Macroeconomics flashcards
Give an example of injections to an economy.
Government spending, consumption, investment and exports.
Give an example of leakages from an economy.
Taxes, savings and imports.
What is GDP?
It is a measure of everything produced within a country in a specific time period (usually a year).
What is the formula for GDP?
The formula for GDP is GDP = C + I + G + (X-M), in which:
C = consumption spending on goods/services.
I = investment spending by business in order to grow. Money is spent on the factors of production (land, labour, capital, enterprise).
G = Government spending.
X-M = Net exports, money gained by exports - money spent on imports.
What is real GDP?
Real GDP is the GDP of a country at any given point after having been being adjusted for inflation.
What is the formula for real GDP?
Real GDP =
(Nominal GDP / Price deflator) x 100
What is GDP per capita?
GDP per capita shows the average economic output per person in a country.
What is the formula of GDP per capita?
GDP per capita =
Real GDP/ Population of a country.
What is GNI?
GNI is the total money made by a country’s people and businesses, including money made abroad, minus money made by foreigners in the country.
What is the formula for GNI?
GNI =
GPD + incomes flowing from other countries - incomes flowing out to other countries.
What is real GNI and what is the formula?
Real GNI is the GNI of a country at any given point after being adjusted for inflation.
The formula for real GNI is: Real GNI = (Nominal GNI/Price Deflator) x 100.
What is the formula for GNI per capita?
GNI per capita = Real GNI/ Population of a country.
Name 2 advantages of using GDP as a measure of national income accounting.
GDP allows comparison with other countries, since it is an international measurement.
Economic growth is a primary target for many governments, and thus GDP gives a relative idea of where countries stand and where they can grow.
Name 2 disadvantages of using GDP as a method of national income accounting.
GDP overestimates quality of life in a specific country, as money spent on projects such as cleaning up pollution is also counted into GDP, even if it is just restoring damage.
GDP does not factor in income inequality.
GDP relies on government agencies to collect data, and that data can be flawed or rigged for various reasons.
Companies are always attempting to improve their products/services but prices don’t change dramatically, which is something GDP does not calculate (quality of output).
What is the business cycle?
The Business Cycle is a model that shows the fluctuations in an economy over time.
Name the four phases of the business cycle.
Growth (expansion)
Boom (peak)
Recession (contraction)
Slump (trough).
Explain the phases of the business cycle.
During the growth phase, GDP is increasing and so is inflation and interest rates.
During the peak phase, economic activity, inflation and interest rates are at their highest.
During the recession phase, economic activity is decreasing, as are inflation and interest rates.
During the trough phase, economic activity, interest rates and inflation are at their lowest.
What factors alter the business cycle?
Business cycles are affected by factors such as changes in climate, natural disasters, wage levels and inflation.
What is the difference between a decrease in GDP and a decrease in GDP growth
A decrease in GDP is a fall in economic output, or a recession if occurring for longer than 2 quarters.
A decrease in GDP growth rate is just when the GDP growth rate decreases.
Name 3 alternate measures of well-being.
The World Hapiness Report/ The Cantril Ladder.
OECD Better Life Index.
Gross National Hapiness Indicator.
Happy Planet Index.
What is the aggregate demand and what is the formula for AD?
Aggregate demand refers to the total output that all buyers in a country are willing and able to buy at any given price and time.
The formula for aggregate demand is the same as the formula for GDP.
What causes a movement along/shift in the AD curve?
Changes in the prices of goods lead to a movement along the AD curve.
A shift in any of the AD components (C, I, G, (X-M)) will cause the curve to shift inwards/outwards.
Name 5 determinants of AD and what component of AD they correspond to.
Confidence - Consumption.
Employment - Consumption.
Interest rates - Consumption.
Wealth - Consumption.
Personal taxes - Consumption.
Household indebtness - Consumption.
Expectations of future price level - Consumption.
Interest rates - investment.
Business confidence - investment.
Technology - investment.
Business taxes - investment.
Corporate indebtness - investment.
Government priorities - government spending.
Income of trading partners - Net exports.
Exchange rates - Net exports.
Trade policies - Net exports.
What is aggregate supply?
Aggregate supply refers to the total output that all firms in a country are willing and able to provide at a given price level.
What is SRAS?
SRAS stands for short-run aggregate supply.
