Year 1 MacroEconomics C1 - 10 Flashcards
Define Macroeconomics?
The aggregated analysis of many markets brought together into one economy.
What are the indicators of economic performance? (TIGER)
Economic Growth
Unemployment
Inflation
Trade / Balance of Payments
Distribution of Income
What are the objectives of economic growth?
To keep growth strong and sustainable
What are the objectives of unemployment?
Low unemployment
Full Employment
What are the objectives of Trade?
To keep balance between exports and imports
What are the objectives of Distribution of Income?
To keep it fair
What are the non-core macro objectives?
Sound Government Finances
Environmental sustainability
Productivity Growth
Define Balance of payments
A record of all financial transactions made between the consumers, businesses and government in one country with others
(The value of imports vs exports)
What are the key benefits of economic growth?
Job creation
Rising income
Improved standards of living
Improved confidence of: consumers to spend and businesses to invest
What are the key benefits of low unemployment?
Higher consumption and aggregate demand
Higher incomes and tax revenue
Improved standards of living
What are the 3 types of inflation?
Inflation
Deflation
Disinflation
Define disinflation
Where prices are still rising but at a lesser rate than before
Define Deflation
Where prices are falling
What’s policy conflict?
When 2 policy objectives cannot both be achieved at the same time.
What do firms or governments often do in response to policy conflict?
Find a trade-off
What do trade-offs provide?
A desirable overall balance between two objectives
What factors cause the importance of an objective to change?
Stage of development within the country
Global economic conditions
Political stability
Experience of other countries
What is considered a short run policy?
A policy that lasts up to 3 years
What is considered a long run policy?
A policy that’s longer than 10 years
What’s GDP?
Gross Domestic Product is a monetary measure of the market value of all the final goods and services produced in a period of time
What are the different forms of GDP?
Nominal GDP and Real GDP
What’s nominal GDP?
The total value of all goods and services produced in a given time period, usually quarterly or annually.
What’s real GDP?
An inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year
What are net exports?
Exports - Imports
What are the 4 expenditure methods?
Consumption
Investment
Government
Net Exports
How is inflation measured?
Using either the consumer price index (CPI) or the retail price index (RPI)
Why do we use index numbers?
To make numbers look more appealing to the eye
To allow for quick and easy data comparisons (percentage changes)
What’s the index value of your base year?
Base year (year 1) always has an index value of 100
How do you calculate index values?
(Raw Number / Base year Raw Number) * 100
What’s aggregate demand?
The total demand for a country’s goods/services at a given price level at a given time period
A measure of a country’s total expenditure on goods/services
How aggregate demand measured?
Consumption + Investment + Government + (Net exports)
What letter represents GDP on graphs?
Y
Name a feature of aggregate demand?
AD only shifts when Consumption, Investment, Government spending, or Net exports change (independent of the price level)
What’s the wealth effect?
As the price level decreases, the purchasing power of income increases (people are richer)
People are more likely to spend money on goods/services in the economy
Hereby increasing Consumption
What’s the Trade effect?
As the price level decreases, exports become more competitive and imports become less competitive
Hence, there’s a greater demand for exports and the revenue generated from exports will increase
Less spending on imports due to domestic goods/ services becoming more competitive
This increases the value of Net Exports and AD and Real GDP
What’s the interest Effect?
If the price rate decreases, interest rates will decrease in the economy
Because central banks will adopt interest rate policies to meet an inflation target
This stimulates:
Lower consumption and exchange rate
Higher investment
Higher net exports
Shifting AD
What do we call the willingness of a household to spend any extra income that they earn?
The marginal Propensity to Consume
What are the determinants of consumption (independent of the price level)?
Level of real disposable income
Interest rates/ availability of credit
Consumer Confidence
Asset Prices
Household Indebtedness
Why might the level of real disposable income increase?
A decrease in the marginal rate of income tax causes the level of real disposable income to increase and hence, increasing the marginal propensity to consume.
Why might the lack of availability of credit effect consumption?
