theme 2 : macroeconomics Flashcards
1
Q
what are the governments four macroeconomic objectives?
A
- economic growth
- unemployment
- inflation
- current account on the balance of payments
2
Q
what is an open economy?
A
where there is foreign trade
3
Q
what is a closed economy?
A
where there is no foreign trade
4
Q
who owns the wealth of the nation?
A
households own the wealth. they own land, labour and capital.
5
Q
what is frictional unemployment?
A
workers who are unemployed because they are between jobs
6
Q
what is voluntary unemployment?
A
when workers leave their employment out of choice (eg. no longer financially satisfying)
7
Q
what is seasonal unemployment?
A
workers who are unemployed due to the seasons changing. eg. tourism industries
8
Q
what is cyclical unemployment?
A
when workers are unemployed due to the economic cycle (during a recession or downturn)
9
Q
what is the inflation rate target?
A
2%
10
Q
why are some economies seen as “strong”?
A
their current account is persistently in surplus
11
Q
why are some economies seen as “weak”?
A
their current account is in persistent deficits
12
Q
why has the importance of gvt budget deficits grown as an economic objective?
A
due to the 2008 financial crisis
13
Q
what do right wing economists broadly tend to believe?
A
that inequality is a good thing as it increases the incentive to work and take economic risks. therefore they are against policies that reduce inequalities, such as increase on taxes on the wealthy.
14
Q
what do left wing economists broadly tend to believe?
A
that everyone in society should have access to a certain standard of living and that the free market leads to high inequality. they believe the gvt should intervene to reduce this. they usually want to provide services such as healthcare and education for free.
15
Q
what is national income?
A
the level of total output in an economy
16
Q
what does the circular flow model show?
A
it presents how money, goods and services move between sectors in an economic system. the flows of income are used to measure a country’s national income or GDP
17
Q
what are examples of withdrawals / leakages?
A
- savings
- taxes
- imports
18
Q
what are examples of injections?
A
- investment
- government spending
- exports
19
Q
what benefits do firms provide households with?
A
- wages
- rent
- dividends
20
Q
what benefits do households provide firms with?
A
- consumer spending
21
Q
what do firms provide to households?
A
- goods
- services
22
Q
what do households provide to firms?
A
- capital
- land
- labour
- enterprise
23
Q
what does O E Y stand for?
A
O - national output
E - national expenditure
Y - national income
24
Q
what is national output (O)?
A
the value of flow of goods and services from firms to households
25
what is national expenditure (E)?
the value of spending by households on goods and services
26
what is national income (Y)?
the value of income paid by firms to households in return for land, labour and capital. same as real gdp
27
what is the aggregate demand equation?
AD = C + I + G + (X-M)
aggregate demand = consumer expenditure + investment expenditure + gvt expenditure + (exports - imports)
28
what is wealth?
the value of assets owned by a household. eg. property, shares and savings
29
what happens if injections are larger than withdrawals?
national income will rise
30
what happens if withdrawals are larger than injections?
national income will fall
31
what does aggregate mean?
total
32
what are the six key indicators of the economy’s performance?
- unemployment numbers
- rate of inflation
- rate of economic growth
- government budget
- degree of inequality
- quality of environment
33
what is the equation for index number?
index number = (raw number in period / raw number base period) x 100
34
what are index numbers?
they are used to observe how the economy is functioning and allow for easier comparisons between two countries.
35
what is a real value?
the value before inflation is taken into account. it effectively removes or excludes inflation from the value.
36
what is a nominal value?
measurements made using price that are current at the time a transaction takes place. current prices that take inflation into account.
nominal values reflect the effect of inflation.
37
what is GDP?
gross domestic product. it is the total output of an economy over a given period.
38
what is GNI?
gross national income. GDP + / - net income from abroad. it adds what a country earns from abroad and subtracts the amount that foreigners send home.
39
what measure is better than GNI? why?
GNI per capita. it allows for comparisons between countries with different population sizes.
