Macroeconomics Flashcards
(163 cards)
1
Q
Gross domestic product (GDP)
A
Measure of output of goods and services in a country in a year.
2
Q
Economic growth
A
Measured as the rate of change of the GDP per capita.
3
Q
Real GDP
A
GDP without effects of inflation (GDP rate has been adjusted).
4
Q
Nominal GDP
A
GDP in monetary terms - hadn’t been adjusted for inflation
5
Q
Total GDP
A
Total output from all citizens of a country
6
Q
GDP per capita
A
Total output per person
7
Q
Value
A
Value of all goods and services produced in one year
8
Q
Volume
A
Quantity of all goods/services produced in one year
9
Q
Gross National Income (GNI)
A
GDP plus any net income from abroad
10
Q
Gross National Product (GNP)
A
GDP from citizens of a country who live both in and out of the country.
11
Q
Evaluating growth points
A
How strong was economy to start with How much output does not appear because it is self consumed How is it calculated/reliability of data Relative exchange rates What does govt spend on
12
Q
Purchasing power parities (PPPs)
A
Real value of an amount of money, in terms of what you can buy with it
- to overcome problem of inaccurate exchange rates
13
Q
Limitations of GDP
A
Doesn’t take into account: Shadow economy Amount of public spending Income inequality Living standards
14
Q
Uk national well-being measures…?
A
Quality of living standards in UK
15
Q
National happiness conclusion
A
Money brings happiness to an extent
People are self interested so not happy if everyone’s rich
Real incomes not as important to people as relative incomes
16
Q
Inflation
A
Sustained increase in average price of goods/services over a period of time
17
Q
Deflation
A
Sustained decrease in average price of goods and services over a period of time
18
Q
Disinflation
A
Increase in average price of goods and services over a period of time, at a decreasing rate
19
Q
Measures of inflation
A
Consumer price index (CPI)
Retail Price index (RPI)
20
Q
Difference between CPI and RPI
A
RPI includes mortgage repayments and housing costs
21
Q
HOW is inflation measured
A
Living Costs and Food survey of 7000 households to find out what people spend money on/what proportion of income is spent on these items to work out weighting
Price survey measures changes in price of 700 of most common goods (basket of goods)
Price index = weightings x price changes
Converted to index number - inflation measured by %change to index number over time
22
Q
How to calculate index number
A
(Number in ratio to base year) x 100
23
Q
Cons of CPI/RPI
A
Living costs and food survey info may be inaccurate
Basket of goods only changes once a year - doesn’t take into account short term changes in spending habits
24
Q
Causes of inflation
A
Demand pull
Cost push
Growth of money supply
25
Demand pull inflation
Caused by excessive growth in AD compared to supply
| Shifts AD to the right twice, allowing sellers to raise prices
26
Cost push inflation
Caused by rising costs of production
| Shifts AS to left, allowing producers to pass on costs to consumers as higher prices
27
Growth of the money supply
Increase in amount of spending power in an economy
| Inflation caused by money supply being above rate of increase in real output in economy
28
Effects of inflation on consumers
Real value of savings falls as prices rise
| Real value of debt falls (as interest rates fall)
29
Effects of inflation on firms
```
Loss of international competitiveness- exports expensive and imports cheap (relatively)
Increased uncertainty about economy reduces investment
Increase profits (relatively) due to increased prices
```
30
Effects of inflation of government
Redistribution of incomes
| Real interest rates fall so cost of borrowing falls
31
Effects of inflation on workers
Purchasing power of people in fixed incomes falls as prices rise
May expect higher wages but firms not confident enough
Easier to find work because firms are lowering wages to cover costs
32
Rate of unemployment
Proportion of people IN work relative to size of labour force
33
Underemployment
Having a job below your productive potential/not utilising your skills or time
34
Measures of unemployment
Claimant count
| Labour force survey
35
Claimant count
Number of people claiming unemployment related benefits
Info is easy to obtain/updated monthly
Excludes people who are looking for work but not claiming benefits
36
Labour force survey
Number of people out of work but actively seeking work
Easy to make comparisons (legal requirement in EU)
More accurate than CC
More expensive/less up to date
37
Impact of change in rate of inactivity
Makes levels of unemployment look lower than actually are
38
Causes of changes in rate of employments/unemployment
Changes in
Compulsory school leaving age
Number of people entering higher education
Levels of net migration/availability of jobs
Levels of income tax
Levels of unemployment related benefits
39
Causes of unemployment
```
Structural
Frictional
Seasonal
Cyclical
Real wage
```
40
Structural unemployment
Caused by decline in certain industry of occupation
| Could be due to immobility of labour/technological advancement
41
Frictional unemployment
Experienced by worked between leaving and starting jobs
| Could be due to contracts ending/wanting higher wages
42
Seasonal unemployment
