Topic 1 - Introduction and the goods market Flashcards
what does the circular flow model show
how money flows through society
What is GDP
Gross domestic output
The measure of aggregate output
what are the three ways of measuring GDP
The product method - add up the value of all goods and services produced in the country, industry by industry
The income method - add up all the incomes paid to households (wages, salaries, profits, rent and interests)
The expenditure method - add up all the expenditure necessary to purchase the nations production
Critiques of GDP
Does not consider health or quality of education
Alternative measures of the economy (Not GDP)
HDI
OECD Better life index
Ecological footprint
what is HDI
limitations of it
measures combined life expectancy at birth, access to education and GNI per capita
Even with these additional variables it doesn’t consider inequalities, poverty, human security, empowerment etc.
what is ecological footprint
has been developed to measure how much nature we have and how much we use
Why is Z different in a closed economy
X = IM = 0 so
Z = I + C + G
Equation for Z
Z = C + I + G + X - IM
what is a endogenous variable
a variable that depends on other variables in the model
(consumption or even AD as it relies on consumption)
what is an exogenous variable
A variables not explained within the model but instead taken as given
what is the consumption function
C = c0 + c1 (Y-T)
c0= Autonomous consumption (intercept)
(What people consume if disposable income is zero so just necessities)
c1= The marginal propensity to consume (the slope_
T = Tax
Y-T = disposable income
What will the effect of an increase in consumption be (considering multiplier and Keynesian cross)
Increase in demand
equal increase in production
equal increase in income
second round increase in demand
equal increase in production
equal increase in income
How does the equilibrium cross always return to equilibrium
via a negative feedback loop
why can we not increase demand without any limit
at some point we will have full employment of workers and there will be no spare capacity to raise demand further