SRAS refers to the positive relationship between Real GDP (Real Output) and the price level of goods/services.
Name 3 determinants of SRAS.
Changes in wages.
Changes in the cost of raw materials.
Changes in the price of imports.
Changes in government taxes/subsidies.
What is LRAS?
LRAS stands for Long-Run Aggregate Supply.
The LRAS curve represents the relationship between Real GDP and the price level of resources in an economy.
Why doesn’t output level change in the long run?
Output level doesn’t change in the LRAS curve because all factors of production are being used at maximum sustainable capacity.
This means that an economy cannot produce any more output.
The price of the goods may increase but the quantity will not increase.
Name the 3 determinants of LRAS?
Quality of the factors of production.
Quantity of the factors of production.
Levels of technology used to produce a majority of goods in a country.
Name the 2 principal macroeconomic perspectives.
The Keynesian Perspective.
The New Classical Perspective.
What is the new classical economic perspective?
The New Classical, also known as the monetarist perspective, is an economic thought that differs SRAS and LRAS.
New Classical economists believe that SRAS is determined by price level and LRAS is not.
Explain the three sections of the Keynesian aggregate supply curve.
Section I is the phase in which there is a perfectly horizontal aggregate supply (AS) curve. There is a lot of unused capacity of production, meaning that output can be increased without price increases.
Section II is the phase in which the economy approaches its potential maximum output. Producers now compete for limited factors of production, leading to an increase in price level.
Section III is the phase in which the economy is at its full capacity (Ymax), there is no more economic growth that can occur as all the factors of production are fully employed. This shows Aggregate Supply (AS) as a fully vertical curve. The third stage of AS for Keynesian Economists is the only stage for new classical economists. The first and second stages for Keynesian economics is SRAS for New Classical Economists.
What are the determinants of the Keynesian aggregate supply curve?
Increases in efficiency.
Institutional changes.
Reducations in the natural rate of unemployment.
What is short-run economic equilibrium?
Short-run equilibrium refers to a situation in which short-run aggregate supply intersects with aggregate demand.
Name and explain the three equilibrium positions.
Recessionary (Deflationary) gap: This type of equilibrium occurs when AD intersects AS below full employment level of output. This means that the demands of the economy are less than the potential output of the economy. In this situation, GDP is less than potential GDP, and unemployment levels are greater than natural unemployment levels.
Inflationary gap: An inflationary gap is the opposite of a deflationary gap. Essentially, it means that the economy is ‘overheating’, and that the economy is not being sustainable because they are using more resources than they can use sustainably. GDP is greater than potential GDP, and unemployment is lower than natural unemployment rates.
Full employment: This type of equilibrium occurs when the economy is being as productive as possible, and AD intersects with AS at Yp (Full employment).
What is economic growth?
Economic growth refers to an increase in real GDP over a period of time (typically a year).
What is the formula for economic growth?
Growth rate =
Real GDP(2) - Real GDP (1) / Real GDP (1) x 100
Name 3 causes of short-term economic growth.
Changes in consumer/buisiness confidence
Changes in interest rates
Changes in government expenditure
Changes in taxation
Changes in exchange rates
Name 3 causes of long-term economic growth
An increase in the size of the labour force.
An improvement in human capital.
An increase in the stock of physical capital.
An improvement in technological advances.
What is human capital?
Human capital are the skills, knowledge, and experience possessed by an individual or population.
What is physical capital?
Physical capital refers to assets, such as building, machinery, and vehicles, which are owned and employed by an organisation.
Name and explain 2 consequences of economic growth.
Change in living standards.
Impact on the entironment.
Income distribution.
What is unemployment?
Unemployment refers to people of working age who are actively looking for a job but who are not employed.
What is the formula to calculate unemployment?
Unemployment rate = Number of unemployed/Labour force
x 100
Labour force = # of employed people + # of unemployed people
Name and explain 2 difficulties in calculating the unemployment rate.
Discouraged workers: The unemployment rate overlooks discouraged workers, who have stopped looking for employment due to repeated failures in securing a job.
Underemployed workers: It fails to account for underemployed workers, who are employed in jobs that do not utilise their skills or provide enough hours.
Geographical disparities: The rate does not reflect geographical disparities, where employment opportunities vary significantly between different regions.
Disparities: The rate does not account for disparities in employment that affect groups differently based on age, gender, ethnicity, and other demographic factors.
