Week 4: FOPs, GDP and Keynesian model Flashcards
Marginal Product
dTP/dL
Backward-bending supply curve
Substitution effect: with higher wages, the price of leisure increases compared to working, thus one works more
Income effect: higher wages result in a higher demand for goods including leisure. More leisure means work less
Skill premium
wage difference between high-skilled and low-skilled labour
Difference low-skilled and high-skilled labour in economic terms
VMP is higher for high-skilled labour (demand is higher)
High skilled labour has higher opportunity costs (supply is lower)
Four consequences of minimum wage
- amount of people working falls
- important for low-skilled labour
- result in less demand and more supply
- welfare loss (like price floors)
Contrasting arguments to idea that governments strive towards maximisation of welfare
- Corruption
- Budget maximisation of civil servants
- Pressure groups have more influence than large majority
- no world government, competition between states
Gross domestic product definition
market value of all final goods and services produced within a country in a given time period, usually a year
Two approaches to measure GDP
Aggregate income and aggregate expenditure
GDP= AE=AI
GDP ‘s four parts
- market value
- final goods and services
- produced within a country
- in a given time period
Income approach
to calculate GDP W+P+M+(taxes-subsidies) W= employee compensation P= profit M= mixed income
National income accounting identity
C+G+I+X-M
Circular flow of expenditure and income formula
(S-I)+(T-G)= (X-M)
Real GDP
Value of final goods and services produced in a given year when valued at the prices of a base year
Nominal GDP
value of final goods and services produced in a given year when valued at the prices of that year
Two main purposes of use of real GDP
- compare standard of living over time
- compare standard of living across countries
Four limitations of real GDP
- household production
- underground economic activity
- leisure time
- environmental quality
Two problems of unemployment
- lost incomes and production
- lost human capital
Natural employment, its definition and the subcategories
unemployment that arises from frictions and structural change when there is no cyclical unemployment
structural + frictional unemployment
Frictional unemployment
unemployment arising from people entering and leaving workforce and from ongoing process of job creation and destruction.
structural unemployment
unemployment arising from technology or international competition changethe skills needed to perform jobs or change the location of jobs
cyclical unemployment
higher than normal unemployment at a business cycle through and the lower than normal unemployment at a business cycle peak
Formula multiplier
change in equilibrium expenditure/ change in autonomous expenditure
Formula Marginal propensity to consume
dC/dYD
Formula Marginal propensity to Save
MPS= dS/dYD
Growth rate formula for real GDP
(GDP (t+1)-GDP(t))/ GDP(t)
Four factors of production
- labour
- capital
- land
- entrepreneurship
labour service
physical + mental work effort that people supply to produce goods and services
casual labour
labour services traded on day-by-day basis
rental rate
price in capital services market
capital
tools, instruments, machines, buildings and other things used to produce goods and services
Derived demand
demand for a FOP. The quantity demanded for FOP depends on a firm’s output decision
Value of Marginal Product
MP/P
tells what an additional worker costs a firm
Value of Marginal Product and wage rate
VMP= wage rate : maximum profit
VMP> wage rate : additional worker will increase profit
VMP< wage rate : firing one employee would give more profit
Three factors for change in demand for labour
- Price of a firm’s output as it influences VMP > shift D for L curve
- Other FOP prices > shift along D for L curve
- Technology: decreases d for some types of labour, increases for otehrs
Reservation wage
lowest wage rate at which a worker would be willing to accept a particular type of job
Effects labour market with minimum wage
creates unemployment as it creates a surplus of labour
unfairness as it blocks voluntary change
minimum wage is inefficient
Explanation of inequality by human capital differences
High income households tend to be better educated, middle-aged
education correlates directly with human capital
age correlates indirectly with human capital due to more experience
effect of technological change in inequality
trend
Globalisation: definition and consequences
entry of developing countries > lower price of manufactured goods
> lower prices for firms’ output > decrease in VMP> decrease D for their labour > wage rate falls, employment shrinks
> increase demand for high-skilled labour, VMP increase, wage rate rises, employment opportunities for high-skilled workers expand
Three types of income taxes
progressive income tax: taxing income at an average rate increasing as income increases
regressive income tax: taxing income at an average rate decreasing as income increases
proportional income tax: taxing income at a constant average rate regardless of the level of income
benefit payment, definition and three types
redistribute income by making direct payments to those with low incomes
Income support payments: wide range of payments to raise household incomes and reduce poverty
tax credit: method of helping low-income employed households
State pension: widely used in EU- pension payed out of current taxes
Subsidised welfare services
goods and services provided by government at prices below MC
improves access to good-quality healthcare and education + reduces inequality in health status and basic human capital
Three income redistribution types
- income taxes
- subsidised welfare services
- benefit payment
Two key influences on demand for non-renewable resources
- VMP, the greater the quantity of resource used, the smaller is VMP of the resource
- expected future price of resource: speculative influence
resource used as example: oil
Three key influences on supply of non-renewable natural resource
- known reserves of resource
- scale of current production facilities
- expected future price of resource: the higher the expected price, the lower the current supply
hotelling principle
traders expect price of a non-renewable natural resource to rise at rate equal to interest rate
Definition and formula unemployment rate
percentage of economically active people who’re unemployed
number of people unemployed/workforce*100
Workforce
number of employed and unemployed people
Employment rate
percentage of people of working age who have jobs
number of people employed/ working-age population * 100
Full employment
Situation where unemployment rate equals natural employment rate
Four factors influencing natural employment rate
- age distribution of the population
young population: high level of frictional unemployment - Scale of structural change
- Real wage rate: natural unemployment affected, minimum wage and efficiency wage bring unemployment
- unemployment benefits increase natural unemployment rate by lowering opportunity cost of job search
Factors influencing consumption expenditure
- disposable income
- wealth
- real interest rate
- expected future income
