Flashcards in Economics-Macroeconomics Deck (32)
The study of how resources are allocated in the national economy and how they are used to meet the government's macroeconomic objectives
What are the governments objectives?
.Economic growth- a steady increase in national output (GDP)
.Price stability- a low and stable rate of inflation
.Reduce the national debt/budget deficit
.Balance of payments- value of exports = value of imports
.Equitable distribution of income
How is the value of an economy calculated?
1. Output method- product of the value of goods and services produced in an economy
2. Income method- product of the value of any incomes earned in the economy
3. Expenditure method- measures the value of all spending on goods and services in the economy
What does the two-sector circular flow of income model show?
Factors of production into an economy brings Income (income method) which is Spending on goods/services (expenditure method) which gets Goods and services (output method)
What does the four-sector circular flow of income model show?
The impact of leakages and injections into the economy
What ways can money enter (injections) an economy?
. Government spending
. Spending on exports
What ways can money leave (leakage/withdrawal) an economy
. Spending on imports
What are the limitations of the national income data?
.Inaccuracies- data from some resources are unreliable
.Improving quality- new technology is not included in the GDP
.Unrecorded economic activity- jobs such as child care is not recorded in the GDP because it is private
.Illegal activity (shadow market) is not included- e.g. drug dealing raises the GDP but is not included
.External costs- Negative externalities are not taken into account
What is the equation for GDP per capita?
Total GDP ÷ Population
Define aggregate demand
The total of all expenditures in an economy- equivalent to expenditure method
What are the components of aggregate demand?
.Consumption (C) - spending by households on goods and services
.Investment (I) - spending by firms on capital goods e.g. machinery
.Government spending (G) - spending by the government on capital goods e.g hospitals
.Net exports (X-M) - the value of exports minus imports into the UK
What is the equation for aggregate demand?
AD = C + I + G + (X - M)
What affects consumption?
.Reduction/rise in income
.Increase/decrease in taxes
.Increase/decrease in wealth
.increased/decreased consumer confidence
What affects investment?
.Increased/decreased business confidence
.Rise/fall in interest rates
.Advances in new technology
What affects government spending?
.Rise in population levels
What affects exports and imports?
.Rise in income in other countries
.Better quality manufacturing in the UK
.Fall in exchange rates
Why is the aggregate demand curve down sloping?
.Wealth effect- as price increases wealth decreases in value
.As price increases interest rates increase so investment falls
.As price increases price of exports increase so fewer people buy them
What is aggregate supply?
The sum of all planned production in the economy, equivalent to the output method of calculating GDP.
What is short run aggregate supply?
When at least one factor of production cannot be varies.
What factors shift the SRAS curve?
1. Increase in wage rates
2. A change in the cost of raw materials
3. A change in the exchange rate altering import prices
4. Changes in government subsidies and indirect taxes
What is the long run aggregate demand?
When all factors of production can be varied
What do classical economists believe about the LRAS
When supply is equal to demand in every market in the economy there is only one level of GDP that can exist, the LRAS. It represents the full employment level of output.
How does the LRAS similar the PPF curve?
The LRAS is equal to producing on the PPF of an economy, all resources are fully employed.
What do classical economists believe about the LRAS curve?
They believe that the LRAS curve is vertical at the full employment level of output. The only way to improve the LRAS is to improve the quality/quantity of factors of production.
What factors shift the LRAS curve?
1. Privatisation- individuals own the firm
3. Reducing the nun wage
4. Remaining legal barriers on businesses
What will an increase in the AD lead to on the SRAS?
An increase in the real GDP and the price level
What will an increase in the AD lead to on the LRAS?
An increase in the price level
What will an decrease in the AD lead to on the SRAS?
A decrease in real GDP and the price level
What will an decrease in the AD lead to on the LRAS?
A decrease in the price level
What is the negative output gap?
Deflation- when the price level decreases
What is the positive output gap?
Inflation- when the price level increases