40
what is GPI? why is better than GNI?
genuine progress indicator. it takes into account the environment.
41
what is the equation of real GDP?
quantity of product x price of product in base year
42
what is the equation for GDP deflator?
(nominal GDP / real GDP) x 100
43
what is nominal GDP?
the value of goods and services using current prices. doesn’t take inflation into account.
44
what is real GDP?
the value of goods and services at constant prices. does adjust for inflation.
45
what are the issues in measuring GDP?
- exclusions of real transactions (gifts)
- the value of leisure (walking outside)
- the underground economy (drugs, prostitution)
- zero price goods are excluded (free software upgrades on old PCs)
- difficult to measure innovation (financial services, homes are multipurpose airbnb)
- accounting for inflation
46
what is the equation for unemployment rate?
(number of unemployed / labour force) x 100
47
who makes up the labour force?
people who are of working age, are able and willing to work. can be both employed and unemployed.
48
what is the difference between GDP deflator and CPI?
GDP deflator only includes domestic goods and not anything that is imported. CPI includes anything bought by consumers including foreign goods. GDP deflator is a measure of all the prices of all goods and services while CPI is a measure of only goods bought by the consumer.
49
what is inflation?
a sustained increase in the general price level for goods and services
50
how can we measure inflation?
use a typical basket of commodities.
we measure the basket during a base year, and then in subsequent years
51
what is deflation?
a persistent fall in the general price level of goods and services shown by a negative rate of inflation
52
what is disinflation?
a reduction in the rate of inflation (3% to 2%)
53
what are the three key labour categories?
- employed
- unemployed (looking for work)
- economically inactive (not looking for work)
54
who is included in the economically inactive group?
students, retired, sick people or people looking after family members, discouraged workers (people who have failed to find work and given up looking)
55
are economically inactive people considered to be part of the workforce?
no. they are not active.
56
what does large numbers of unemployment mean?
that the country is not fully utilising all available labour resources and therefore sacrificing potential output that could be produced
57
how can we measure unemployment?
- claimant count
- ILO unemployment rate
58
what is the claimant count?
the number of people registered as unemployed and claiming JSA
59
what is ILO (international labour organisation) unemployment rate?
a measure based on the labour force survey. it identifies the number of people available and seeking work, but without a job.
60
why is the claimant count and ILO not accurate?
claimant count :
- only captures those who claim JSA, not who are eligible
- those who are unemployed for other reasons but cant claim JSA
ILO :
- based on sample and then extrapolated to fit entire population
- not fully accurate and representative
61
why is hard to measure unemployment in developing countries?
- no social security system which provides no incentive to register as unemployed
62
what is underemployment?
- when people are overqualified for a role (eg. a lawyer being a taxi driver)
- when people are working less hours than they would like to (eg. part time instead of full time)
63
what is the unemployment rate equation?
(number of unemployed / labour force) x 100
64
what’s the difference between unemployment and economic inactivity?
unemployment is when people are not in work, but they are actively looking for a job. they are available to work. inactivity is when people aren’t looking nor do they have / want a job.
65
what is the workforce?
people who are economically active? - either in employment or unemployed
66
what is the balance of payments account?
a record of all financial dealings over a period of time between economic agents of one country and all other countries
67
what can balance of payments be split into?
- a current account
- a capital and financial account
68
what is a current account?
where payments for the purchase and sale of goods and services are recorded
69
what is a capital / financial account?
where flows of money associated with saving, investment, speculation and currency stabilisation are recorded
70
what is primary and secondary income?
primary income :
- loan of factors of production abroad (interest, profits, dividends)
secondary income :
- range of mainly gvt transfers to and from international organisations (EU)
71
how can current balance be calculated?
- the difference in value of exports and total imports
- adding the balance of trade in goods with services, income and current transfers
72
when does a current account surplus occur?
when exports are greater than imports
73
when does a current account deficit occur?
when imports are greater than exports
74
what is a current account deficit mainly caused by?
private consumers and firms buying too many imports and borrowing the money from abroad to pay for them
75
what are the four types of unemployment?
