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economics > economic activity > Flashcards

economic activity Flashcards

1
Q

what does the circular flow of income show?

A

in any given period of time, he value of output produced by the economy is equal to income generated in producing that output which is equal to expenditures made to produce that output

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2
Q

what are the key components that link firms and households?

A

households provide FoP ( land, labour, capitol, entrepreneurship) and firms provide wage, rent, interest and profit

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3
Q

what are savings?

A

consumer income that is not spent on goods and service (leakages)

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4
Q

what is investment?

A

spending by firms for the production of capitol goods (injections)

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5
Q

what is the link between savings and investments?

A

households place savings in financial markets which finance investment

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6
Q

how are taxes and government spending linked?

A

taxes are leakages since they are paid instead of spending, but government spending on health care come back into the flow as an injection

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7
Q

how can the size of the circular flow of income be determined?

A

injections > leakages = larger flow
injections < leakages = smaller flow

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8
Q

what is national output?

A

value of all goods and services produced in a country over a period of time
- also known as GDP, total output or aggregate output

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9
Q

why do we measure economic activity?

A
  • track performance
  • compare to other countries
  • for policy and decision making
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10
Q

what are the 3 ways to measure economic activity?

A
  • output approach
  • expenditure approach
  • income approach
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11
Q

what is the output approach?

A

calculates the value of all goods and services produced and consumed domestically (GDP)
- value added approach to avoid double counting
- counted by sector to trace performance

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12
Q

what is the expenditure approach?

A

TE = C + I + G + (X-M)
C = consumer spending on domestically produced goods and services
I = investment on capitol goods
G = government spending
X-M = net exports

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13
Q

what is the income approach?

A

GNI = GFP + net factor incomes from abroad
- adds up all the income earned by the FoP for the residents of a country
income - spending on production of goods and services

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14
Q

what is the difference between GNI and GDP?

A

GNI - total income from residents of a country regardless of the FoP’s location
GDP - total value of goods and services produced within a country

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15
Q

what are nominal values?

A

value measured in terms of current prices at the time of measurement

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16
Q

what are real values?

A

measures the value that takes into account changes if prices over time to allow for comparison

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17
Q

what are purchasing power parties?

A

amount of currency that is used to buy the same quantity of local goods and services that can be bought with $1 in the US
- eliminates price differences on the value of output or income

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18
Q

what is the difference between total and per capita values?

A

total - gives info on the overall size of the economy
per capita - takes total value and divides by the population
- can measure standards on living based on average GDP
- affected by population size and economic growth

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19
Q

what is a base year?

A

a year chosen as a benchmark or comparison point against the value of output in the following years

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20
Q

what is the difference between nominal and real GDP?

A

nominal - measures the value of current output valued at current prices
real - measures the value of current output at base year prices

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21
Q

what is GDP deflator?

A

price change compared to base year across all goods in an economy

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22
Q

how do you calculate GDP deflator?

A

(nominal GDP / real GDP ) x 100

23
Q

how do you calculate GDP rate of growth?

A

( GDP year n - GDP year n-1) / GDP year n-1

24
Q

what is the consumer price index?

A

measures changes in price levels of a basket of goods for a given year
- excludes fuel due to volatility

25
Q

how is GDP deflator used?

A

a base year is set at 100 and each year changes according to inflation rates

26
Q

what is a keynesian multiplier?

A

allows us to calculate the ultimate effect of additional government spending and consumption in the circular flow of income model

27
Q

what is the multiplier effect of the change in injections?

A

as injections ( investment, exports, government spending) increases, real GDP increases ad they are components of AD and there is an additional indirect effect due to increased consumption

28
Q

how do you calculate change in real GDP?

A

change in real GDP = k x change in an injection

29
Q

what is k and how do you calculate it?

A

K = 1 / 1 - MPC
proportion of income on goods and services not spent on tax, savings or imports which are domestic

30
Q

how do you calculate MPC?

A

change in consumption / change in national income

31
Q

how do you calculate MPT?

