KEI Flashcards
(47 cards)
Define GDP and REAL GDP
Monetary value of all final goods and services produced within a country’s geographical boundaries over a given period of time
Real GDP - without inflation
Define real GDP growth rate
% change in GDP
What does positive % gdp growth mean
Economic growth
What does negative gdp growth signal
Recession
What types of economic growth are there?
5:
- actual
- potential (LRAS increases)
- sustained
- sustainable
- inclusive
What does sustained economic growth imply
Actual (increase in output along AS) + Potential growth (increase in LRAS)
What does sustainable economic growth imply?
Sustained growth + good for the environment
What does inclusive growth imply?
Income distribution (equality) - (GINI) + sustained economic growth
What does the Gini coefficient values imply?
Closer to 1 - income inequality
Closer to 0 - income equality
What is a key limitation of nominal gdp (clue: PxQ)
Nominal GDP may rise, but since it is Price (current) X Quantity (current), increase in nominal GDP could also be due to price increase - doesn’t accurately measure increase in output of a country
Define Gross national income:
Value of all final goods and services produced by nationally owned factors of production over a given period of time
GNI equation:
GDP + NFIA (income from abroad - income flowing out into a foreign country)
Limitations of GDP: (2) and how it affects calculations (consider context of country, LDC VS DC)
- Non marketed activities:
- not captured when using GDP
- despite using society’s resources, they don’t occur in markets and hence no transaction occurs and good isn’t priced.
Skewed against LDCs
- Underground markets:
- production value from unreported activities
Skewed against LDCs (lack of accurate data collection)
Macroeconomic goals of an economy
- Economic growth
- Price stability
- Maximum employment
- Favourable BOT position
Define CPI
Weighted price index of a fixed basket of goods and services purchased by a household
How to calculate inflation rate?
[(CPI current year) - (CPI previous year)] / CPI previous year x100%
Limitations of CPI: (2)
- Substitution bias
- Quality adjustment bias
Explain substitution bias
- when prices of a good rise, consumers switch to a relatively less expensive alternative of the good (if coffee gets more expensive than tea consumers switch to tea, but coffee is still given a higher weightage in CPI during immediate calculation)
- overstates increase in cost of living from one year to the next (consumers can switch to cheaper alternatives)
Explain Quality adjustment bias
Differences in quality of good that is not accounted for in CPI
What is the deflationary spiral?
Decrease in prices -> consumers withhold consumption -> consumption expenditure decreases -> firm revenue decreases -> income and employment decreases -> demand for a good decreases -> prices decrease …
What is the deflationary spiral?
Decrease in prices -> consumers withhold consumption -> consumption expenditure decreases -> firm revenue decreases -> income and employment decreases -> demand for a good decreases -> prices decrease …
What is meant by favourable balance of trade?
When there is a trade surplus (generally favoured over a trade deficit)
exports greater than imports
In what way can a trade surplus be unfavourable?
- Retaliatory measures from trade-deficit trading partner (i.e. stop importing goods)
- Vulnerable to external shocks (dependent on exports)
- SOL: export dependent: more intensive for local FOPs -> stress
What is meant by a trade deficit:
Total expenditure on imports more than total revenue from exports:
M > X