- seasonal
- frictional
- cyclical
- voluntary
76
what is seasonal unemployment?
when employment changes according to the seasons (tourims sectors etc.)
77
what is frictional unemployment?
when people are moving between jobs
78
what is cyclical unemployment?
when unemployment changes de to the economic cycle (boom, recession etc.)
79
what is voluntary unemployment?
when people are voluntarily jobless (left their job by choice)
80
what is aggregrate demand?
the total amount of demand within an economy
81
what are the components of AD?
C- consumption
I - investment
G - government expenditure
X - M - net trade (exports - imports)
82
what is an exchange rate?
the value of one currency in terms of another
83
what does it mean when the value of exports is higher than the value of imports?
surplus on balance of trade
84
what does it mean when the value of exports is lower than the value of imports?
deficit on balance of trade
85
what is the balance of payments?
records all the financial transactions made between consumers, firms and the government in one country, with other countries
86
what are visibles / tangibles?
goods
87
what are invisibles / intangibles?
trade in services
88
what are the causes of a current account deficit?
- strong domestic growth (increase in AD)
- recession overseas
- strong exchange rate (ICED)
- high costs of production for domestic firms
- high relative inflation
- poor quality goods
- depletion of resources
89
what is the main factor affecting AS?
changes in production costs
90
what causes an outward (rightward) shift in SRAS?
- decrease in production costs
- decrease in price of raw materials
- decrease in taxation
91
what causes an upwards (leftwards) shift in SRAS?
- increase in production costs
- increase in wage costs
- increase in corporation tax
92
what are the labels for the axis on an AS and AD graph?
y axis - price level
x axis - real GDP (Y)
93
what shape is a classical LRAS graph?
vertical line
94
what shape is keynesian LRAS graph?
horizontal line curving into a vertical line
95
what are some factors that cause a shift in LRAS?
- technological advances
- changes in relative productivity to competing economies
- changes in education and skills
- changes in government regulations
- demographic changes & migration
- competition policy
- enterprise / risk taking
- factors mobility (CELL)
- economic incentives
96
what does an increase in PL on an AD graph mean?
inflation
97
define investment.
the addition to the capital stock of the economy (factories, machines, offices and stocks of materials) used to produce other goods and services
98
what are the two different types of capital in investment?
- human capital
- physical capital
99
give two factors that affect government expenditure.
- changes in political priorities
- changes in economic priorities
100
give three factors that affect net trade.
- changes in national income abroad
- changes in exchange rates
- changes in the level of trade protection
101
what is consumer expenditure?
the total spending by households, on goods and services over a given period of time
102
how does real (disposable) income affect conusmer spending?
an increase in YdR will allow consumers to spend more. this is the most important factor affecting consumer spending.
103
how does direct taxation affect consumer spending?
if there is a cut in direct taxation, then ceterus paribus, consumers will see an increase in their disposable income and spending power. vice versa, an increase in direct taxes will see consumers with less disposable income.
104
how does consumer confidence determine consumer spending?
fears of rising unemployment and expectations of rising taxes will reduce consumer spending. consumer confidence is measured using surveys that ask people about their financial situation and and their future expectations for them and the economy.
105
how does rate of interest affect consumer spending?
interest rates affect borrowing and saving. high interest rates increases cost of spending on borrowed money. so, this lowers consumer spending. higher interest rates also incentivises saving.
lower interest rates may lead to more consumer spending as consumers can buy goods on credit for a low rate.
106
how does the supply of credit affect consumer spending?
a lower supply of credit means that consumers cannot borrow to spend, thus consumer spending falls
107
how do expectations of inflation affect consumer spending?
if consumers expect deflation, they may hold off on spending in order to obtain lower prices in the future.
if consumers expect inflation, they may stock up on durables.
