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What are the 5 Macroeconomic Indicators?

Economic Growth, Unemployment, Inflation, Balance of Payments & Income Distribution


Definition of Macroeconomics

The study of the economy as a whole and is concerned with the total amount of G&S produced by the national economy and the problems associated with them


How do we know if we've allocated scarce resources efficiently and equitably?

We look at the 5 macro indicators


How do you measure Econ. Growth?

You measure it in Gross Domestic Produce = value of all G&S produced within national borders by FOPs


How do you measure GDP?

You use the Circular Flow Model


What 3 lines do you use?

1. Rent, Wages, Interest & Profit
2. Goods and Services
3. Consumer expenditure on Goods & Services


What are the 2 agents in the Circular Flow Model and what are their jobs?

2 Agents - Households & Firms
Households own and supply FOPs in return for rent, wages, interest and profit
Firms use the FOPs to produce G&S which are then bought by households using the income


In an open Circular Flow Model, what are the injections and leakages?

Injections = Govt. spending, Exports, Investments
Leakages = Imports, Savings, Taxes


What is the difference between Nominal and Real GDP?

Nominal GDP is with inflation while Real GDP is without


What's the equation for Real GDP?

Nom. GDP * (Pr. index Base Yr / Pr. Index Current Yr) = Real GDP
Important as we need to remove inflation to compare


What's the formula for Gross National Product?

GDP + (Overseas income, investment & assets owned by UK citizens) - (Income & investment owned by foreign nationals)


What's the formula for GDP per Capita?

GDP / Population


What's the formula for Green GDP?

GDP - Environmental costs of production


What's the definition of Aggregate Demand?

Total demand for all G&S in the economy by households, firms, govt. and overseas consumers at a given Pr. lvl


What's the formula for AD?

C + I + G + (x-m)


What is Real Output?

Output without inflation


What is Price Level?

Average price for a whole macro economy

An increase in Pr. lvl will lead to a fall in Real Output


Why does AD shift?

It shifts as there is a change in the value of Real Output demanded but Pr. lvl stays the same.
It only shifts due to non-price determinants


Why does consumption increase when disposable income increases?

As you have a higher income after tax, you'll consume more luxury goods, but there wont be a change in consumption of necessities


Why does consumption increase when interest rates fall?

As cost of borrowing has declined, loans are now more affordable, therefore more people will borrow. This now means more people can consume.
Also, the opportunity cost of saving compared to consuming will fall so more likely to consume


Why does consumption fall when wealth and consumer confidence also fall?

Declining wealth will psychologically lead to a fall in consumer confidence so less people will consume luxury goods


Why does investment increase when interest rates fall?

Projects will become more profitable as cost of borrowing has decreased so investment will increase


Why does lower corporation tax increase investment?

Retained profits will increase and as these profits aren't given to shareholders, they can be used to finance investment (cheapest)


What is the Marginal Propensity to Consume?

Willingness to spend extra income


Why do different governments influence Govt. spending?

Left-wing govt. will intervene more in the market while a right wing govt. will do the opposite


Why does low economic growth change Govt. spending?

Low econ. growth will in turn lead to lower tax revenue and therefore a lower budget


Why do external influences like war or natural disasters influence Govt. spending?

As they need to please the population and therefore may or may not help


What are some influences on Exports?

- Quality of Goods (research and development)
- Innovation
- Marketing
- Exchange Rates (weaker rate = more sales)


What are some influences on Imports?

- Quality of Goods (research and development)
- Standard of living
- Trade restrictions
- Exchange Rates


What's the definition of Aggregate Supply?

The total value of output that firms are willing and able to supply at a given Pr. lvl


Why causes a movement along the SRAS curve?

If Pr. lvl increases, firms will desire to make more profits and therefore will produce more. Thus causing a movement along the curve


What's the main difference between SRAS & LRAS?

In SRAS, all FOPs are fixed (labour semi) while in LRAS, all FOPs are variable


Why does SRAS shift?

SRAS shifts due to changes in costs associated with production = Business Costs

e.g. Wages up -> Labour cost up -> Business cost up -> Less profits -> Production down -> SRAS shifts in


What's the definition of Productivity?

