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2.2 Flashcards

Aggregate Demand (AD) (70 cards)

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1
Q

What is economic performance?

A
  • Economic growth
  • Employment
  • Inflation
  • Balance of payments
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2
Q

What is export?

A

Exporting goods and services globally, sell and provide.

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3
Q

What is import?

A

Receiving goods and services from around the world.

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4
Q

What are visible imports/exports?

A

The trade in physical goods.

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5
Q

What are invisible imports/exports?

A

The trade in services.

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6
Q

What are income transfers?

A

Also known as transfer payments, are government payments to individuals or organisations without requiring goods or services in return, aiming to redistribute income and wealth.
- Interest and profits from assets held abroad to help foreign countries.

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7
Q

What are Balance of Payments Account?

A

Record of payments between one country and the rest of the world.
Current Account + Financial and Capital Accounts = formula.

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8
Q

What is the most important element of the current account?

A

Is the record of inflows and outflows or money spent on goods and services. Also includes income and transfers.
Trades in goods = Visible trade
Trade in services
Profit and income = Invisible trade
Current transfers

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9
Q

What does buying from somewhere equal?

A

Debit.

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10
Q

How do you record the current account?

A
  • INFLOWS of foreign currency are counted as a positive entry (e.g. exports sold overseas)
  • OUTFLOWS of foreign currency are counted as a negative entry (e.g. imported goods and services)
    CURRENT ACCOUNT = INFLOWS - OUTFLOWS.
    Postive Current Account = surplus
    Negative Current Account = deficit
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11
Q

What is the difference between primary income and secondary income?

A

Primary income - profit from firms
Secondary income - transfers

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12
Q

What are Financial and capital accounts?

A

Long-term and Short-term flows of money associated with saving and investment, and speculation currency purchases.

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13
Q

What do Long-term financial and capital accounts include?

A
  • Foreign direct investment (FDI): e.g. M&S opening a new store in China would be an outflow. ( Note that profits sent home will be a credit on the current account)
  • Portfolio investment: Shares bought in foreign companies and government bonds. Again dividends earnt appear as credit in the domestic country.
  • Other investments: Trade credit, loans, purchases of currency and bank deposits.
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14
Q

What is international interconnectedness?

A

One country’s exports are another country’s imports. In this way, the sum of all countries trade balances will theoretically be zero.
- Economic conditions in one country might impact on economic conditions in another country through their impact on demand for imports.

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15
Q

How are current accounts seen?

A

Current account deficits ae generally seen as undesirable, while current account surpluses are usually seen as signs of the economic strength of a country.

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16
Q

What are the macroeconomic objectives?

A
  • Economic Growth
  • Low levels of unemployment
  • Low inflation
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17
Q

How will a current account be impacted by a deficit for each macroeconomic objective?

A

Economic Growth - A deficit would decrease economic growth as they are purchasing more than they are giving away which will result in less income as their profits won’t equal their outflow. NEGATIVE
Low Levels Of Unemployment - A deficit would increase levels of unemployment as they won’t be producing as much so therefore people are likely to lose jobs in manufacturing sectors. NEGATIVE
Low Inflation - A deficit would mean with income falling, people are going to spend less and demand will decrease causing prices to lower. POSITIVE.

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18
Q

What is aggregate demand in macroeconomics?

A

The total demand for goods and services in the economy at a given time and price level.

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19
Q

What is the AD equation?

A

AD = C + I + G + ( X - M)

C = consumption
I = investment
G = government expenditure
X = exports
M = imports

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20
Q

What does the AD curve plot?

A

It plots the planned level of real expenditure at different average price levels. Average price levels can be calculated in the UK from the CPI.

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21
Q

Why does the demand curve slope downwards?

A

Real Balance effect - total expenditure by the economy remains much the same along the AD curve. As price level falls people spend the same amount but get more for their money.
At lower price levels, interest rates are likely to be lowered making investment (I) a component of AD increase.
Lower prices mean increased competitiveness and thus X-M rises.

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22
Q

What happens if the price level changes on an AD diagram?

A

There is movement along the AD line due to higher prices meaning a fall in demand.

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23
Q

What are the reasons for shifts in AD?

A
  • Consumption increases - go right
  • Investment falls - go left
  • Government spending falls - go left
  • Imports rise - go left
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24
Q

What will a shift in AD cause?

A

A change in real output (GDP), whether increasing it or decreasing at each average price level.