108
how does the wealth effect affect consumer spending?
wealth represents the value of a stock of assets. housing is the biggest form of wealth. for most people, majority of their wealth is held in property, stocks and shares, savings and pension schemes. so, when the real value of these assets are rising, consumers are more confident to spend.
many economists think that there is a positive relationship between wealth and spending although the size of the effect is open to question (ev).
109
how does the distribution of income affect consumer spending?
lower income families tend to have higher propensity to consume than better off households. so, a redistribution of income towards poorer families may have the effect of boosting total consumer demand.
110
what is investment?
the addition to the capital stock of the economy. (factories, machines, offices and stocks of materials, used to produce other goods and services)
111
what is the difference between "investment" and "saving"?
investment only takes place if real products are created
eg. putting money into a bank is saving
the bank buying a compter to handle accounts is investment
112
what is gross investment?
investment before depreciation
113
what is net investment?
gross investment less the value of depreciation
114
what is depreciation / capital consumption?
when the value of the capital stock depreciates over time as it wears out and is used up.
115
give an example of physical capital.
investment in factories etc.
physical capital investment is the I in AD equation
116
give an example of human capital.
investment in education and training of workers etc.
117
which sectors can investment be made by?
- public sector (constrained by cmplex political considerations)
- private sector
118
what are the six determinants of private sector investment into physical capital?
1. changes in business confidence
2. changes in interest rates
3. changes (improvements) in technology
4. changes in business taxes
5. level of corporate indebtedness
6. legal / institutional changes
119
how does changes in business confidence affect private sector investment?
business optimism means that firms spend moe on investment, shifting the AD curve to the right. business pessimism means a decrease in investment, shifting the AD curve to the left.
120
how do changes in interest rates affect private sector investment?
if investment is financed by borrowing, an increase in interest rate will reduce investment. vice versa.
121
how do improvements in technology determine private sector investment?
improvements in technology stimulates investment as it makes the firms more promising for the future. shifts AD curve to the right
122
how does a change in business taxes affect private sector investment?
if the gvt increases taxes on profits of businesses, after tax profits fall. this reduces investment, shifting AD curve to the left
123
how does the level of corporate indebtedness determine private sector investment?
if firms have high levels of debt due to having borrowed in the past, they will be less inclined to make investments and the AD curve shifts to the left. a low level of corporate indebtedness, leads to more investment and a right shift in AD curve.
124
what does a weaker pound cause?
Weaker
Pound
Imports
Dear
Exports
Cheaper
net trade increase =\> AD increases
125
what does a stronger pound cause?
Stronger
Pound
Imports
Cheaper
Exports
Dear
net trade decrease =\> AD decrease
126
what is SRAS?
short run aggregate supply
127
what is the aggregrate supply curve?
the sum of all the industry supply curves in the economy. it shows how much output firms wish to supply at each level of prices.
128
how do firms respond to increases in demand in the short run?
by working their existing labour force more intensively
eg. through overtime
129
why is an increase in output likely to lead to an increase in costs in the short term?
due to competition. firms are able to increase prices as labour costs rises which lead to increased prices.
130
what five factors shift the SRAS curve?
1. wage rates
2. raw material prices
3. taxation
4. exchange rates
5. productivity
131
how do wage rates shift the SRAS curve?
an increase in wage rates will result in firms facing increased costs of production. so, a rise in wage rates will lead to a rise in average price level. shifts SRAS curve left / upwards.
sras =\> srasD
132
how does the price of raw materials shift the SRAS curve?
a fall in the price of raw materials could happen due to a fall in demand for commodities or value of the £ rises (making imports cheaper). a fall in the price of raw materials will lower industrial costs and will lead to some firms reducing prices of their products. this causes a downwards / rightwards shift in the SRAS curve.
sras =\> srasI
133
how does taxation shift the SRAS curve?
increase in tax will increase costs. so, SRAS curve shifts upwards / leftwards.
sras =\> srasD
134
how do exchange rates shift the SRAS curve?
if exchange rates fall, price of imported goods rises. this increases prices. so, a fall in the exchange rate causes a shift leftwards / upwards.
