Y1 Macroeconomics Flashcards
Output Method (of Calculating GDP)
The summation of the final value of all goods and services produced within an economy in a given year.
Income Method (of Calculating GDP)
The summation of all factor incomes earned within an economy in a given year.
The four components of factor incomes are wages/salaries, profit, interest, and rent.
Components of Factor Incomes
1) Wages/Salaries
2) Profits
3) Interest
4) Rent
Expenditure Method (of Calculating GDP)
The summation of the total expenditure on all goods and services produced within an economy in a given year.
Total expenditure is the sum of consumer spending, investment, government spending, and net exports.
Total Expenditure Formula of GDP
Y = C + I + G + NX
- C = Consumption (Consumer Spending)
- I = Investment
- G = Government Spending
- NX = Net Exports (Imports – Exports)
Aggregate Demand Formula
AD = C + I + G + NX
The formula for aggregate demand is identical to that of real GDP (expenditure method). So, aggregate demand is equal to real GDP (AD = Y)
Index Value of the Base Year
100
Index Number Formula
IN = [ (Year X Value) / (Base Year Value) ] x 100
Real GDP
The value of GDP after adjusting for inflation.
GDP (Gross Domestic Product)
The total value of all goods and services produced within a country in a given year.
Shortcomings of GDP Calculations
- Does not measure the value of illegal activity and informal activity.
- Does not take into account the value of negative externalities.
- Does not consider the level of economic inequality in a society.
- Does not track the value of foreign-earned income.
- Does not consider the value of foreign direct investment.
GDP per Capita
The average level of income for individuals in an economy.
GDP per Capita = (GDP) / (Population)
GNI (Gross National Income)
The total income generated by a country’s factors of production in a given year, regardless of where the factors of production are located.
GNI Formula
GNI = GDP + Net Factor Income
Net Factor Income = (Income Earned by Workers/Firms from Home Country) – (Income Earned by Foreign Workers/Firms in Home Country)
Advantages of GNI (GNI vs. GDP)
- GNI accounts for the income earned by domestic workers/firms in foreign countries.
- GNI excludes the income earned by foreign workers/firms in the home country.
Economic Growth
An increase in real GDP within an economy in a year caused by an increase in aggregate demand or an increase in long-run aggregate supply.
Short-Run Growth
An increase in aggregate demand
Causes of Short-Run Growth
- Lower Interest Rates
- Lower Income/Corporate Tax
- Higher Consumer/Business Confidence
- Higher Government Spending
- Weaker Exchange Rate
Each of these changes will increase aggregate demand.
Effects of Lower Interest Rates
- Increase in Consumption ( C↑)
- Increase in Investment ( I↑)
- Increase in Net Exports ( NX↑)
Effects of Lower Income/Corporate Tax
- Increase in Consumption ( C↑)
- Increase in Investment ( I↑)
Effect of Higher Consumer/Business Confidence
- Increase in Consumption ( C↑)
- Increase in Investment ( I↑)
Effect of Higher Government Spending
- Increase in Government Expenditure ( G↑)
Effect of Weaker Exchange Rate
- Increase in Net Exports ( NX↑)
Long-Run Growth
An increase in long-run aggregate supply
Causes of Long-Run Growth
- Higher Labor Productivity
- Higher Investment
- Larger Size of Workforce
- Greater Competition
- Improvements in Infrastructure
- New Resource Discoveries
Each of these changes will increase long-run aggregate supply.
Exchange Rate
The difference between a country’s exports and imports.
- A high quantity of exports relative to imports indicates a weak exchange rate.
- A low quantity of exports relative to imports indicates a strong exchange rate.
Benefits of Economic Growth
- Higher Disposable Incomes
- Higher Employment Rates
- Higher Corporate/Firm Profits
- Higher Government/Tax Revenue
Drawbacks of Economic Growth
- Higher Inflation (Lower Purchasing Power)
- Higher Income Inequality
- Greater Environmental Costs
- Current Account Deficit (Negative Net Exports)
Unemployed Individual
Any individual of working age who is willing and able to work and actively seeking work, yet is not employed.
Unemployment Criteria
- Working-Age Individual
- Willing and Able to Work
- Actively Seeking Work
- Currently Not Employed