At specific times of year
| Due to immobility of labour/lack of transferable skills
43
Cyclical unemployment
Caused by lack of AD in economy
| Due to recession
44
Real wage unemployment
Caused by real wages pushed above market equilibrium of employment - excess supply of labour
Due to trade unions negotiating higher wages/introduction of NMW
45
Effects on unemployment during a recession
Increases among low skilled workers, especially if migration levels are high
46
Migration
People coming into a country
47
Effects of unemployment on consumers
Lower incomes so living standards fall
48
Effects of unemployment on firms
Lower consumer spending so lower profits
| Workers increase efficiency out of fear of losing jobs increasing profits (depending on cause of unemployment)
49
Effects of unemployment on workers
Lose morale/skills become outdated - reduces employability
| Reduced incomes can lead to health problems
50
Effects of unemployment on government
Less income tax revenue
Increased spending on unemployment benefits
Less indirect tax revenue due to fall in consumption
51
Effects of unemployment on society
Areas with high unemployment can have high crime rates
| Fall in living standards due to less spending on public goods
52
Balance of payments
Record of all payments in and out of country
| Made up of current account, capital account and financial account
53
Financial account
Involves movement of financial assets
54
Capital account
Transfers of non monetary and fixed assets
55
Current account
Made up of trade in goods, transfers, investment and primary income
Deficits or surpluses
56
Trade in goods and services
Measures imports/exports of tangible goods and services
57
Investment and primary income
Measures money flows in/out of country resulting from employment (primary income) or investment (inc. bank interest, profits from firms, dividends, salaries)
58
Transfers
Money flows that aren’t payments for goods/services or result of investment
59
Current account deficit
Imports are more than exports
Due to high consumption levels
Lack of ability to compete internationally (so exports fall)
Growth in foreign countries (expensive inelastic goods)
60
Current account surplus
Exports more than imports
Weak Domestic currency (exports cheaper)
High interest rates - less spending/more saving
Recession (fall in consumption/imports)
61
Interconnectedness Of economies through international trade
Interdependent countries due to international trade
If one country suffers, others have direct effect
Problem when current account imbalances are persistent
62
Aggregate demand
Total demand/spending in economy over given period of time
63
Why is AD curve downwards sloping
Exports are high at low prices due to international competitiveness
64
Consumption
Total amount spend by households on goods/services
| Largest component of AD
65
Influences on consumer spending
```
Savings
Disposable income
Interest rates (savings/debt rises)
Consumer confidence
Wealth effects
```
66
Investment
Money spent by firms on assets used to produce goods
67
Gross investment spending
All investment spending
68
Net investment
Only investment that increases productive capacity
69
Influences on investment
Economic growth rate
Business expectations/confidence
Keynes/animal spirits (intuition/social norms)
Export demand
Access to finance
Interest rates
Government influence/regulation-subsidies/tax
70
Government spending
Money spent by govt on public goods/services
| Only includes spending that directly contributes to output of economy
71
Influences on govt spending
Fiscal policy - overspending to boost AD/growth and vice versa
Trade cycle- to balance out surpluses/deficits
72
Exports
Goods/services produced in one country then sold in another
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Imports
Goods/services brought into country after being produced elsewhere
74
Net trade
Exports - imports
75
Influences on net trade balance
```
Country’s real income (If high - increases imports)
Exchange rates
State of world economy
Protectionism
Non price factors eg. Quality
```
76
Aggregate supply
Total output produced in economy at given price level over period of time
77
Short run aggregate supply slopes up from left to right because...?
Increase in price causes increase in output
78
Why is LRAS vertical
Increase in price won’t increase output because economy is already running at full capacity
79
Long run aggregate supply
Determined by FoPs
| AS completely inelastic because at full capacity
80
Factors influencing LRAS
```
Technological advances
Changes in relative productivity
Changes in education/skills
Changes in govt regulations (⬆️competition)
Migration
```
81
Short run aggregate supply
Determined by changes in cost of production
| Completely elastic because of spare capacity in short run
82
Factors influencing SRAS
Cost of raw materials/energy
Exchange rate changes
Tax rate changes
83
National output
National income
| National expenditure
84
Monetary flows
Incomes from firms to households
| Spending from households to firms
85
Physical flows
FoPs from households to firms
| Goods/services from firms to households
86
Influence on income levels (in terms of circular flow)
The more households spend and firms produce, the higher national income levels.
