Y1 Macroeconomics Flashcards
Name Four main Economic Objectives
Low and stable inflation
Real Economic Growth
Low Unemployment
Balance of payments
Name three secondary objectives
Income distribution (equality) Environmental externalities Balancing budget
Measures for Unemployment (2)
Claimant Count
Labour Force Survey
Why is the LFS usually higher than the Claimant Count?
Not all members of a household will claim benefits, while some will still unemployed
- People may be unemployed but not eligible for benefits
What are the criteria for the LFS?
Monthly survey
60,000 households
Uses International Labour Organisation definition of u/e
- looked for work past 4 weeks, ready to start in 2 weeks
What is GVA
Gross value added (value of resources used to produce goods and services)
How is GDP calculated
GVA + taxes - subsidies
How do you calculate Real values with indices
= nominal * base year/current year
National Output is theoretically the same as…
National income and national expenditure
What is capital depreciation
loss in value of capital due to capital consumption and depreciation
GDP + NPIA = ?
GNI
What is NPIA
Net property income from abroad (international earnings)
Why is GNP a better measure than GDP?
It includes overseas and domestic earnings
NNI =
GNI - depreciation
What is the best estimate for a country’s national income
Net National Income (NNI) = GVA + taxes - subsidies + NPIA - capital depreciation
What type is excluded from National Income calculations?
Transfer payments as they have no corresponding outputs
Name a transfer payment
2nd hand trade
Government benefits
Pocket Money
What is the most common value used for comparing country’s national income?
GDP pc - accounts for population size and is readily available data
Name 5 weaknesses with GDP pc when comparing countries
Purchasing power Quality of G+S may differ Income distribution is ignored Externalities ignored Unrecorded Economy may differ in size
What is GNP
Value of G+S produced domestically and internationally by residents
What is the accelerator equation?
Investment = a (change in income)
a is the capital-output ratio (ratio of capital needed to goods produced)
Name 3 positives of investment
Uses profits Improves effeciency Raises capicity Capital can substitute labour (cheaper) Exploit economies of scale Provides barrier to entry so start ups can't compete
Net investment =
Gross investment - capital depreciation/consumption
What is investment in economics?
Adding of CAPITAL stock to the economy
What is the balance of payments?
Record of all financial dealings between two countries
What is the balance of payments split into (and which bit is more important for year 1 macro)
Current Account (Important), capital and financial accounts
What is the current balance
Net trade (difference between exports and imports)
Current account surplus =
Exports>Imports
Current account deficit =
Imports>exports
Why are current account deficits problems in the long run?
means a country is living beyond its means -leads to debt
What is the current account split into?
Visibles (goods) and Invisibles (services)
What is Hot Money?
IR proportional to ER
Higher interest rates increase saving which increases speculative money flows into the UK, appreciating the pound
What are Primary and Secondary incomes in the current account?
Primary is investment income
Secondary is transfers between organisations or governments
What goes from households to firms in the circular flow model?
Factors of Production, Expenditure
What goes from firms to households in the circular flow?
Wages etc, G+S
What are the injections?
Investment, Exports, Government spending
What are the withdrawals?
Saving, imports, taxes
How is inflation measured?
Typical basket of goods (600 items)
Consumer Price Index and Retail Price index
What is disinflation?
A decreasing rate of inflation
What is Stagflation?
High inflation during a recession
What is the opposite of inflation?
Deflation
What is Money Illusion?
Wage increase may not equate to a real change in income, yet people feel richer
3 Costs of high inflation
Economic disruption as planning is difficult
Less international competitiveness
Redistribution costs (disrupt fixed incomes/taxes)
Shoe-leather costs - money lost as decisions put off
Menu costs - shops have to change prices
Wage Price Spiral - higher wages mean higher prices which mean higher wages etc
Types of inflation (2)
Demand pull
Cost push
6 causes of unemployment
Frictional Seasonal Structural Cyclical/demand deficient Real Wage - minimum wage Benefits trap
3 Costs of unemployment
Loss of household income - less spending Emotional difficulties for unemployed Reduces available capital workers Employers don’t want the long term unemployed Can lead to increases crime and violence Costs the government's large amounts in welfare Loss of economic output Demand is less
Equations for the multiplier
1/(1-MPC) =
1/(MPW) =
1/(MPT + MPM + MPS)
2 examples of supply-side shocks
Commodity price rise
Trade Union wage rise
2 Demand-side shocks
Stock Market Crash
IR rise
Sharp pound appreciation
World economic recession
What is hysteresis?