sras =\> srasD
a rise in exchange rates will lead to a fall in price of imported goods. this decreases prices in rest of economy. causes shift rightwards / downwards.
sras =\> srasI
135
how does productivity shift the SRAS curve?
productivity is output per unit of input employed. productivity and supply can increase in the long run if there is a better educated workforce or improvements in technology. however, in the short run this will cut production costs - shifting rightwards / downwards
sras =\> srasI
136
what does the SRAS curve assume about wage rates?
that they are fixed in the short run
137
what does the SRAS curve show?
relationship between aggregrate output and average price level
138
what is a supply side shock?
when there is a large change in one of the factors shifting the SRAS curve (wage rates, raw material price, taxation etc.), a supply side shock occurs.
an event that causes an unexpected increase in costs or disruption to production
139
why can it be argued that the LRAS curve is fixed at a given output level, whatever the price level?
in the long run, there is a limit to how much firms can increase their supply. they run into capacity constraints. there is a labour limit, capital equipment is fixed in supply, labour productivity is maximised.
140
what is the LRAS curve?
the level of output associated with production on the PPF of an economy
141
what is an output gap?
when output is above or below the long term average rate of growth in an economy e.g. a recession.
142
how is the LRAS curve and full capacity linked?
LRAS curve shows the level of full capacity output of the economy. at full capacity there are no underutilised resources in the economy. production is at its long-run maximum.
in the short run, an economy might operate beyond full capacity which creates a positive output gap. this is unsustainable in the long run and output must fall back to its full capacity levels.
143
give nine factors that shift the LRAS curve.
1. technological advances
2. changes in relative productivity to competing economies
3. changes in education and skills
4. changes in gvt regulations
5. demographic changes and migration
6. competition policy
7. enterprise and risk taking
8. factor mobility
9. economic incentives
144
how do technological advances shift the LRAS curve?
improvements in tech allows new products to be made and current products to be produced more efficiently. this increases capital productivity, shifting LRAS curve rightwards.
lras1 =\> lras2
145
how do changes in relative productivity with competing economies shift the LRAS curve?
an increase in UK productivity of one good relative to other economies will encourage production of that good in the UK. this encourages investment, shifting the LRAS curve rightwards. increased specialisation within other countries will shift LRAS of the world economy, rightwards. this allows production to be located in the cheapest, most efficient place in the world economy.
lras1 =\> lras2
146
how do changes in education and skills shift the LRAS curve?
improvements in education and skills of workers will raise their productivity. thus shifting the LRAS curve of the economy rightwards.
lras1 =\> lras2
147
how do changes in gvt regulations shift the LRAS curve?
making it simpler to set up a company encourages enterprise, which creates companies, output and jobs. shifts LRAS curve rightwards.
lras1 =\> lras2
148
how do demographic changes shift the LRAS curve?
population changes that increase the size of workforce are likely to increase LRAS. immigration of working aged people will increase productive potential of the economy as there is spare capacity of resources.
lras1 =\> lras2
149
how does competition policy affect the LRAS curve?
competition is likely to force firms to be more productive and reduce their costs, or more innovative by producing new products.
on the other hand, less competition can also be beneficial as it can encourage investment. eg. copyright laws and patents can protect firms research and development
lras1 =\> lras2
150
how does enterprise shift the LRAS curve?
economies in which enterprise is encouraged are likely to see increases in their LRAS. the creation of new firms increases output and creates competition. so, if risk taking and enterprise increases, LRAS curve shifts rightwards.
lras1 =\> lras2
151
how does factor mobility shift the LRAS curve?
increases in factor mobility likely leads to an increase in LRAS. eg. workers from estonia or poland moving to the UK, are likely to increase the UKs productive potential. this allows more output to be made.
lras1 =\> lras2
152
how do economic incentives shift the LRAS curve?
eg. tax incentives for the unemployed to take a job can reduce unemployment (increasing labour) and increase output. shifts LRAS curve rightwards.
lras1 =\> lras2
153
what would a shift leftward on an LRAS curve show?
reduction in productive potential of the economy
154
why is the vertical LRAS curve called the classical LRAS curve?
it is based on the classical view that markets tend to correct themselves fairly quickly when they are pushed into disequilibrium due to shock. so, if all markets are in equilibrium, there can be no unemployed resources. hence, the economy must be operating at full capacity on its PPF if there are no unemployed resources.