Output per hour per worker


Why does LRAS shift?

LRAS shifts due to changes in the quantity or quality of FOPs


What is the definition of Macro Equilibrium?

It is when the value of G&S willing and able to be supplied by firms at a given Pr. lvl is exactly equal to the value demanded by consumers, firms and overseas consumers


Why do you show the SRAS curve on a LRAS diagram?

You need it in case you go out of sync


What process do you use to remember what causes each curve to shift?

1. Which curve is affected?
2. If AD, which components?
3. If AS, is it SR or LR?
4. Which way will it shift and why?
5. What happens to real Y?
6. What happens to the Pr. lvl?
7. What does this mean for our Macro Obj.?


What is Actual Econ. Growth?

Actual economic growth is measured by the annual change in a country's real GDP or national output.
You can use a PPF diagram or a shift of AD to show this


What is Potential Econ. Growth?

Potential economic growth is the estimated growth when all FOPs are utilised.
You can use a PPF diagram or a shift of LRAS to show this


What is the Business Cycle?

It is the regular fluctuations in the lvl of economic activity around the productive potential of an economy


In the Business Cycle, what is a Boom?

It's a period where the rate of GDP growth is fast and higher than the long-term trend


In the Business Cycle, what is a Slowdown?

Opposite of a Boom where GDP growth decreases and unemployment rises


In the Business Cycle, what is a Recession?

A period where the economy suffers from a fall in output and unemployment rises


In the Business Cycle, what is a Depression?

A long period of economic downturn where the GDP falls


In the Business Cycle, what is a Recovery?

A period after a recession/depression that shows a sign of improvement in an economy. GDP increases and unemployment falls


What is the problem with forecasting Real GDP growth?

Due to the volatility of key indicators, no macroeconomic model can cope accurately.
These key indicators being:
- Uncertain business & consumer confidence
- Fluctuations in exchange rate
- Uncertain reactions to macro policy changes
- External events


What is the Output Gap?

It is the difference between the actual lvl of GDP and its estimated potential lvl


What is a Positive Output Gap?

It occurs when the lvl of National Output is greater than the long-run Potential Output.
This means that some resources are working beyond usual capacity.
e.g. people working overtime shifts
Economy likely to be in Boom


What is Negative Output Gap?

It occurs when the lvl of National Output is below the long-run Potential Output.
This means some FOPs are being underutilised
Economy likely to be in Recession


What is a Hysteresis?

It's a sharp fall in Real GDP which then leads to structural unemployment, deskilling, demotivation and therefore a fall in the LR potential of the economy


What are the 2 types of Govt. policy?

1. Demand Side Policies
2. Supply Side Policies


What are the 2 parts of Demand Side Policies?

1. Fiscal Policies
2. Monetary Policies


What is the definition of Fiscal Policy?

It is the management of govt. spending funded through taxation and/or borrowing


If the govt. spends more than it gains in revenue, what it called?

This is a budget deficit.
This means that the govt. has had to borrow to subsidise the extra spending


How else can the govt. generate money?

They can sell G&S and also privatise state owned enterprises


What are the 2 types of govt. spending?

1. Current Spending (day to day e.g. wages)
2. Capital Expenditures (public investments on physical capital e.g. roads)


Why do we put net borrowing in percentages of GDP?

It makes it easier to compare with other nations e.g. EU.
Normally, we should worry if it is above 60%. So while we're over 100% at the moment, due to the context of other economies being in similar positions, we aren't in a totally horrible position.
It is also not near in relation to the past: WWI (175%) & WWII (225%)


Why will countries be more willing to lend to Japan rather than Italy?

Japan has a more reliable economy


What is a Tightening of Fiscal Policy?

It is when the Budget Deficit decreases or Budget Surplus increases


What is a Loosening of Fiscal Policy?

It is when the Budget Deficit increases or Budget Surplus decreases


What factors effect Fiscal Policy?

- Party in power
- Business Cycle e.g. More spending in recession
- Wars