When a variable does not return to the same trend when dramatically changed
What are the factors of production?
Land, labour, capital, enterprise
Name three transfer payments?
Pocket money
2nd hand trade
Government benefits
Why is real GDP pc better than just GDP
Real adjust for inflation
pc adjust for population time
formula for real
nominal x base year/current year
Why is unemployment bad?
Wastes scarce resources and means the economy is underperforming
What is inflation
increase in average prices
Why is high inflation bad
unstable prices and therefore consumers misinterpret and therefore there is misallocation of resources
When is there a current account surplus?
Exports>imports
When is there a current account deficit
Imports>exports
How is the current account deficit financed?
borrowing and selling assets of the general population
Equation is Ad
AD = C + I + G +X-M
What is the interest effect?
Reason for AD sloping down
- If PL increases people have to borrow more to finance it, this increases demand for loans increasing the cost of money (interest rates), this reduces Consumption and investment therefore AD decreases
What is the wealth affect (in terms of AD)?
Reason for AD sloping down
As PL increases, consumer purchasing power decreases reducing RO
What is the international effect?
Reason for sloping AD
As PL increase then international competitive decreases and therefore exports decrease reducing AD
What are durable and non-durable goods?
Durable - proivdese.g. car
Non-durable - used up or perishes soon after purchase e.g. food
What is MPC?
Marginal propensity to consume =
change in consumption/change in income
= dC/dY
What is APC
Average propensity to consumer =
C/Y
What is the wealth effect?
Large change in asset prices change consumer confidence as they feel wealthier or poorer
What is APS
Average propensity to save
= S/Y
What is MPS
marginal propensity to save
dS/dY
What is the UK APC approx
~90% - high and suggests under investment
What is investment?
spending on capital stock
What are the positives of investment? (3)
Uses profits Raises capacity Capital can substitute labour Improves efficiency Exploit economies of scale Creates barrier to entry
Variables that affect investment (5)?
Costs Interest rates The rate of economic growth Business expectations/confidence World economy Retained profit access to credit government regulations
D exogenous
non-economic variables have influence
What does “ring-fenced” mean?
When areas of G spending are unlikely to change bc they are too supported
(i.e. a government would struggle to cut education spending)
G and T in a deficit/
G>T
How is a government deficit financed?
Government borrowing
What factors affect net trade? (3)
Price (labour/production costs) Real income - incomes up raise imports Exchange rate - SPICED World economy Protectionism (FREE TRADE) quality
What happens in teh short run
at least one factor of production is fixed
Why is the SRAS upward sloping
As price levels increase, business can make more profit so their output increases
Why is the SRAS shallow?
As businesses can repsond quickly in the short run to a small increase in price (overtime working for e.g.)
What affects SRAS?
Supply side shocks
Name some supply side shocks
Wage rates Raw material prices taxes exchange rates productivity
What curve works in a similar way to the LRAS
PPF
What cause shifts in the LRAS (5)
Technological advancements Productivity increase Education/skills Regulation Size of workforce COmpetition policy New enterprise Mobility of FoP Economic incentives (e.g tax breaks) Institutional structure (politics)
What is the issue with classical LRAS
Doesn’t account for long times of mass unemployment
What are the types of LRAS?
Classical Keynesian
Why is the keynesians model more realistic
Modern economies have minimum wages therefore stopping wages falling very low when labour is in excess supply
Events in the economic cycle
Peak/boom
Downturn/contraction
Regression/depression/slump
Recovery/expansion
Circular flow equation
O=E=Y
Name the injections
Investment
Government spending
Exports
Name the withdrawals
saving
taxing
imports
What goes from firms to households in the circular flow diagram
Goods and services
Wages/rents/interest/profit
What goes from households to firms in circular flow
Expenditure (on G+S)
Land, labour, capital
When is an economy in equilibrium
injections=withdrawals
what is not necessarily independant in macro?
