macro economics Flashcards
(26 cards)
Gross domestic product
total production of goods and products of those within a country
aggregate output of the country per year. output is valued in what buyers pay for it and what it costs to produce
GDP is a good indicator of trends and the way i which country is working
gross national product
total production of goods and products of those factors of production owned by the nations citizens across the world and at home
money in a country
-stocks and flows of money
-stok: quantity of a good at point in time
- flow: amount of good which moves per period of time
GDP calculated in terms of a flow
methods to calculate GDP
- expenditure approach
- factor incomes
- output approach
expenditure approach
the following are collected and added together:
- consumption expenditure - household expenditure (C)
- investment - new equipment (I)
- government purchases on goods and services (G)
- net exports (X sport spending, M import spending)
GDP = C+I+G+X-M
expenditure not included in the calculation:
- intermediate goods and services
- second hand goals
- financial securities
factor incomes approach
the following are collected and added together:
- wages and salaries
- mixed income (Self employment income)
- total operating surplus (trading profits)
- rent and interest
- statistical discrepancy
GDP = total domestic income TDI - stock appreciation +/- statistical discrepancy
output approach
- contribution that industry makes to GDP. the value added by the individual industries, this avoids double counting
- get output for each sector and look at trends
inflation
sustained increase in price level - need method to measure inflation
retail price index (RPI) and consumer price index (CPI)
- base period selected
- select ‘basket’ of goods
- each month calculate the value of that basked and express as a percentage of same basket at base date
- RPI deos not include top 4% of cashers or pensioners who have non state pensions
problems with comparing countries
- currency changes
- accounting methods
- pricing and flow
- climatic influences
- distribution of income
standard of living
real GDP (GDP- inflation) / population
problems with measurement of RPI
- changes in nature of goods and services
- comparison becomes more difficult as time goes on
- range of households - different income groups
- base year may become unrealistic
- spending patterns change rapidly
GDP deflator
GDP deflator = nominal gdp/ real gdp x 100
an attempt to look at all activity in similar terms to RPI
real GDP = GDP -inflation
nominal GDP = measured GDP
effects on inflation
- business confidence
- fluctuation in inflation makes it difficult for businesses to predict the future and their returns on investment - international competitiveness
- prices of exports rise faster than competitors, would occur if country has high inflation - redistribution of income
- increase in food prices and rent hits poor families the worst
- high inflation skews wealth to the rich - deflation
- depression tends to follow inflation but does not lead to lower prices, only a lowering of output and fewer jobs - savings
- value of savings fall with inflation
causes of inflation
demand pull and cost push inflation
demand pull
- excess purchasing power the increase in demand pulls prices up if supply constant
- increase in demand caused by increase in supply of money or gov running a budget deficit
- tax reductions can cause demand pull. lower basic rate of tax, increase allowances, reduce NI contributions
- government can stimulate growth via these measures
- currently, interest rate is low to stimulate growth
quantitive easing
- low interest rate not enough for stimulation
- central bank buys assets in bonds therefore money appears in the system
- increasing money supply can lead to hyper inflation
see notes
cost - push inflation
- an increase in cost not matched by higher production will give a price rise which is passed onto customers will give inflation
- increased costs due to: increase in money wages rate, increase in money prices of raw materials
stagflation
result of a combination of a rise in price level and fall in real GDP
factors that increase costs
- imported raw materials
- domestic costs
- poor productivity
- profiteering
- world shortage
- wages
concerns of inflation for government
- redistribution of income
- departures from full employment
policies
- reduce demand
- limit the supply of money
- curb activities of banks -reduce the amount of credit
- reduce budget deficit/ generate a surplus
- extra imports - take money out of economy
- increased taxation - high tax lowers money supply
- raise productivity
perfect anticipated inflation
- can adjust all variables to take into account the rate
- difficulties in terms of currency as interest is not paid on it and loss of opportunity - shoe leather costs
- menu cost - have to keep changing the price of things
imperfect anticipated inflation
if ou can’t predict the inflation rate, money is redistributed in the system because of:
- as money value of personal income rises - move into higher tax zone
- inflation reduced the real value of gov debt
- inflation effectively taxes cash
net result = flow of money from the private sector to gov and creditors loose out to debtors if rate higher than expected
-long term contracts at risk
