Macroeconomics Paper 3 study Flashcards
(20 cards)
What is GDP
GDP is the total monetary value of all finalized goods and services produced in the economy of a country and within the country’s borders in a specific time.
What are the two ways of calculating GDP?
Income Approach:
Add all the income earned by households as compensation for their FOP
- Land : rent
- Labor : wages
-Capital : interest
-Entrepreneurship : profit
Hence GDP = rent + wages + interest + profit
Output-expenditure Approach:
Adding C + I + GS + (X-M) = GDP = AD
What is and how do you calculate real gdp
Real GDP is the monetary value of all finalized goods and services produced in a country’s economy and within the country’s borders in a specific time. This type of GDP takes into account inflation
Real GDP = ( Nominal GDP / GDP deflator ) * 100
What is and how do you calculate Nominal GDP
Nominal GDP is the monetary value of all finalized goods and services produced in an economy of a country within the country’s borders in a certain timeframe. However, this type of GDP does not take into account inflation.
Nominal GDP = C + I + GS + (X-M)
What is real GDP per capita
Average economic output produced by a person within the population of a country adjusted for inflation
Real GDP / population
What is nominal GDP per capita
average economic output of a person within the population of a country that isn’t adjusted for inflation
Nominal GDP / population
What are some limitations of GDP?
Doesn’t take into account environmental impacts
Doesn’t take into account underground activities like things produced in the black market.
Doesn’t take into account non market output like household chores, caring for children or elderly)
Doesn’t take into account the type of output a country produces (if it’s guns or food)
Doesn’t take into account income inequality and wealth concentration: If the wealthy are producing a lot and hence increasing the AD, there is economic growth but the lower income individuals might not be producing hence earning a substantial amount even though there is economic growth.
What is the business cycle? Define the concept and draw a model while explaining the phases.
What are the drawbacks of the business cycle:
The business cycle shows the short term fluctuations of an economy and hence shows the long term trend of the economy and its economic growth.
Peak: This is when the economy is producing at its highest
Contraction: when the economy starts to slow down and economic growth decreases / deflation.
Trough: This is the lowest the economy is at which is usually a recession.
Expansion: This is when the economy begins to recover from a recession as price levels increase and output starts to increase. This is usually accompanied by inflation. Hence the economy is growing.
What is unemployment ?
What are the types of unemployment?
How do you measure unemployment?
What is the ideal percentage of unemployment in a country?
Why will there always be unemployment in a country?
Unemployment is the people who without a job but are within the labour age range and actively looking for a job.
The types of unemployment are:
Structural: when there is a mismatch between the job and the worker’s skill. Or, they are replaced by things like technology and their skills can’t be easily applied to other jobs. “Overqualified” or replaced by technology
Frictional: This is when the person is inbetween jobs like transitioning from one to another. Or, it could be a college student coming out of school and is starting to look for a job. Hence, they are “temporarily unemployed”
Seasonal: These people are unemployed because their jobs are dependant on a certain season of the year. For example, skiing can only happen in the winter. Or tourist jobs
The bad type of unemployment is cyclical unemployment: This is when people are unemployed because there is low demand in the economy. This is bad because it usually entails a recession. People are getting laid off and have less income hence they spend less which causes output to lower and prices to lower. This leads to deflation and usually a recession.
The ideal percentage of unemployment is around 2 to 3 percent
There will always be unemploymnet in a country because of the natural rates of unemployment.
What is economic growth?
Economic growth is the increase in real GDP overtime so there is more services and goods being produced within an economy
Real GDP: GDP adjusted for inflation hence you can actually measure the actual output not just the increase in price levels
Short term economic growth: An increase in AD such as consumer spending
Long term economic growth: an increase in the productive capacity of an economy such as an increase in capital or technological advancements.
How do you calculate Real GDP, GDP deflator?
Real GDP : (Nominal GDP/gdp deflator) times 100
GDP Deflator : (nominal gdp / real gdp) times 100
What is GNI and how do you calculate it?
Gross national income; its the total income earned from a country
Nominal GNI : Nominal GDP + (income earned from nationals abroad - income earned from domestic foreigners)
Real GNI: (Nominal GNI/gdp deflator) times 100
What is the circular flow model
This is an oversimplified model of the market economy and how money, resources, goods and services flow between firms and households. There are also leakages and injections of the economy through groups such as government, financial institutions, and foreign countries.
Explain the keyniscian model
Draw
What is cost push inflation. Explain its causes. Explain how it will eventually resolve itself. Explain some policies to help resolve it.
Draw diagram
Cost push inflation is a short term decrease in output
Cost push inflation is when demand decreases while price levels increase (stagflation). This is caused by a negative supply shock such as an increase in costs of production (increase in oil prices, increase in wages, increase in gov regulations, increase in business taxes)
So eventually, there will be more unemployment, less disposable income, less aggregate demand. However, workers will eventually accept the lower wages hence more employment and more disposable income. Hence, firms will be able to increase their production back to YFE.
Explain demand pull inflation
Demand pull inflation is when demand and price levels increase. This is usually because of an increase in the determinants of GDP/ demand:
- Consumer spending (tax cuts, stimulus that increases disposable income
- increase in investment
- increase in government spending
Increase in net exports
This will eventually fix itself because at first, there is short term economic growth so AD increases but firms will eventually not be able to keep up with the demand and the AS curve will decrease back to YFE.
To fix this, you can use contracitonary fiscal policies such as decreasing GS and increasing taxes.
You can also do Contractionary monetary policies such as increasing interest rates to decrease the supply of money. Hence there will be less demand for money as people don’t like higher interest rates. draw the diagram
Explain long-term growth with the three diagrams
Long term growth is an increase in the potential production capacity of an economy
Determinants:
- change in quality/quantity of FOP
- Change in population
- Tech advancements
- Education/training of workforce
- Gov policies
- Depletion/discovery of raw materials
Explain what is and how to calculate unemployment
What is the diagram of labour force?
To be unemployed, the person has to not have a job, within the age range of the labour force, and actively looking for a job.
(number of unemployed / workforce ) times 100
Draw the diagram
What are the types of unemployment
Structural unemployment: there is a mismatch between the skill of the worker and the skills required of the job (overqualified, tech replacement, or low demand for the skill)
Seasonal unemployment: when someone is unemployed because their job only occurs during some periods of the year
Frictional unemployment: When someone is between jobs
Cyclical unemployment: there is low demand, increased unemployment, decrease in disposable income, decrease in consumer spending
(Low economic growth = low demand and high unemployment)
