Macroeconomics: 3.1-3.6 Flashcards
What is macroeconomics?
Studies the behavior of the national economy
- total output
- average price level
- level of employment
- distribution of income
- trade
- government policies
Describe the circular flow of income model.
Open economy with government
- households/firms inject investment, leak savings
- gov injects gov expenditure, leak taxes
- international trade injects exports, leak imports
Outline the 3 approaches to derive national income.
- Expenditure Method
- Value of all spending on the final goods and services in the economy
- Output Method
- Calculate the value of all final goods and services (goods not being used for further production) provided by the economy
- Income Method
- Add up all income earned by the factors of production
(i.e. add up all wages, rent, interest and profits)
Define GDP.
Value of goods and services produced within the country, regardless of who owns the factors of production
Define GNI.
Total income received by residents of a country, regardless of where the factors are located. (GDP + income from abroad - income paid abroad)
Nominal GDP V.S. Real GDP
Nominal GDP is measured using current market prices.
Real GDP is measured using constant prices.
Therefore, nominal GDP would be affected by the
changes in price level while real GDP does not.
Real GDP allows better comparisons
Equation of price deflator
Nominal GDP / Real GDP x 100%
Outline the limitations of GDP/GNI
- Cannot accurately measure the true value of output (non-marketed output e.g. growing own food/parallel markets, negative externalities)
- Cannot accurately measure economic well-being (e.g. distribution of income, quality of life factors)
Outline alternative measures of well-being
- OECD better life index
- Happiness index
- Happy planet index
Define recession.
two successive quarters of
negative economic
growth
Define aggregate demand.
The total demand for all goods and services in an economy over a period of time at different general price levels
AD = C + I + G + (X-M)
Outline how AD is affected by the price level.
- Wealth effect: decrease in PL leads to a higher purchasing power of money
- Interest rate effect: a fall in PL leads to a drop in interest rates which increases the demand for money
- International trade effect: fall in PL leads to more exports and increases C and I
Define aggregate supply
The total planned national output being produced at different price levels.
Outline characteristics of Monetarist curve.
- Gov intervention destabilizes things more than they help
- Significant difference between short run and long run
- In the short run, wages and factor prices are sticky due to labour contracts or minimum wage
Outline why SRAS curve shifts.
Any factors affecting the cost of production for firms
- Changes in resource prices - price of raw materials
- Changes in indirect taxes
- Changes in subsidies
- Supply shocks (e.g. war, natural disasters)
Outline what is long-run aggregate supply.
- shows full employment level of output
- this output level is the potential GDP (optimal and stable output)
How does the inflationary gap self-correct in the Monetarist model?
- AD increases
- in the short run, firms increase output
- Inflation is slower to realize
- When realized, workers urge for pay rise
- cost of production for firms increases
- SRAS shifts to the left
- Back to potential output at a higher price
Outline reasons for LRAS shift.
Quantity or quality of factors of production changes
- Improvements in efficiency
- introduction of new technologies
- changes in working population or labor quality
- institutional changes - better infrastructure etc.
Describe the Keynesian model.
- Assumes no difference between short run and long run
- Wages and product prices have downward inflexibility
Outline the 3 sections of the Keynesian curve.
Three sections
- Recession with low output, high unemployment and spare capacity
- No more spare capacity as employment of resources increases, economy reaches potential output
- Real GDP can no longer increase as firms are using the maximum amount of resources
Define unemployment
People of working age who are willing to work and are actively looking for a job but are currently without a job
How is unemployment rate measured?
Unemployment rate = Number of unemployed / Labour force x 100%
Define labour force
The number of employed + unemployed
Excludes
- Dependent population (children, retired persons)
- Adult students
- Disabled/ill
Outline why there are difficulties in measuring unemployment.
Underestimation
- Hidden unemployment: Discouraged works/People without jobs under retraining
- Underemployment: People who want to work as full-time but work as part-time/People with jobs that don’t make full use of their skills
Overestimation
- Jobs in the underground (informal economy)
- Unregistered/unregulated/unreported jobs
Unemployment disparity among different population groups
- Regional
- Gender
- Ethnic
- Age