topic 6 - output and aggregate demand 1 Flashcards
GDP is… this measures…
gross domestic product
the output made in
the economy, regardless of who owns the production inputs.
GNP is… this measures…
Gross national product
the income of a
country.
Value added is…
the increase in the value of goods as a result of
the production process
a final good is a…
good purchased by the ultimate/final user (households or firms)
an intermediate good is a…
partial finished good that forms inputs to a subsequent production process that then use them up.
when doing accounting for the current period how do we treat inventories or stock?
as final goods
in the absence of government and foreign sector (closed economy) we assume ______ = __________
where:
i________ is…
s_____ is…
this comes from the fact that in the absence of government and foreign sector GDP = ____ ______ = _____ _______
savings = investment (S=I)
the purchase of new capital goods by firms
the part of the economy not spent on buying goods or services
GDP = total income = final expenditure
three ways to measure national output?
explain each.
expenditure, income, output
expenditure:
the sum of expenditures in the economy e.g Y=C+I+G+X-Z (income(y) = consumption(C) + investment(I) + government(G) + exports(X) - imports(Z) )
income:
the sum of incomes paid for factor services (wages,
profits, etc.)
Output:
The sum of output (value added) produced in the
economy
(dont switch between them during calculations, but the results are interchangeable (the same))
what is the GNP deflate?
to account for population change what should you use?
an index showing what happens to the price of all goods
GNP per capita
(e.g UK is gaining people but not productivity so GNP is increasing but not GNP per capita)
(not sure if this fact is true)
potential output is…
The output the economy would produce if all factors of production were fully employed
actual output is…
What is actually produced in a period
(we will focus on when actual is less then potential)
given there is no government and no international trade what are the 2 components of aggregate demand?
this can be written in short form as…
consumption and investment
(investment as in planned or desired additions to physical capital & inventory)
AD = C + I
(aggregate demand = consumption + income)
to simplify the consumption demand model what do we assume?
that households allocate their income between consumption and saving
consumption function facts:
what relationship do consumption and income have?
when income ___________ _ people still _________
do we assume people spend all there income in this scenario?
strong positive correlational
approaches 0, consume
NO (people tend not to consume all there income, consumption is only a fraction of income)
consumption function:
the consumption function shows…
the general equation for consumption function is…
where… (state the variables)
draw a rough general graph of a consumption function
desired aggregate consumption at each level of aggregate income
C = A +cY
where:
, C is consumption
, A is autonomous consumption
, little c is the marginal propensity to consume
, Y is income
slide 18 (consumption on y and income on x)
saving function:
what is MPS? and is represented as…
the general equation for saving function is…
where… (define variables)
draw a rough graph
marginal propensity to save, represented as (1-c)
S = -A + (1-c)Y
where:
, S is savings
, -A is autonomous consumption
, (1-c) is marginal propensity to save
, Y is income
slide 19
consumption and saving function:
all income is either consumed or saved ∴ Y =
Y = C + S
investment demand is…
we assume that investment (I) is __________ and
______________ of current output and ______
(this assumption is later relaxed so this one may have to be taken out later)
a firms desired or planned additions to physical capital and inventories
constent, independent, income
equilibrium output is…
this can be found on a AD income graph by…
draw the graph
this model is called the…
at this point of equilibrium all ________ in the _________ are ___ _______
when planned demand (AD or desired spending) = actual output/income
(i think the terms aggregate demand, planned demand and desired spending all mean the same thing in this scenario. same with actual output and actual income)
drawing a 45 degree line from the origin until it crosses the AD line. the point of intersection is the equilibrium point.
slide 22
Keynesian cross
resources, economy, fully utilised
what are exogenous and endogenous variables?
exogenous variables are external factors on the economy
endogenous variables are variables that originate from within the model (e.g number of people is endogenous to AD model)
what is another way to find equilibrium (non AD way)
draw this graph
set planned investment = planned savings
slide 24 savings / investment on the y and output/income on the x. investment is constent horizontal linear and savings is +ve linear
what will happen if firms become pessimistic about future demand? show this on an AD income graph.
is firms are pessimistic about future demand they will invest less. as AD = C + I and I is a constent the AD line should be taken vertically downwards to show a decrease in AD with no change in the gradient.
this decrease will then change the equilibrium point between AD and income/output. the new income/output and AD value relating to the new equilibrium point is less
∴ you can say that as firms become more pessimistic about future demand, investment will decrease which will decrease output/income and AD in the economy.
see slide 26
assume AD and output are in equilibrium, derive Y = A+I/1-c
what can you use this equation for?
derive S=-A + (1-c) form Y=C+S
as a reult for of teh assumption this topic output= income
∴ Y=AD=C+I=A+cY+I=
∴Y=A+cY+I
Y-cY=A+I
Y(1-c)=A+I
Y=A+I/1-c
to find out what happens to output/income after different exogenous effects
Y=C+S
S=Y-C
S=Y-(A+cY)
S=Y-A-cY
S=-A+y(1-c)
S=-A+(1-c)Y
If either ___________ ___________ or ___________
changes, it will affect _______, which will affect ___________,
which will affect _______ _____
this is represented mathematically through the Multiplier… and the equations…
autonomis consumption(A), investment(I), output(/income(Y)), consumption(C), output(/income) again
Multiplier = 1/1-c >1
y=1/1-c * (A+I)
effects
C=A+cY
effects
Y=C+S
(and then feedback loop)
(not sure about this slide)
state the equations/identities used in this topic:
AD=
I=
Y=
C=
S=
AD=C+I
I=S
Y=C+S
C=A+cY
S=-A+(1-c)Y
A reduced desire to ____ leads to an ________ in
output, with no change in _______ ________.
save, increase, planned savings
(dont really understand this one. comes form slide 29 - need to look at that slide again) (need to look into to paradox of thrift more)
