Year 1 Flashcards
Aggregate Demand
The total amount of demand on all goods and services within an economy in a period of time
Aggregate supply
How much firms in an economy would be willing to supply in the short/long run at any given price level
Consumption
Total planned household spending on consumer products
Productivity
Output of a good or service per unit of a factor of production in a given time period
Macroeconomic equilibrium
where AD equals AS
Multiplier effect
The process by which a change in one component of Aggregate Demand results in a greater final change to Aggregate Demand
Disposable income
The income households have to devote to consumption/saving taking into account taxes
Investment
Spending on capital goods by firms to increase productivity
Government spending
Money spent by the public sector on the acquisition of goods and provision of services
Net investment formula
Gross investment - depreciation
Depreciation
The monetary value of a capital good decreases in value to to wear, tear and other obsolescence
Factors causing a shift in AD
1) Disposable Income
2) Benefits/pensions
3) Interest rates
4) consumer/business confidence
5) wealth effect
6) monetary and fiscal policy
Downward multiplier
An initial increase in withdrawals results in a greater final change
Inflation
A sustained increase in the general price level
Deflation
A sustained decrease in the general price level, the inflation rate is negative
Nominal vs real income
Nominal is the amount you actually earn and real income takes into account value in terms of goods you can purchase
Demand pull inflation
An increase in AD increases the general price level causing inflation
Cost-push inflation
Increased costs decreases SRAS, increasing the general price level causing inflation
Deflationary spiral
Deflation leads to general price level decreasing. Consumers notice decrease in price and decide to save to wait till prices drop further. Decreased consumption means AD decreases further/ firms lay off workers.
Wage price spiral
High inflation rate increases prices do cost of living increases. Workers negotiate higher wages and increase firms cost which shifts SRAS inwards and so prices increase further and may cause hyperinflation
Disinflation
Price level is increasing but at a decreasing rate
Hyperinflation
Inflation rises above 50%
Index number
(Current number ➗ base number)x100
Inflation rate
(New index - old index) ➗old index ✖️100
Finding inflation (4)
1) Ons survey 7000 households
2) basket of 650 G+S and % of total spending on each of these
3) price survey of 1000s of shops to find average price of most common G+S
4) Calculate weighted average of all prices to find price level
Problems with CPI (4)
1) Unusual spending habits
2) Changes in quality
3) Time lag
4) Does not include mortgage repayments
Benefits of high inflation (3)
1) Protects from deflationary spirals
2) Reduces real value of debt
3) Decreases real wages so lowers Cost of Production
Cons of high inflation (3)
1) Wage price spiral
2) reduces real value of wages and savings
3) decreased business confidence
Macroeconomic objectives (6)
1) low/stable inflation
2) strong sustained economic growth
3) satisfactory balance of payments
4) balanced budget
5) environmental sustainability
6) increase equality
Active population (workforce)
People of working age who are able to and are actively seeking work or are actively working
Inactive population
People of working age who are unable to work or aren’t actively seeking work
Eg. Rich people/university students
Unemployment
When somebody is able to work and actively seeking work but is currently jobless
Difference between unemployment rate and employment rate
Employment rate is working age population therefore includes economically inactive people as well
Unemployment rate
unemployment level ➗Active population (x100)
Employment rate
employment level ➗working age population (x100)
Activity rate
Active population ➗ working age population (x100)
ILO measure
Labour Force Survey of 80000 households every quarter and ask if they’re unemployed with definition: looking for work in last 4 weeks and are able to start in next 2 weeks.
Limitation of ILO measure
Inaccurate as only surveying 80,000 households from 2.7 million in the UK
Claimant count limitation as a measure
People may be unemployed but not claim benefits because of a stigma or if partner is high earner
Underemployment
Workers are employed but are working fewer hours than they want to or underusing their skills and qualifications
Unemployment types (5)
Real Wage unemployment Cyclical (demand deficit) Structural Frictional Seasonal
Causes for structural unemployment (2)
Occupational and geographical immobility
Short run vs long run
A period where at least one factor of production is fixed vs a period when all factors of production are variable
Spare capacity
When the economy is operating at below its maximum potential output
Full employment
When the economy is operating at its maximum potential output
SRAS shift factors (5)
Commodity prices New resources Wages Taxes Inflation (wage price spiral)
Difference between real and nominal GDP
Real values are values that have been adjusted to remove the effects of inflation.
Nominal values are measured in money terms, they are unadjusted and current.
GNI
GDP plus net income paid into the country by other countries.
PPP
These are values that express GDP in accordance with how much the currency will buy in the local economy.
This allows for more accurate international comparisons.
Limitations of using GDP (6)
The informal economy Currency values Income distribution Consumer and capital spending - possible future growth Quality of goods and services Quality of life - e.g. pollution/stress
Everything about happiness
Happiness rises with incomes, but only up to a certain point $70000. After this, marginal gains in happiness fall.
This means that maybe economic growth isn’t the most important aim.
Happiness index by ONS takes into consideration health, finances, crime etc
Balance of payments
A record of all transactions between one country and the rest of the world
Current account deficit
More money is leaving the UK than entering it. Total inflows less than outflows.
Animal spirits
Increased business confidence. When there is a market boom entrepreneurs get too confident and take risks
Consumer credit
Borrowing by consumers to fund the purchase of goods and services
Potential growth
An increase in the productive potential of the economy
Remittances
Money transferred back home from abroad from relatives working abroad
Supply side policy
Policies that are designed to increase LRAS (productive capacity of the economy) by increasing quality or quantity of factors of production
Supply side interventionist policy (3)
Infrastructure
Education
Healthcare
Market based supply side policy (3)
Reduced corporation tax
Decrease min wage
Deregulation
Benefits of supply side policy (4)
Achieve economic growth
Decrease inflation
Improve current account (BoP)
Decrease unemployment
Components of current account (4)
Trade in goods
Trade in services
Investment abroad
Current transfers
Investment income
Any rent or profit made on an investment abroad
Exchange rate
The price of one currency in terms of another
Current account
A component of BoP, and measures trade in goods, services, investment income and current transfers
Capital and financial account
Part of the BoP and tracks investment into and out of the country
Factors affecting current account (5)
Exchange rates Inflation Costs Quality Income
Income
Measures the flow of money a person of economy receives each year
Budget balance
The difference between government spending and tax receipts
Consumption shifts to AD (4)
Disposable income
Interest rates
Consumer confidence
Wealth effect
Investment shifts to AD (3)
Interest rates
Business confidence
Benefits payment
National wellbeing
Measures how satisfied people are in their lives
