Topic 3: Economic Issues Flashcards
what are the economic issues
- economic growth
- unemployment
- inflation
- distribution of income and wealth
- environmental sustainability
- external stability
what to do with each issue
- define
- measure
- causes
- trends
- impacts
what is economic growth
an increase in the value of goods and services that an economy produces over a peirod of time
how is eco. growth measured
changes in real gross domestic product (GDP) over a period of time typically a year (annual percentage change in GDP)
formula for real gdp
real gdp = nominal GDP x (100/CPI)
economic growth formula
economic growth (%) = (real gdp(current) - real gdp(previous)) / real gdp(previous) x 100
what are the three different time periods that can be used to measure eco. growth
- quarterly rate of economic growth - ABS
- year-on-year growth
- annual economic growth rate
why is economic growth important
raises a countrys level of income and standard of living
what is aggregate supply
total productive capacity of an economy
aggregate supply formula
aggregate supply equation: Y = C + S + T
how to increase aggregate supply
- discovery of new resources
- population growth
- workers acquring new skills
- adoption of new technology
- increased capital
- efficiency measures
- govenremnt policies
what are the constraints of economic growth in regards to aggregate supply
- limited by the amount and quality of resources
- as AD rises –> AS rises until it meets capacity point
- skills shortage
- infrastructure bottlenecks
what is aggregate demand
total demand for goods and services in an economy over a given period of time
aggregate demand equation
AD = C + I + G + (X - M)
what factors influence aggregate demand
consumption
investment
government spending
net exports
equalibrium of eco. growth
AD = AS
or
I + G + X = S + T + M
Injections = Leakages
what is gdp
the total monetary value of all final goods and services produced within a country during a period of time
what is the simple multiplier
the number of times the final increase in national income exceeds the intial increase in expenditure
simple multiplier formula
k = 1 / (1-MPC)
k = 1 / MPS
national income formula - simple multiplier
∆Y = ∆AD x k
∆Y = ∆G x k
∆Y = ∆X x k
positive effects of economic growth
- higher living standards
- higher employment levels
- higher levels of business investment
- improved budget outcomes
- improved economic mobility
- improved social mobility
negative effects of economic growth
- inflation
- rise in income inequality
- external stability
- environmental impacts
what polices are used to control aggregate demand
macoreconomic policies (fiscal and monetary)
demand-side, counter-cyclical policies
how do policies affect AD
- downturn - government stimulates aggregate demand by increase G or reducing T
- upturn - slow the rate of growth by increase T or reducing G
- lower interest rates –> more borrowing –> rise in consumption and investment demand