87
Wealth
Sum of all assets in economy
| Affects income and spending but no direct effect on circular flow of income
88
Income
Money that firm or individual receives for providing good/service
89
Circular flow of income
Affected by injections and withdrawals (leakages)
90
Injections
Increases circular flow of income/economic growth
Exports
Investment
Government spending
91
Withdrawals/leakages
Decreases circular flow of income/economic contraction
Imports
Savings
Taxes
92
State of economy when injections and withdrawals are equal
Equilibrium
93
Multiplier ration
Ratio of change in equilibrium real income to change in injections (that caused change in equilibrium)
94
The multiplier effect
When injection made into circular flow and actual change in national income is greater than amount of initial injection
95
Size of multiplier depends on...?
How quickly money leaks/injects from circular flow
If quick, multiplier will be small
If mpc is small, multiplier will be small (because national income=national expenditure)
96
Multiplier calculations
1/1-mpc
1/mpw
97
Marginal propensity to consume (mpc)
Change in consumption/change in income
98
Marginal propensity to save (mps)
Change in saving/change in income
99
Marginal propensity to withdraw (mpw)
Mps +mpt +mpm
| T=tax, m=import
100
Equation stating all income must be spent or withdrawn
Mpc + mpw= 1
101
Actual economic growth
Increase in real gdp
102
Potential economic growth
Increase in capacity of economy
103
Factors causing econ growth
Increase in component of AD
Export led growth
Increase in AS
Increase in LRAS could increase potential growth
104
Importance of international trade for export led econ growth
International trade important so country doesn’t rely on export market
International trade increases world GDP
Export led growth means there is current account surplus so an imbalance in economy
105
Negative output gap/recessionary gap
Difference between level of output and trend output (when actual is below trend)
Occurs during recession (under performing)
Downwards pressure on inflation
106
Positive output gap/inflationary gap
Difference between level of output and trend output (when actual is above trend)
Occurs during boom (fully using resources)
Upwards pressure on inflation
107
Why is it difficult to measure output gaps?
During a recovery, goes from negative to positive output gap
108
Boom
When economy is growing quickly
109
Recession/slump
Negative economic growth for at least 2 consecutive quarters
110
Recovery
Economy starting to grow again, going from negative to positive econ growth
111
Long run growth shown by...?
Increase in trend rate of growth
112
Trend rate of growth
Average rate of econ growth over period of time
113
Trade/business/economic cycle shows...?
How actual growth of economy fluctuates over time
114
How to show negative output gaps on AD/AS diagram?
Can’t show positive output gaps on AD/AS
No shifts - just show spare capacity (shows that underperforming)
115
Benefits of econ growth on consumers
Higher incomes due to greater profits to firms so more disposable income
Employment rises
116
Benefits of growth on firms
Greater profits
| Greater investment so increases productive potential
117
Benefits of econ growth on govt
Increase in tax revenue/reduce spending on unemployment benefits
Reduces need to borrow money
Increased production from firms increases exports and improves BoP
118
Benefits of econ growth on current/future living standards
Higher wages so increase standard of living
| Better environment due to more money to invest in resources
119
Costs of econ growth on consumers
Industrial expansion from firms may bring negative externalities
120
Costs of econ growth on firms
Must import more resources to meet high demand
121
Costs of econ growth on govt
Demand pull inflation because demand increases faster than supply
Cost push inflation as demand increases so price goes up
Potential BoP deficit due to increase in imports because of higher incomes
122
Costs of econ growth on current/future living standards
Income inequality (low skilled workers won’t get higher wages)
Increased stress/reduced productivity due to higher wages/responsibilities
Finite resources may be used to in achieving growth - restricts future growth/living standards
Environment destroyed when resources are overexploited
123
Quantitative easing
Increases money supply to encourage consumption to boost AD/create upward pressure on inflation
BofE creates money to buy assets owners by banks/firms
Encourages banks to lend money/firms to invest money
124
Demand side policy
Deliberate manipulation of AD by govt to achieve macro objectives
Consists of monetary and fiscal
To stabilise economy in short run
125
Monetary policy
Interest rates and QE
126
Fiscal policy
Government spending and taxation
127
Stagflation
When economy isn’t growing but is still suffering from inflation
128
Progressive tax used to...?
To redistribute income and reduce poverty
129
Regressive tax used to...?
