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
- Provides a Standardized Measure of Economic Activity
GDP quantifies the total value of goods and services produced within an economy over a specific period → This allows consistent comparisons of economic performance across different countries and time periods → Policymakers, businesses, and economists can track economic trends, such as growth, stagnation, or recession → A rising GDP typically indicates increasing production, higher employment, and improving living standards → This helps governments and central banks make informed decisions on fiscal and monetary policies to sustain growth. - Helps Governments Design Effective Economic Policies
GDP data provides insights into the state of the economy, allowing governments to assess whether intervention is needed → If GDP growth is too slow or negative, policymakers may introduce stimulus measures, such as lower interest rates or increased public spending, to boost demand → Conversely, if GDP growth is too fast, leading to inflation, governments may adopt contractionary policies, such as raising taxes or interest rates → By monitoring GDP, authorities can stabilize economic cycles, preventing excessive inflation or deep recessions → This ensures a more stable economic environment for businesses and households. - Guides Business Investment and Decision-Making
Businesses use GDP as an indicator of market conditions and demand trends → If GDP is growing steadily, it suggests rising consumer spending and business confidence, encouraging firms to expand operations, invest in new technology, or hire more workers → This drives further economic growth, creating a positive feedback loop of increased productivity and higher employment → On the other hand, if GDP growth slows, businesses may adjust their strategies, such as cutting costs or delaying investments, to prepare for potential downturns → This ability to anticipate and react to economic conditions reduces financial risks for firms. - Allows for International Comparisons and Investment Decisions
GDP provides a universal benchmark for comparing economic performance across countries → International investors and financial institutions use GDP growth rates to assess the attractiveness of different markets for investment → A country with strong and stable GDP growth is seen as a favorable destination for foreign direct investment (FDI), leading to job creation and technological advancements → Higher GDP also improves a country’s creditworthiness, making it easier to attract loans and investment for infrastructure and development projects → This contributes to long-term economic expansion and higher global competitiveness. - Correlates with Living Standards and Development
Although GDP does not directly measure quality of life, higher GDP is generally associated with greater income levels, better public services, and improved infrastructure → Economic growth leads to higher government revenue through taxation, which can be used to fund healthcare, education, and social welfare programs → Over time, rising GDP allows for technological progress, improved productivity, and better working conditions, enhancing overall well-being → Countries with higher GDP typically experience lower poverty rates, longer life expectancy, and better access to essential services → This makes GDP a useful indicator for tracking overall development and economic progress.
issues with using GDP
- Excludes Non-Market Activities
GDP only measures market transactions and excludes non-market activities such as household labor, voluntary work, and barter transactions → This means that a significant portion of economic activity, especially in informal economies or within households, is left out → As a result, GDP can underestimate the true economic output, especially in developing countries where a large portion of work is informal, leading to an incomplete reflection of overall economic activity. - Does Not Account for Income Inequality
GDP is an aggregate measure that does not provide insights into the distribution of wealth within a country → It can show an overall increase in economic output, but fail to reflect whether this growth is equally distributed across all segments of society → For instance, if GDP rises due to growth in sectors that benefit the wealthy, the welfare of poorer groups may not improve, leading to a misleading picture of prosperity where the benefits of growth are not evenly shared. - Ignores Environmental Costs
GDP measures economic activity without considering the negative externalities, such as pollution, environmental degradation, and resource depletion, associated with production → Economic growth that involves significant environmental damage may show a rise in GDP while harming long-term sustainability → As a result, GDP may encourage unsustainable practices by focusing on short-term growth rather than environmental preservation, which is essential for future prosperity. - Does Not Reflect Quality of Life or Well-Being
GDP measures the total value of goods and services produced but does not directly assess factors such as health, education, or life satisfaction → An economy might have a high GDP but still experience poor quality of life for its citizens if basic services and social well-being are lacking → Therefore, GDP fails to account for non-economic aspects of development like mental health, happiness, and social inclusion, which are crucial for a country’s holistic progress. - Can Be Misleading in Terms of Living Standards
GDP is typically reported on a per capita basis to estimate living standards; however, it can be misleading because it does not account for factors such as cost of living differences between regions or the effects of inflation → Even if GDP per capita increases, it might not accurately reflect improvements in actual purchasing power or real income for citizens → For example, rapid inflation or rising housing costs can dilute the perceived improvement in living standards despite an increase in GDP.