Banks might be unwilling to lend money
Reducing the impact of lower interest rates
Why might high consumer confidence effect consumption?
A low level of unemployment causes people to feel confident in their job prospects
This deters them from saving money
Increasing the marginal propensity to consume
Why might High Asset Prices effect consumption?
They make people feel more wealthy
Causing an increase in the MPC
E.g. Share prices, or house prices
Why might Household Indebtedness effect consumption?
Individuals are more likely to save their money if their family is in debt
Reducing the MPC
Define savings
The part of disposable income that’s not spent on goods/services in the economy
It’s also a determinant of Aggregate Demand- if savings increase, consumption decreases
Identify the 6 Determinants of Saving?
Level of Real Disposable Income
Interest rates
Consumer confidence
Range of financial institutions
Tax Incentives e.g. ISAs
Age Structure of Population
What is an ISA? And what is it an example of?
An individual savings account that pays tax free returns on savings
This is an example of a tax incentive
What are the determinants of investment?
Interest Rates
Business confidence
Corporation Tax
Spare capacity
Level of competition
Price of capital
Define investment
When firms spend money on capital goods to increase their productive capacity
Why might interest rates effect the level of investment?
Firms finance investment either by borrowing money or investing retained profits
If interest rates are lower the marginal propensity to invest will decrease
Why might the level of business confidence effect the level of investment?
Business confidence is determined by expected profit and expected demand in the economy
If these are high then the marginal propensity to invest will increase to be able to supply their future demand
Why might corporation tax effect the level of investment?
The higher the corporation tax, the lower the level of retained profit is going to be
Retained profit is used to invest
Hence, the marginal propensity to invest will decrease
Why might spare capacity effect the level of investment?
If businesses are operating at close to full capacity then the MPI increases
Because they want to increase capacity e.g. by building new factories
Why might the level of competition effect the level of investment?
If competition is high a lot of investment will occur
So that businesses can get ahead of their competitors
Why might price of capital effect the level of investment?
If the price of capital is low then investment is less costly
This increases the MPI
What’s the price of capital
The cost of capital measures the cost that a business incurs to finance its operations.
It measures the cost of borrowing money, or raising it from investors compared to the expected returns on an investment.
What are the 4 types of Government Spending?
Current Spending
Capital Spending
Welfare Spending
Debt Interest Payments
What’s current spending?
Govt spending on the maintenance of public services and payment of public sector wages
What’s capital spending?
Govt spending on infrastructure projects
What’s welfare spending?
Govt spending on benefits and pensions
What is the difference between debt interest payments and the other 3 forms of govt spending?
The Capital, Current and Welfare spending would all act as an injection into the circular flow of the economy
Consequently shifting Aggregate Demand
What’s budget deficit?
When govt spending is greater than taxation revenue in a fiscal year (April - April)
What’s a budget surplus?
When govt spending is less than taxation revenue in a fiscal year
What’s national debt?
The Total stock of debt over time
The ACCUMULATION of budget deficits
What are the 5 determinants of net exports (x-m)
Real disposable income earned abroad
Real disposable income earned at home
Strong or weak exchange rates
Protectionism at home/abroad
Relative inflation levels at home
How does Real disposable income earned abroad and at home effect net exports?
If the real disposable income earned abroad is higher than the real disposable income earned at home
The marginal propensity to export increases
This increases export revenue and net exports
How do Strong or weak exchange rates effect net exports?
Strong: SPICED
(Strong Pound = Imports Cheap Exports Dear)
Export demand and revenue decreases
Weak: WIDEC
(Weak Exchange rate = Imports Dear Exports Cheap
Export demand and revenue increases
*Dear = Expensive
How does protectionism at home and abroad effect net exports?
If we have high tariffs on imports coming in from abroad, import expenditure will reduce
Hence, net exports will decrease
How do relative inflation at home effect net exports?
If inflation in the UK is higher than that of trading partners
Exports will be less competitive and will produce less revenue
Net exports will decrease