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25
What is the definition of consumption?
The total amount spent on consumer goods by a typical household in a period of time. Consumption accounts for around 60% of AD.
26
Spending on goods can be both durable and non-durable but what's the difference?
Durable - provides a flow of services to the consumer over a number of years, replaced infrequently e.g. freezers, computers, furniture. Non-Durable - used up at the point of consumption, requires immediate replacement e.g. food and drink, fuel/petrol.
27
What are some of the goods and services that households consume?
- Food and drinks - Transport - Alcoholic drinks, tobacco and narcotics - Clothing and footwear - Housing, fuel and power
28
What determines the level of consumer spending?
- The level of real disposable household income - Interest rates and the availability of credit - Consumer confidence - Changes in household financial wealth - Changes in employment and unemployment - Taxes
29
What is the definition of disposable income?
Is the income available including tax credits and interest on savings minus deductions of income tax and national insurance.
30
What is the formula for consumption?
Disposable income - Savings = Consumption
31
What are some examples of income within consumption?
- Wages - State benefits - Tax credit - interest on savings and shares - Yields on bonds
32
What are some examples of tax within consumption?
- National insurance - Income tax
33
What are some examples of saving within consumption?
- Stock of cash - Money in a bank - Stocks - Shares
34
What is consumer confidence?
An economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.
35
What are interest rates?
The cost of borrowing money. Interest rates are normally expressed as a percentage of the total borrowed. They also show the return received on saving money in bank or form an asset like government bond.
36
What is the wealth effect?
A psychological phenomenon that causes people to spend more as the value of their assets rises. When consumers homes or investment portfolios increase in value, they feel more financially secure, so they increase their spending. Conversely, when consumers see the value of their homes or portfolios fall, they tend to spend less. The wealth attempts to explain why consumers might change their spending habits even if their income and fixed costs have stayed the same.
37
What is the Average propensity to consume and the equation?
It measures the average amount spent on consumption out of total disposable income. - APC = Consumption/Income
38
What is the Average propensity to save and the equation?
Measures the average amount of disposable income that is saved. - APS = Saving/Income
39
What is the Marginal propensity to consume and the equation?
Measurement of how any extra income is spent on consumption. - MPC = Change in consumption/Change in income
40
What is the Marginal propensity to save and the equation?
Measurement of how any extra income is saved. - MPS = Change in saving/Change in income
41
What is the definition of investment?
Spending on capital goods to gain an increased output of goods or services in the future. Also consider: - Gross investment = Total capital spending - Net investment = Gross investment minus and estimate for capital consumption (depreciation).
42
What is investment NOT?
It is not: - Putting money in the bank (SAVING) - Buying shares in a company in economics is also classed as SAVING as it is just a transfer of money. If that money was then used to buy capital goods it would be a different.
43
What does investment include?
- FIXED CAPITAL (non-current assets, last more than a year) = Plant and machinery, Buildings, Vehicles, New technology. - WORKING CAPITAL (short-term) = Spending on stocks of finished goods, raw materials and component parts. - HUMAN CAPITAL = Investment in the education and training of workers.
44
What happens to the value of capital goods over time?
Depreciation
45
What influences the amount of investment in an economy?
- Interest rates - Confidence levels - Risk - Government policy - Regulation - Demand for export - Access to credit
46
How are investments and interests involved with each other?
Investment is carried out to get more profit. Sometimes firms make a good investment and get a high rate of return. Other times there is a low rate of return. Investment will occur when the rate of return is greater than the interest rate.
47
What are Animal spirits?
Term chosen to emphasise the importance of confidence and the 'gut instincts' of businessmen on their future business prospects. They may also refer to the risk involved in taking investment decisions which invariably have an element of risk attached.
48
What is the need for government policies?
Government fiscal (Government spending and taxation), monetary (Interest rates) and supply side (Government try to increase production potential) policies will influence the level of investment in the economy.
49
Why is cutting corporation tax likely to encourage investment?
Less tax will be given alongside profits and so investments are likely to increase.
50
Why is regulation related to investment?
Because it often adds to a firms costs. If excessive regulations are in place then this may put off investment. And if regulation is reduced, this may encourage investment.
51
Why is demand for exports an indication of investment?
If the world economy is growing, then it is likely demand for exports will grow. With more demand, there is likely to be increased levels of investment to meet the new levels of demand.
52
What does Access to credit mean?
How much money banks have to supply out.
53
If there's a rise in investment, how will AD be affected?
AD will increase and shift to the right.
54
INVESTMENT INFLUENCES...
55
What is government spending?
Also known as public expenditure, refers to the total amount of money a government spends on goods, services, and transfer payments, which are used to fund public services, social benefits, and investments in capital.
56
What are somethings the government spend money on?
- Social protection - Personal social services - Health - Transport - Education - Defence - Industry, agriculture and employment - Housing & Environment
57
Where does the government get their incomes to finance expenditure?
Primarily finances its expenditure through taxes, with the largest sources being income tax, National Insurance contributions and Value Added Tax (VAT).
58
What does fiscal policy involve?
Involves the government changing the levels of taxation and government spending in order to influence AD and the level of economic activity.
59
What is the Trade Cycle?
A trade or business cycle refers to the recurring fluctuations in economic activity, characterized by periods of expansion (growth) followed by contraction (recession).
60
How do Exchange rates affect imports and exports?
A weaker currency makes a country's exports cheaper and imports more expensive, potentially boosting exports and hurting imports, while a stronger currency does the opposite.
61
What influences the level of imports and exports of a country?
- Degree of protectionism - Real income - Relative prices - Exchange rates - The state of the world economy - Non-price factors
62
What is the definition of Exchange rates?
Is the rate at which one currency trades against another on the foreign exchange market (value of one currency in terms of another).
63
What happens when a currency appreciates and depreciates?
- When a currency appreciates, it gets stronger and can buy more of a foreign currency. - When a currency depreciates, it gets weaker and can buy less of a foreign currency.
64
What will UK exporters and importers prefer?
- A UK exporter will generally prefer a WEAKER GBP. - A UK importer will generally prefer a STRONGER GBP.
65
Exports, imports and AD:
If exports are greater than imports (X>M) there will be an increase in AD. If exports are less than imports (X
66
What does protectionism refer to?
Refers to the government policies that restrict international trade to help domestic industries. Popular policies include: - Tariffs - Subsidies - Quotas - Product standard and regulation
67
What would happen if a government implement new protectionist policies or raises the severity of existing policies?
The volume of imports will fall which will cause AD to increase.
68
What non-price factors could influence the volume of exports from a country?
- Population - Conflicts - Supply of raw materials - Manufacturing capacity - Quality control
69
What factors could influence the value of imports and exports?
- A fall in the value of the GBP - A rise in real domestic incomes - Inflation in the UK increasing - Recession in the US economy - The high quality of car brands - Extensive marketing - Imposing tariffs
70
What are net exports (X-M)?
They reflect the net effect of international trade on the level of aggregate demand. When net exports are positive, there is a trade surplus (AD rises). When net exports are negative, there is a trade deficit (AD falls).

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