A

change in tax / change in national income

32
Q

how do you calculate MPM?

A

change in imports / change in national income

33
Q

how do you calculate MPS?

A

change in savings / change in national income

34
Q

how do we interpret k?

A

Bigger leakages = smaller multiplier
Bigger multiplier = Bigger effect of an increase in an injection on real GDP

35
Q

what is the business cycle?

A

a cycle made out of short term fluctuations in the growth of actual real output with alternating period of contraction and expansion

36
Q

what are the 4 stages of the economic activity?

A

Peak - maximum real GDP
Trough - minimum real GDP
Contraction - falling real GDP
Expansion - increasing real GDP

37
Q

what is recession?

A

2 consecutive quarters (6 months) of negative economic growth

38
Q

how can economic growth be shown on the PPC?

A

shows maximum possible combinations of 2 goods or services
- increasing quality or quantity of the FoP shifts the curve to the right

39
Q

how can economic growth be shown using a LRAS curve?

A

New classical economics believe that in the long run, potential level of output is determined the quality and quantity of the FoP

40
Q

what is full employment level of output?

A

value of goods and services when resources are used close to the greatest extent possible
- natural rate of unemployment still exists

41
Q

what is potential output?

A

output represented by long term growth trend ( straight line in the business cycle)

42
Q

what is output gap?

A

actual GDP - potential GDP

43
Q

what is inflationary and deflationary gap?

A

inflationary gap - actual GDP > potential GDP
deflationary gap - actual GDP < potential GDP

44
Q

what are the government macroeconomic objectives?

A
  • low and stable inflation, full employment and positive economic growth
  • reducing intensity of expansions and contractions to make gaps as small as possible to lessen the problem of rising prices
  • increasing thr steepness of lines (potential output) to achieve more rapid long term economic growth
45
Q

why are national income statistics useful?

A
  • to compare progress over time for a government
  • to compare between countries
  • to check effects of policies implemented to improve policy making in the future
46
Q

what are the national income statistics?

A

GDP and GNI

47
Q

why does NIS not accurately measure the true value of output?

A
  • doesn’t include non-marketed output
  • doesn’t include output sold in parallel markets
  • doesn’t take into account quality improvements of goods and services
  • doesn’t take into account negative externalities
  • doesn’t take into account depletion of natural resources
  • don’t account for differing price levels
48
Q

why does NIS not accurately measure wellbeing?

A
  • no distinctions about composition of output
  • cannot reflect achievements in education and health
  • no info on distribution of output and income
  • doesn’t take into account increased leisure
  • doesn’t account for quality of life factors
49
Q

how can NIS be used for comparison over time and between countries?

A

time - using real values but comes with a time lag
countries - doesn’t allow easy comparison unless per capita values

50
Q

what are 3 alternative measures of wellbeing?

A
  • OECD better life index
  • Happiness index
  • Happy planet index
51
Q

what is economic wellbeing?

A

prosperity, economic satisfaction and standards of living

52
Q

what is the OECD better life index? what are the pros and cons?

A
  • based on a number of factors that the member countries select that will contribute towards a better life
    wellbeing for the present - quality of life and material conditions
    wellbeing for the future - natural, human, social and economic capitol
    pros - wider range, distinguishes between short and long run
    cons - ignores equity and hard to measure
53
Q

what is the happiness index? what are the pros and cons?

A
  • organisation focused on gathering scientific and technological knowledge to encourage use of sustainable development policies
  • real gdp per capita, social support, life expectancy, freedom, generosity, perception of corruption
    pros - hard to quantify and measures
    cons - ranking becomes less meaningful due to cultural variations of happiness
54
Q

what is the happy planet index? what are the pros and cons?

A

measures of the sustainable wellbeing and takes into account life expectancy wellbeing and equality
HPI - (life expectancy x wellbeing x inequality of outcomes) / ecological footprint
pro - focuses on the planet and measures sustainability
cons - controversial measure of ecological footprint

economics (14 decks)

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