Year 1 Macro Flashcards
What is macroeconomics about?
Studying the performance of an economy, how well is the economy doing?
Macroeconomic indicators
- Growth: strong (high), sustained (continuous over time) and sustainable (the way in which we’re growing today can continue over time, growth without excessive inflationary pressures or environmental damage). An indicator of incomes and living standards in an economy
- Unemployment: low unemployment(high employment), full employment. Tells us about those in the economy who don’t have jobs
- Inflation: low and stable, 2% (+- 1%): the rate of growth of prices in an economy (high inflation/hyperinflation can ruin an economy but also deflation)
- Trade: balanced: the value of imports of goods and services compared to the value of exports of goods and services (trade deficits and surpluses bad).
- Distribution of income: “fair”: not just incomes rising, but how those rising incomes are distributed (no economy has a precise figure, it’s normative).
MEMORY DEVICE: TIGERS:
Trade
Inflation
Growth
Employment
The redistribution of income
Stability
What is macroeconomic stability?
The objectives relating to growth, unemployment, inflation and trade are all achieved
Non-core objectives of economies
- Sound government finances: economy can pay it way
- Environmental sustainability
- Productivity growth
In the circular flow of income diagram, who are the two economic agents?
Households and firms/businesses
What is households role in the circular flow of income
- Provide their 4 factors of production
- In return for this households receive factor incomes from firms
- Spend these factor incomes on the goods and services produced by firms
What are the factors of production
MEMORY DEVICE: CELL Capital Enterprise Land Labour
Firms role in the circular flow?
- Use FOP to make goods and services
What are the reward for FOP?
Capital: interest
Enterprise: profit
Land: rent
Labour: wages/salaries
From the basic circular flow model, what sectors are ignored?
- Government
2. The international sector
Leakages from circular flow (withdrawals)
- Savings (S)
- Taxation (T)
- Imports (M)
Injections into the circular flow
Investment (I)
Government spending (G)
Exports (X)
Investment
When firms spend on capital goods
Economic growth conditions
Rising if I + G + X > S + T + M
Falling if I + G + X < S + T + M
Macroeconomic equilibrium if I + G + X = S + T + M
GDP Methods
- Output method: the final value of all goods and services produced in an economy in a year
- Income method: all factor incomes earned in an economy in a year
- Expenditure method: total expenditure on a country’s good and services in a year ( C + I + G + (X - M))
CRUCIALLY
Output = income = expenditure
Measurement of Economic Growth: 1:
GDP or Real GDP (adjusted for inflation) Used the most Income = output = expenditure Gives us a measure of growth Gives us a measure of living standards (as it measures income, if GDP rises income rises)
GDP definition
The value of all final goods and services produced in an economy in a year
Measurement of economic growth 1 cons;
Using GDP as a measure of growth:
1. Risk of double counting: especially if output measure is used. But measuring “the final value of all goods and services being produced.” So can overcome this issue. Double counting is when we include the value of output in the primary sector and we include it again when that primary commodity is manufactured into something in the secondary sector. By including it twice, by looking at the value of the output produced in the secondary sector we may be double counting that output. Can inflate the final GDP figure.
2. Informal activity: e.g illegal activity like businesses that are operating but not registered. DIY work, gardening. All activity and has market value but not included in GDP as not registered. GDP lower than what it should be
3. Errors give vast data collection: need a lot of info to get value correct. Can come from a lot of sources and needs to be collected quickly so chance of error large. Which is why we see a lot of revisions to GDP quarterly figures
As a measure of living standards:
1. Negative externality: quality of output ignored. Negative externalities not included e.g cost of air pollution. If were living standards lower
2. Income inequality: nothing mentioned about distribution of income
3. The kind of output produced: if lots of output produced is capital, won’t benefit consumers. Benefits firms. Takes time to be converted into consumer goods and make consumer products
4. Other quality of life aspects: that’ll increase living standards that GDP doesn’t take into account. Like healthcare, freedom, gender equality, democracy & education level. So HDI often used
5. GDP doesn’t tell us about individual incomes!! If GDP rising but population is rising by more then individually worse off
Measurement of economic growth 2:
Real GDP per capita
GDP divided by population
Gives average incomes
Measurement of economic growth 2: cons
- Same issues as GDP
- Factor income abroad & significance of remittances: remittances are domestic workers leave the country and work abroad, income sent back to home country. GDP per capita doesn’t take this into account, even though living standards rise
- Influence of FDI & repatriation of profit: FDI can distort the figure. FDI is when foreign firms operate a business in your home country. Counts towards GDP but income generated sent back to their own country and won’t stay in the domestic economy, rise in GDP but won’t make people richer.
Measurement of economic growth: 3:
GNI (per capita)
GNI = GDP + net factor income
Income earned by domestic workers/firms - income earned by foreign workers/firms at home
Remittances taken into account given us a better representation of living standards, especially in development countries where they’re large. GNI not influenced by FDI. Any profits made by foreign firms not included. GNI better measure of living standards where they play a big role
Measurement of economic growth 4:
Green GDP
(Accounts for the environmental costs of production)
Green GDP = GDP - environmental costs e.g costs of air pollution
Measurement of economic growth 4: cons
- Monetary value on environmental costs difficult: quite normative
- GDP could fall dramatically: politically sensitive thing to do. China tried it a while ago to overcome huge environmental cost criticism, but GDP figures massively fell. So lower living standards then just Real GDP. Politics overrides.
GNI
The total income generated by a country’s FOP regardless of where those FOP are located
Measurement of economic growth 3 cons
A lot of issues still remain
A lot of issues have fundamental flaw of environmental COP not included and they can be used to measure living standards
Causes of economic growth 1:
Short term: actual growth
Rate of growth the economy’s actually experiencing
Measured by level of AD. So any increase in AD equation.
Movement from inside curve to closer to/on curve.
Output increases and DP inflation
Causes of economic growth 1: actual causes:
Reduced interest rates: borrowing rises. Consumption falls
I increase
G increase/Reduction in tax
Rise in net exports due to fall in exchange rate: exports cheaper imports expensive
Causes of economic growth 2:
Increase in potential growth (long-term)
Increase in quantity and/or quality of FOP
Shift outwards of PPF or AD/AS: increases in LRAS (productive capacity of the economy).
Causes of economic growth: 2: actual causes:
- Increase in productivity: improves quality of labour
- Advancement in technology: increases quantity and quality of capital
- Increase in investment: quality and quantity of capital rises
- Improvement in infrastructure (G): COP fall as transport costs fall. Increases efficiency of economy
- Increase in net immigration: quantity of labour rises
