week 1 Flashcards
General information about the module + Schools of Thought + Measuring Income and Well-Being
name the 4 most popular economists we study
- hayek
- keynes
- friedman
- marx
what did hayek stand for?
free-market capitalism and opposition to central planning
- the power of free markets
- the market economy is an inevitable consequence of freedom
- prices reflect free individuals’ preferences
- any intervention is interference with individual freedom (Coercion)
what would hayek say about the market economy?
the market economy may not be perfect, but any sort of intervention to fix things would make things much worse
what is marxism?
Marxism is a heterodox school of economic thought
(Considered an unconventional or outside-the-mainstream way of looking at how economies work)
what did marx believe?
Society is dominated by class struggle & the exploitation of one class by another
how does marxism clash w/ the austrian school (hayek)?
marxism:
1. there is nothing natural, ideal or perfect about the market economy
2. it reflects existing power structures
what does marx mean when he says the free market economy reflects “existing power structures”?
workers produce things for the market, but market controls workers and make them subject to a specific group’s interests (“the capitalists”).
No different from, say, the situation under Feudalism
what does marx mean by there is nothing “ideal” about the market economy
Marx spoke much about business cycles and the market economy (“capitalism”) as fundamentally crisis-prone and imperfect
- Predicted its eventual collapse and replacement with a new power structure, namely communism
what is keynesian economics?
(different from both marxism + hayek)
The market economy is like a machine that may not work well and therefore “needs fixing” – but it remains “natural”
did keynes agree that if free markets were left to their own devices, they would ensure full employment?
no: keynes thinks unemployment over time is the result of demand deficiencies
so fiscal policy measures should be used to boost demand in a recession or reduce demand in an overheating economy
- implies intervention in the market + loss of freedom
what does keynes’ idea imply to austrians?
intervention in the market -> loss of freedom -> ultimately coercion
what would marxists say about “fixing the market mechanism”
they would say fixing the market mechanism simply sustains the existing class structure
who made monetarism?
friedman
what is monetary neutrality?
The idea that an increase in money supply doesn’t increase real variables (output, consumption + relative prices) but only increases price level over time..
what do monetarists believe about full employment?
a certain level of unemployment is “natural” so the economy will never reach full employment
would most monetarists use fiscal policy and why?
NO. most monetarists would not use fiscal policy as it is very error prone due to timing and other problems with implementation - e.g corruption
what are soft monetarists?
nonetheless somewhat supportive of active fiscal policy
what are hard monetarists?
hard monetarists believe fiscal policy does more harm than good [but monetary policy shld also follow rules or it too will do the same)
what did hayek think about monetary policy?
hayek was strongly opposed to monetary policy + to central govs controlling money through a central bank (woudl’ve liked bitcoin v much)
why is measuring economic activity important?
allows us to compare income between different countries over time
define GDP
the market value of all final goods and services produced in an economy within a given period
what does GDP exclude?
GDP excludes most items:
- produced & sold illicitly (illegal drugs)
- produced + consumed at home (garden veg)
income must equal…?
income = expenditure
; every transaction has a buyer n seller
what is market value determined by?
market prices
GDP measures the market value of all items…
produced in the economy + legally sold in markets
– this includes market value of housing services in both rental housing + owner-occupied housing
why are intermediate goods excluded in GDP?
the value of intermediate goods are alr included in the prices of final goods - so they are excluded to avoid double counting
when are intermediate goods included?
when the intermediate good is NOT sold but added to the inventory
(then counted as a final good)
what is the formula for GDP?
Y = C + I + G + NX
(income = expenditure)
how much percentage of GDP are each of the components of GDP?
consumption - 66%
investment 15%
gov spending - 20%
NX - 1 to -4%
define consumption as a component of GDP
spending by households on goods n services
but this excludes housing - as that is an investment
what is investment?
spending on capital equipment and structures
NOT buying a stock or bond
what are government purchases?
spending on goods and services by local and national governments + gross investments
NOT transfer payments (benefits) as thse DONT increase income but redistribute it
what are net exports?
Exports - Imports
what are other measures of economic activity apart from GDP?
- GNP
- NNP
what is NNP net national product?
calculation
GNP - depreciation
What is Gross National income GNP?
total income earned by UK nationals, including remittances to the UK excluding remittances sent abroad.
GDP + net factor income from abroad = GNP
what is nominal GDP?
production of g+s valued at current prices (not adjusted for inflation)
what is Real GDP
Production of G+S valued at CONSTANT prices of given base year (Adjusted for inflation)
for the base year, Nominal GDP is the same as what?
Real GDP
Nom. GDP = Real GDP
how do you calculate GDP against a base year
what is the GDP deflator?
GDP deflator measures the current level of prices relative to the level of prices in the base year
or
Ratio of nominal to real gdp
what does the GDP deflator equal for the base year in which real GDP is calcultaed w respect to?
100
what is GDP deflator used for?
taking inflation out of nominal GDp (“Deflating it”)
what is the calculation for GDP deflator?
Give me an example of GDP deflator
what is inflation?
rise in economy’s overall price level
what is the inflation rate?
% change in some measure of the price level from 1 period to the next
how to calculate inflation in year 2?
does real GDP grow over time historically?
yes
what was the avg GDP growth per year from 1965-2008
3%
why is GDP growth not steady?
steady GDP growth is interrupted by business cycles
how to calculate real GDP/person
REAL GDP / Population size
what’s wrong with using GDP per capita?
- it measures only the AVERAGE economic well being in population
- misses value of almost all activity taking place outside markets
- no info about the distribution of income as it only takes into account the average
- quality of the environment lower
The current account is the ____?
The sum of NX, net factor income (dividends, interest) and net transfer payments (foreign aid)