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
- Includes Income from Abroad
GNI (Gross National Income) measures the total income of a country’s residents, including income earned abroad → This is an advantage over GDP, which only considers income within national borders → As a result, GNI provides a more accurate picture of the economic well-being of a country’s residents, especially if a significant portion of the population works or invests abroad → For countries with high levels of remittances or foreign investments, GNI gives a better representation of the income available for spending, investment, and saving. - Measures Overall Economic Welfare
Unlike GDP, which only focuses on economic output within a country, GNI accounts for both domestic production and net income from foreign sources (e.g., profits, dividends, remittances) → By including income from abroad, it reflects the wider economic impact on the standard of living and welfare of residents → This can be particularly important for countries with high levels of foreign-owned companies or large expatriate communities → Therefore, GNI is considered a broader and more accurate indicator of economic well-being than GDP. - Facilitates International Comparisons
GNI allows for easier cross-country comparisons, particularly for countries with substantial international investments or remittance inflows → Since it includes income from foreign sources, GNI makes it easier to compare the economic welfare of citizens in different countries, accounting for those who earn income abroad → For example, countries with large numbers of migrant workers (like the Philippines or India) will have a higher GNI than GDP, and GNI provides a truer reflection of national income levels when comparing international development. - Reflects Investment Returns
GNI includes returns from investments owned abroad, such as interest, profits, and dividends → This is important for capital-rich economies that earn income from foreign investments, as it better captures the true economic benefits these countries receive from their external investments → For example, if a country has substantial holdings in foreign companies or real estate, this income is factored into GNI, giving a clearer understanding of the nation’s financial position and its capacity to support domestic economic growth. - Can Indicate Economic Development
An increase in GNI per capita may indicate sustained economic development that is driven by increased foreign investment, successful exports, or efficient remittance channels → As countries expand their global presence and gain more income from abroad, their GNI per capita may rise, leading to higher levels of economic growth and improvement in living standards → This can be particularly significant for developing countries that rely on foreign earnings to fund infrastructure development, education, and healthcare.
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
equation for aggregate demand
C + I + G + (X - M)
what will increase short term growth
- fall in interest rates - money becomes cheaper to borrow, more spending
- increase in investment, which will increase I in aggregate demand equation
- increase in govt spending or decrease in tax as it would increase consumption
- fall in exchange rate, exports increase, imports decrease
INCREASE AGGREGATE DEMAND
what is long term growth
potential growth
what is long term growth caused by
an increase in the quantity/quality of factors of production
an increase in aggregate supply
what might cause long term growth
- increase in productivity - this improves quality of labour
- advancements of technology- increases quality and quantity of capital
- increase in investment- increasing capital quality
- improved govt spending for infrastructure, lowering firms cost of production- makes economy more efficient so they can produce more
- increase in net immigration- quantity of labour increases
what is actual growth
the level of aggregate demand over time
what is the trend rate of growth
measures how much the productive capacity of the economy increases each year
why does actual growth fluctuate
- shocks - demand side shocks or supply side shocks, meaning supply or demand falls rapidly
summarise the economic cycle diagram
- at the peak of actual growth, we are experiencing a “boom”, high economic growth with inflation
- then we experience a slowdown going down
- at the trough, we are at a recession
- going up, we experience a recovery
WHAT IS A RECESSION
2 successive quarters with negative growth
what does it mean when the actual growth is below the trend rate of growth
there is a negative output gap, where there are spare factors of production not being used up
what does it mean when actual growth is above trend rate of growth
there is a positive output gap - workers could be working unsustainable hours
What is the circular flow of income?
the movement and spending of income throughout the economy
what is economic growth
the increase of the productive potential of the economy