AD and AS
Which side of LRAS is negative output gap
left
What is the name for the output gap on the right side of the LRAS
positive
Where does an economy always end up long run in classical economics
On the LRAS as LR there is full employment
3 equations for the multiplier
1/(1-mpc)
1/mpw
1/(mps+mpt+mpm)
Principle of the multiplier
as money flows around an economy it causex a domino effect by boosting NI more than the initial investment
What is the negative multiplier effect
What is resultant after a large withdrawal (knock on effects)
What are the difficulties with the multiplier (3)
Hard to measure
based on the circular flow model
Not instantaneous
Difference between real and nominal
Real = adjusted for inflation Nominal = unadjsuted prices
What is a transfer payment
movement of money without a corresponding output
Difficulties with measuring economic growth? (4)
Statistical innaccuracies
Hidden economy (black market)
Home produced services
Public sector (non marketed goods can be difficult to value)
Flaws with comparing NI over time (3)
Population changes quality may chnage defence costs are not invested measures are innacurate C is SR growth but I is LR growth income inequality
What is a Purchasing power parity
comparison between GDP taking into account cost of living
Why is a PPP better than an exchange rate
weaker economies are often undervalued even though their population has a high purchasing power
What is wealth?
a stock of assets that produce a flow of income over time
What is the easterlin paradox?
Happiness and income only correlate at low incomes
- only relative income matters once necessities are covered
Name indicators of happiness? (5)
Economy personal finace location type of work health relationships well being government trust education/skills
What is stagflation
rising inflation and unemployment
definition of a recession
tow sucessive quarters of negative growth
Name some demand side shocks (3)
housing bubble burst stock market crash sharp IR rise Sharp tax raise World economic recession sharp appreciation in the pound
What does actual GDP above the trend line represent?
Output gap positive
- overworked, unsustainable
Why is a positive output gap unsustainable in the long run?
Economy is overworked
In the LR workers may demand higher wages for extra hours
What is hysterisis?
Variable does not return to its former trend
- e.g. shock creates new trend level
Why does economic hysterisis occur?
A shock can cause long term struxtural unemployment
What are the factors on the function of output?
Land, labour, capital, technical progress, effeciency
How can AD affect long term growth?
An increase in demand by cause the need for business investment
How long does it take for a government to double at a growth at
i) 3%
ii) 5%
iii) 10%
i) 25
ii) 14
iii) 7
What is sustainable growth?
Must increase productive potential as well as AD
shift AD and LRAS
What occurs in unsutainable growth?
Scarce resources and used up and increase in price reducing consumption
suppliers try and find alternatives
consumers switch products
impact on consumers and producers of economic growth
Consumer incomes rise over time, may become unequal
Producers - sales increase, but some markets may disappear
impact of economic growth on government?
rising tax revenue
rising demand for public goods
Impact on environment of economic growth
usually negative but depends on regulation
What is reflation
recovering growth after a recession (QE for e.g.)
What two measures are used to measure inflation
CPI - consumer price index
RPI - retail price index
Is the CPI or RPI usually higher
RPI
How is inflation calculated?
using a typical basket of goods (650 items) and their average change in price
items are weighted and then added proportionately
2 main causes of inflation?