Encourage supply side growth
130
Proportional tax used to...?
Achieve horizontal equity
131
Contractionary monetary policy
Reducing AD using high interest rates, restrictions on the money supply and a strong exchange rate
132
Expansionary monetary policy
Increasing AD using low interest rates, growth of the money supply (QE) and weak exchange rate
133
Aim of monetary policy
To ensure price stability, promote economic growth and reduce unemployment
134
Monetary policy committee
Part of BofE
| Sets interest rates to meet inflation target set by govt by changing AD
135
Inflation target
2% give or take 1
136
Direct tax
Tax on incomes
| Has impact on AD
137
Indirect tax
Tax on spending
| Has impact on AS
138
Progressive tax
When incomes rise, taxes rise as proportion of income
139
Regressive tax
When incomes rise, taxes fall as proportion of income
140
Proportional tax
Everyone pays same proportion of tax
141
Reflationary/expansionary/loose fiscal policy
Increasing G or lowering taxes to boost AD
| Usually causes budget deficit (G>revenue)
142
Deflationary/contractionary/tight fiscal policy
Reducing G or increasing taxes to reduce AD
| Usually causes budget surplus (G
143
When is reflationary fiscal policy likely to be used?
During recession to increase growth/reduce unemployment
| Will also increase inflation/worsen current account of BoP (cos of import spending rise due to higher incomes)
144
When is deflationary fiscal policy likely to be used?
During boom to reduce growth/increase unemployment
| Will also reduce price levels/improve current account of BoP (cos import spending rises due to lower incomes)
145
Structural budget position
Govts long term fiscal stance
146
Cyclical budget position
Govts short term fiscal stance
147
Demand side policy strengths
Monetary has shorter time lag than fiscal
148
Demand side policy weaknesses
```
Monetary raises costs of production
Fiscal creates time lag in decision making
Crowding out (opp cost)
```
149
Supply side policy aim
To expand productive potential of economy/increase trend rate of growth
150
Supply side policies
Govt creates right conditions for market forces to allow growth
Includes free market and interventionist policies
151
Free market supply side policies
Aim to increase efficiency by removing obstacles in free market
Eg. Tax cuts, privatisation, deregulation, policies to increase labour market flexibility
152
Interventionist supply side policies
Aim to correct market failure
| Eg. G on education, subsidies for R&D, G in infrastructure.
153
Market based supply side policies are effective for...?
Increasing incentive for firms to invest
Encouraging competition due to deregulation
Improving labour market flexibility
154
Interventionist supply side policies effective for...?
Improving education/training - improve skills/quality of labour force
Improve infrastructure to allow trade liberalisation
155
Trade liberalisation
Removing trade barriers to allow goods/capital to move freely between countries
156
Supply side policy strengths
Unemployment should fall as economy grows and output expands
Reduces cost push inflation due to greater efficiency so lower costs
Current account of BoP improves due to increase in international competitiveness
157
Supply side policy weaknesses
Effects seen after long time
Unintended consequences eg. Deregulation leads to too much risk taking
Unfair policies eg. Benefit cuts
158
Potential conflicts/trade off between inflation and unemployment
Shortage of labour causes rise in wages - increases consumption so cost of production rises - inflation
Short run Philips curve shows as inflation falls unemployment rises
159
Philips curve in the long run
Not viable because if govt increases G on reducing unemployment, inflation rises so wages have lower value - firms get lower profits
160
Potential conflicts between growth and BoP on current account
Growth raises incomes causing increase in import demand so firms have lower incentive to export due to greater demand in domestic market so current account worsens.
But if AS rises (fall in costs/rise in investment) economy will be more internationally competitive due to ability to export more/import less whilst growing
161
Potential conflicts between increased employment and sustainable environment
Less unemployment means increased congestion/air pollution.
Higher incomes means more likely to go on holiday so increase carbon emissions
But low unemployment could mean govt gets more tax revenue to reduce carbon use
162
Potential conflicts between growth and income redistribution
Growth causes incomes to rise at top end of income spectrum from bonuses leading to income inequality
Even if people on high incomes employed low skilled people, immigrants would fill gaps so wages wouldn’t rise
163
Potential conflicts between inflation and equilibrium on BoP
When inflation low, prices relatively low to other countries so export demand rises and import demand falls so budget deficit on current account of BoP improves.
But if there is surplus already, inflation control won’t remove surplus.
If interest rates high (because inflation high), exchange rate rises so more hot money into country so strong currency worsens current account.