155
why is the keynesian LRAS curve this shape?
keynesian economists disagree with the classical view that the market will quickly correct itself. they argue that even if there is unemployment, there will not be a fall in wages. when there is mass unemployment (due to unemployed resources), the curve will be horizontal as output can be increased without having to increase costs, as workers will not demand higher wages. when the economy nears full employment, LRAS curves into a vertical line. this is because workers are able to negotiate higher wages as they are in demand and scarce. this increases firm's costs. at full employment (complete vertical line), firms will not be able to take on more labour as the economy has reached its maximum productive potential.
156
what is happening at point A?
the economy is in a deep and prolonged depression. there is mass unemployment. in theory, unemployment should lead to falling wages. however, national minimum wages, trade unions and firms being moral prevents this from happening.
157
what is happening between point A and point B?
labour is becoming scarce enough for an increase in demand for labour to push up wages. this then leads to a higher price level. the nearer output gets to B, the greater the effect of an increase in demand for labour there is on wages and therefore price level.
158
what does an increase in aggregrate demand lead to?
increase in real output and increase in price level
159
what does a decrease in aggregate demand lead to?
a fall in real output and a fall in price level
160
how will an increase in interest rates affect aggregate demand?
lowers it as investment and consumption falls
161
what do keynesian and classical economists agree on?
agree that in the short run, AD is downward sloping. AS is upward sloping.
162
describe and explain what is happening to the SRAS / AD equilibrium.
initial equilibrium is P1Y1 where AD1 and SRAS1 intersect
increase from SRAS1 to SRAS2 changes equilibrium position to P2Y2
fall in price level and increase in real GDP
decrease in SRAS leads to higher price levels and decreased real GDP
163
describe and explain what is happening to the SRAS / AD equilibrium.
initial equilibrium level is P1Y1 where AD1 = SRAS1
increase in AD1 to AD2 leads to change in equilibrium position to P2Y2
prices and real GDP are higher
fall in AD leads to lower prices and real GDP
164
describe and explain what is happening.
classical lras equilibrium model with sras shift.
increase from AD1 to AD2 leads to positive output gap
economy is in LR disequilibrium as SRAS1 and AD2 do no intersect on LRAS1 curve
SR equilibrium is P2Y2
SRAS1 shifts to SRAS2 =\> cost of production increases
economy is producing same amount but at higher prices Y1P3
SR equilibrium shifts and is now same as LR equilibrium
165
describe and explain what is happening.
classical lras equilibrium model with lras shift.
initial equilibrium is P1Y1 where AD1 = LRAS1
increase in LRAS from LRAS1 to LRAS2 caused lower prices and higher output at P2Y2
SR disequilibrium as SRAS1 does not intersect curve, this will be closed by shift in SRAS
166
describe and explain what is happening.
keynesian lras equilibrium model with ad shift
shift from AD3 to AD4 is purely inflationary and only increases price, not output =\> equilibrium point changes from P2Y3 to P3Y3
if economy is in recession, increase from AD1 to AD2 only increases output, not price =\> equilibrium point changes from P1Y1 to P1Y2
shift of any AD curve to or from AD5 =\> change in both price and equilibrium
167
describe and explain what is happening.
keynesian lras equilibrium model with lras shift
if economy is producing at or near full employment (AD1), rise in LRAS increases output and decreases price level =\> change in equilibrium point from P1Y1 to P2Y2
if economy is in a recession (AD2), increase in LRAS has no effect on prices or output =\> P3Y3
