Week 7 Flashcards
What is Macroeconomics?
Macroeconomics is the study of the economy as a whole
What is the ‘Levels of Well-being’
Levels of Well-being measures the quality of life and uses indicators such as educational attainment, measures of the standard of living, life expectancy
What is important for the relationship between income and expenditure?
Total income must equal expenditure because:
- Every transaction has a buyer and a seller
- Every euro of spending by some buyer is a euro of income for some seller
- The equality of income and expenditure can be illustrated with the circular-flow diagram
Expenditure meaning
Expenditure is the act or process of spending money, time, or energy on something
What is the circular flow of income
Households buy goods and services from firms; firms use this money to pay for resources purchased from households.
When households receive income, some of the income is saved (S) providing funds for financial institutions. Some is taxed (T). The taxes can be used by the government in making purchases (G) such as education, health and infrastructure.
Some products and services may be purchased from other countries as imports (M) and some services and products maybe sold abroad as exports (X).
Some businesses will invest (I) in new capital.
Leakages (Withdraws) are T + S + M
Injections into the economy come from G, X and I
Gross Domestic Product Meaning
Gross domestic product is a measure of the income and expenditures of an economy
Net National Product (NNP) meaning
Net National Product is the total income of a nation’s residents (GNP) minus losses from depreciation
Why total spending can rise from year to year
1) The economy may be producing a larger output of goods and services
2) Goods and services could be selling at higher prices
The GDP (Gross Domestic Product) Deflator meaning
The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
GDP deflator equation
GDP deflator = (Nominal GDP/Real GDP) x 100
What is Chain Linking
Chain linking means that they update tax reports every year by calculating the prices in previous years prices
Productivity definition
Productivity refers to the amount of goods and services produced for each hour of a worker’s time
GDP per capita meaning
GDP per capita takes the level of real GDP at a point in time and divides it by the population to get a measure of income per head
GDP per worker meaning
GDP per worker is a measure of the income per head of the working population
The Trend Rate of Growth explained
The trend rate of growth is the average sustainable rate of economic growth over a period of time.
Found by taking GDP in some time period, subtracting GDP from an earlier time period, dividing the result by the initial time period and expressing the figure as a percentage
The Solow Theory explained
The Solow theory has been used to explain economic growth. It identifies the rate of human and physical capital and population growth as being key determinants of economic growth.
How is Productivity Determined?
1) Physical capital (makes workers more productive)
2) Human capital
3) National resources
4) Technological knowledge
The Aggregate Production Function and Investment explained
Assuming technology is given (A), an increasing physical capital stock (K) is associated with a rising GDP, relatively quickly at first but then slows due to the law of diminishing marginal product.
The level of investment in capital stock is shown by the line I.
The savings rate determines the level of investment.
Levels of physical capital stock are associated with levels of GDP.
If the capital stock is K1, for example, GDP will be Y1.
The distance between the level of GDP at K1 and the investment level is consumption, and the remainder is investment
Steady-state Equilibrium definition
Steady-state equilibrium is the point in a growing economy where investment spending is the same as spending on depreciation and the capital-output ratio remains constant
Causes of Growth
1) Changes in savings rates
2) Increase in population
3) Dilution of capital stock
4) Promoting technical progress
5) An increase in technology
What is the Endogenous Growth Theory?
The Endogenous growth theory is a theory of long-run economic growth which results from the creation of new knowledge and technology which impacts on everyone and makes them more productive as a result
What is the catch-up effect?
The catch-up effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. (This helps explain why China had a higher growth rate than Japan, even though both countries devoted a similar share of GDP to investment).
Foreign Portfolio Investment Definition
Foreign Portfolio Investment is when Investments are financed with foreign money but are operated by domestic residents
Is education important for economic growth?
Yes, for a country’s long-run growth, education is at least as important as investment in physical capital.
Property Rights definition
Property rights refer to the ability of people to exercise authority over the resources they own
