongside rising stress or poor health
→ So, it’s a poor indicator of actual well-being
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
GDP per capita equation
GDP / population
issues with using GDP per capita
- Fails to Measure Income Inequality
GDP per capita is an average measure of income, calculated by dividing total GDP by the population → However, it does not show how income is distributed within a country → A nation with high GDP per capita may still have severe wealth inequality, where a small elite controls most of the wealth while large portions of the population remain in poverty → This can lead to social unrest, lower social mobility, and weaker long-term economic growth if wealth remains concentrated → As a result, GDP per capita overstates the actual standard of living for most citizens in highly unequal societies. - Ignores the Informal Economy
Many developing countries have large informal sectors, where economic activities are unregistered, untaxed, and unregulated → Small businesses, street vendors, and subsistence farming contribute to economic output, but these activities do not get recorded in official GDP statistics → This causes GDP per capita to underestimate actual economic activity and living standards in such economies → Additionally, in countries where the informal sector is growing, policies based on GDP per capita may misguide economic planning since the true size of the economy is not reflected → This can lead to misallocation of resources and ineffective policy responses. - Excludes Non-Market Transactions and Quality of Life Factors
GDP per capita only accounts for monetary transactions and does not measure non-market activities like unpaid domestic labor, volunteer work, or environmental contributions → For example, a country where households rely on subsistence farming or barter systems may appear to have low GDP per capita, even if basic needs are being met → Similarly, GDP per capita does not consider quality of life aspects, such as access to healthcare, education, leisure time, or environmental conditions → This means two countries with similar GDP per capita could have vastly different living standards, making it an incomplete measure of well-being. - Does Not Account for Cost of Living Differences
GDP per capita is typically measured in nominal or real terms but does not consider purchasing power parity (PPP) unless adjusted → This means countries with high GDP per capita may still have high costs of living, making real income lower than it appears → For instance, a country like Switzerland may have a high GDP per capita, but high prices for housing, healthcare, and goods mean that the average citizen may not be significantly better off than someone in a country with lower GDP per capita but a lower cost of living → Without adjusting for PPP, GDP per capita can distort cross-country comparisons and misrepresent actual economic well-being. - GDP Growth Can Be Driven by Unproductive or Harmful Activities
An increase in GDP per capita does not necessarily mean an improvement in economic welfare → GDP includes all economic activity, even if it does not contribute positively to well-being → For example, natural disasters, wars, or environmental degradation may increase GDP due to government spending on reconstruction or military activity → Similarly, overexploitation of natural resources can lead to short-term GDP growth but weaken long-term sustainability → This means that rising GDP per capita does not always reflect genuine improvements in living standards, making it a flawed measure of progress.
what are remittances
when domestic workers leave the country and work abroad to earn higher incomes but the income is then sent back to the home country
what is fdi
foreign direct investments is when foreign firms operate in your home country
what is GNI (per capita)
the total income generated by a countries factors of production regardless of where those factors of production are located
GNI equation
GDP + net factor income
advantages of GNI
🧮 1. Reflects Total National Income
→ GNI includes income earned by nationals abroad
→ This gives a more accurate picture of the wealth accessible to citizens
→ For example, a country with large overseas investments or remittances will see this reflected in its GNI
→ Helps policymakers and investors better understand national economic capacity
🌍 2. Better for Comparing Economies
→ GNI allows for comparison of living standards across countries
→ Especially useful when GDP is distorted by foreign ownership of capital
→ It adjusts for profit repatriation by multinationals which may inflate a country’s GDP
→ Gives a fairer view of what residents actually benefit from economically
📉 3. Highlights Dependency on Foreign Income
→ Countries highly reliant on remittances or FDI returns can be identified
→ Policymakers can use this to evaluate economic sustainability and resilience
→ If GNI is much higher than GDP, it may signal reliance on external income flows
→ Encourages strategies to diversify the domestic economy
🏦 4. Useful in Development Metrics
→ GNI per capita is used by institutions like the World Bank to classify countries (e.g., low-income, middle-income)
→ It helps allocate aid and funding more effectively
→ It provides a consistent global measure of average income
→ Ensures a development-focused perspective rather than just total output
issues with using GNI
Excludes Informal Economic Activity
- GNI does not account for economic activities that occur in the informal sector, such as subsistence farming
- They are significant in developing countries, where informal sectors can contribute substantially to livelihoods.
- so, GNI may understate the true level of economic activity and development, leading to misinformed policy decisions.
Fails to Reflect Non-Monetary Development Factors
- GNI does not consider quality-of-life indicators such as healthcare, education, and environmental sustainability.
- For instance, two countries with similar GNI levels may differ significantly in human development outcomes like life expectancy or literacy.
- This undermines GNI as a comprehensive measure of development, as it overlooks critical social dimensions.
Exchange Rate Limitations
- GNI comparisons across countries are often distorted by fluctuations in exchange rates, which may not reflect real purchasing power.
- For example, a devaluation of a currency might artificially lower GNI in dollar terms, even if domestic economic activity remains unchanged.
- This makes cross-country comparisons less reliable and could lead to skewed assessments of economic performance.
Potential Bias in Data Collection
- GNI relies on accurate reporting of national income, which can be compromised by poor data collection practices or intentional manipulation.
- For example, some countries may overstate or understate income to secure favorable trade or aid agreements.
- Such biases undermine the credibility of GNI as a consistent and objective indicator of development.
Overemphasis on Economic Growth
- Using GNI as a primary measure of development may lead to policy focus on maximizing income rather than addressing broader well-being.
- For instance, countries may prioritize resource extraction to boost GNI, ignoring the long-term environmental and social costs.
- This narrow focus can divert attention from sustainable and equitable development strategies.
what measures quality of life standards
HDI