demand pull
cost push
What influences demand pull inflation
increases in C I G or X
decreases in M
What causes cost push inflation
increases in costs for firms
increase in regulations
wage changes
Costs of high inflation (5)
growth and unemployment (planning difficult)
decreases competitiveness world trade
redistributional costs - real values change dramatically
Price increases are unpopular
Shoe-leather costs - money lost as decisions put off
Menu costs - changing prices
Inflationary noise - ineffecient allocation
Wage price spiral - workers want higher wages which pushes up costs, which means workers need more money etc
Problems of deflation (3)
depressed demand
lowers confidence
encourages saving
Benefits of low inflation
money illusion
AD is steady
doesn’t affect saving
investment can repay long term borrowing
What is the money illusion
low inflation causes people to believe that their wages are increasing when they aren’t in real terms
Causes of unemployment (6)
Frictional Seasonal structural Demand-deficient/cyclical Real wage benefits trap
What is the benfits trap
people would rather claim benefits then work
What is the real wage cause of unemployment
a minimum wage stops firms being able to employ as many people as they want
What are three target areas for governments looking to increase employment
women
older workers
Disabled workers
Pros of migration
Fills skills gap
circular flow of income creates jobs
Negatives of migrations
decreases wage rates
put jobs owned by UK citizens under pressure
Costs of unemployment (5)
emotional loss of human capital loss of income and tax revenue can lead to crime large costs to government in welfare reduced AD and output
Benefits of small amounts of employment?
flexible workforce
career changes can boost productivity
deflationary
defers strikes
Name top five global trading nations
usa china japan germany uk
What is the balance of payments?
A record of all financial transactions between two countries over a period of time
What is the balance of payments spilt up into
curent account
capital and financial account
What is the current account?
Payment for the purchases and sale of goods and services
What are invisibles
intangible services
Example of invisible credit export
foreigner staying in UK hotel
Example of invisible debit import?
foreign holiday
what are goods traded
visibles
Money move in an export?
into the UK
Name for net money flowing into the UK
Current account surplus
What type of current account does the uk have
deficit
What is the current account made of
millions of private and public transactions
issue of a long term deficit on the current account
lead to increasing private debts
Point of Hot money
IR proportional to ER
Two parts of demand side policies
Fiscal
Monetary
Who desides monetary policy
Monetary policy commitee (9 people chaired by Mark Carney)
Part of Bank of England
Independant from government
What are the main types of monetary policy
IR - conventional
QE - unconventional
Is a rise interest rates generally regressive or progressive
regressive as the wealthy have larger savings and the poor borrow more
What is quantitative easing
Government buys financial assets (usually bonds) with newly printed money to increase borrowing and lending
IR target
2% +- 1%
What is key to the analysis marks
the transmission mechanism
What is government expenditure split into?
Capital
Current
How is government expenditure financed?
Taxing and borrowing
What is PSNB
Public Sector Net borrowing - government borrowing
What is accumulated when PNSB>tax revenue
Public sector net debt (PSNB)
What is the PSNCR
Public sector net cash requirement
q.175 what is the current (nov 2017) debt as a percentage of GDP
87.2%
What are automatic stabilisers?
Smooth the business cycle with progressive taxes and benefits systems
What are the arguments for running a budget deficit
More G and multiplier
Low IR borrow now instead of later
growing economy will be able to cope with future debts
Types of fiscal
loosening, tightening
What does expansionary fiscal policy do
shift AD out
What type of policy can shift AD in
Contractionary demand side poicies
Weaknesses of demand-side policies (5)
time lag 1-2 years
Can increase debts
Multiplier has little effects in the short run
Difficult to quantise output gap or multiplier
Very easy to overstimulate economy
What would a keynesian economist say about demand side policy
only way out of a recession (diagram)
Name some supply side policy (5)
incentives promoting competition reforming the labour market improving labour quality improving infrastructure removing red tape
Why is supply-side sometimes more advantageous than demand side
long term and deflationary
Problems with supply side
can cause output gap
can increase income inequality (cutting min wage)
what happens when AD is raised
Increase Real output
Lower unemployment
Inflationary pressure (especially if small output gap)
Reduced international competitiveness → balance of payments deterioration
AS shift what happens?
Improve or worsen all 4 main macroeconomic objectives (growth, inflation, employment, balance of payments)
Can have knock on effects on wages and the labour force
What are on the axis of the short run Philips Curve
unemployment
Rate of change of moeny wage (inflation)
What is key to the trade off?
Where the current equilibrium is on the LRAS (keynesian)
What is the accelerator equation
It = a (Yt - Yt-1)
How do you calculate the accelerator coefficient
ratio of capital to goods
What does the CPI exclude
mortage payments
council tax
tv licences
Name of the survey used for inflation calculation
Living costs and food survey (LCF)
D productivity
output per unit of input
