Week 13 - Intro to Macroeconomics Flashcards
What is the difference between macroeconomics and microeconomics
Macroeconomics looks at the economy as a whole whereas microeconomics focuses in on individual units like households, businesses, and industries.
Macroeconomics studies the overall behaviour and performance of the economy.
What are the 2 branches of macroeconomics
The long run which studies the long term economic growth of an economy and what determines this increase in national income.
The short run which studies the short term fluctuations in the economy called business cycles, what causes them and what consequences they have.
What are the major macroeconomic issues
Economic growth and living standards.
Productivity.
Recessions and expansions.
Unemployment.
Inflation.
Economic interdependence among nations.
Standard of living [economic growth and living standards]
The degree to which people have access to goods and services that make their lives easier, healthier. safer and more enjoyable.
Economic growth [economic growth and living standards]
The process of steady increase in quantity and quality of goods and services the economy can produce.
It determines the long run behaviour of the economy.
Gross Domestic Product (GDP) [economic growth and living standards]
The total monetary value of all finished goods and services produced within a country’s borders n a specific time period, usually a quarter of a year.
GDP per capital is the GDP divided by population and shows the average economic output per person.
Average labour productivity [productivity]
Average labour productivity (y) = total output (Y) / number workers in the economy (N)
Average labour productivity represents how much the average working person contributes towards the economy.
Between 1950 and 2007, average labour productivity increased by around 1-2% per year in the US.
Output per person [productivity]
Output per person = total output (Y) / total population (P)
Output per person includes both working and non working people.
Expansion [recessions and expansions]
A period in which the economy is growing above normal.
Recession [recessions and expansions]
A period in which the economy is growing at a rate significantly below normal.
Classified by when real GDP falls for 2 or more consecutive quarters or when real GDP growth is well below normal or even negative.
Depression [recessions and expansions]
A particularly sever recession
Business cycles [recessions and expansions]
Short-term fluctuations in GDP and other variables
Unemployment rate [unemployment]
The percentage of the labour force who wish to be employed but cannot find work.
Importance of unemployment rate for studying economies [unemployment]
Unemployment can be a key indicator of the state of the labour market.
In recessions, unemployment increases and in expansions it falls.
How does unemployment affect economic growth [unemployment]
High unemployment leads to lower incomes and reduced economic growth.
Inflation rate [inflation]
The annual percentage change in general levels of prices.
Effects of inflation rate [inflation]
It imposes costs on people with fixed money incomes as prices increase but their incomes do not.
It can cause a loss of purchasing power and can lead to instability if uncontrolled.
Recent trends in inflation rates [inflation]
Goods inflation has been very high since 2021 due to a surge in consumer demand and a lagging supply caused by the COVID-19 pandemic and the Russo-Ukrainian War.
It has increased relative to recent years however it is still lower than the levels seen in the 1970s.
Imports and exports [economic interdependence among nations]
Imports: goods and services purchased from other countries.
Exports: goods and services sold to other countries.
Trade imbalances [economic interdependence among nations]
Trade imbalances are when there is a significant difference between the number of imports and exports.
Trade deficit and surplus [economic interdependence among nations]
Trade deficit is when a country imports much more than it exports.
Trade surplus is when a country exports much more than it imports.
Issues with trade [economic interdependence among nations]
Importing a good/service can be cheaper than creating the good/service in the country itself which decreases the national cost for this good/service.
However, by stopping producing this good/service in the country itself, people can lose jobs to international competition. It also decreases the GDP of the country.
Monetary stabilisation policies
Policies introduced by central banks or monetary policy committees that aim to stabilise the economy.
These policies control money supply, interest rates and credit availability to help manage inflation, unemployment and economic growth.
Expansionary monetary policy
A type of monetary stabilisation policy used during recessions.
Money supply is increased to boost economic growth, interest rates are lowered to encourage borrowing and investment.
It is used when unemployment is high and GDP is low however it can lead to too high levels of inflation.
Contractionary monetary policy
A type of monetary stabilisation policy used to control inflation.
Money supply is decreased to slow down overheating economy and interest rates are increased to discourage excessive borrowing.
It is used when inflation is too high and needs to be controlled however it can lead to unemployment and slower growth.
Fiscal stabilisation policies
Policies introduced by the government that aim to stabilise the economy.
These policies change government spending and tax levels to manage economic growth, inflation, and unemployment.
Expansionary fiscal policy
A type of fiscal stabilisation policy used during recessions.
It aims to boost economic activity by increasing government spending on areas like infrastructure and public services to create jobs and stimulate demand. It also cuts taxes for individuals and businesses to increase disposable income and spending.
It is used when unemployment is high and GDP is low but can lead to higher budget deficits and national debt if mismanaged.
Contractionary fiscal policy
A type of fiscal stabilisation policy used to control inflation.
It aims to slow down an overheating economy and to control inflation by reducing government spending to lower demand and slow price increases. It also increases taxes to reduce consumer and business spending.
It is used when inflation is too high and needs to be controlled however it can lead to higher unemployment and slower growth if too aggressive.
Structural policies
Structural polices are long-term government policies aimed at improving the efficiency, productivity, and competitiveness of an economy.
Structural policies focus on fundamental reforms to create sustainable growth and stability.
Structural policies aim to boost productivity and innovation, sustainably reduce unemployment and make economies more competitive and adaptable.
Positive analysis of macroeconomic policy
Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable.
Can be shown to be correct or incorrect.
Normative analysis of macroeconomic policy
Addresses whether a policy should be used. It is based on the values, opinions and ethics of the person doing the analysis.
It is neither correct or incorrect as it is based on value judgements.
Aggregation
Aggregation: The adding up of individual economic variables to obtain economy-wide totals.
It allows economists to compare broad categories of good s and services such as imports and exports however it obscures fine details of an economic situation.
