Module 11 – Macroeconomics Overview Flashcards Preview

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Flashcards in Module 11 – Macroeconomics Overview Deck (36):

Define Capital Stock?

Ntural and man made resources


Define Labor force 

...that part of the population willing to work 


Define National Output 

National Output = Capital Stock + Labor


What does Purchasing Power Parity (PPP) allow?

Purchasing Power Parity (PPP) allows the comparing of countries national output by comparing the cost of a basket of goods 


If part of the ___ and part of the___ is idle then the national output will ___

capital stock (e.g. factories);  labor force; be less than its potential


Describe Potential output growth? 

Potential output is not static, it normally grows due to the:
- growth in the quality and quantity of labour
- growth in the quality and quantity of capital stock
- technological advances


What is Gross National Product (GNP)?

The actual output of an economy is known as the Gross National Product (GNP)

GNP is the value of all final goods and services produced in the economy in a year:

GNP = apa + bpb + cpc + ... p

where p = price of that goods or service and a,b,c… is the quantity


Households give ___ to firms and in return receive an ___


resources (labour);income (Gross National Income=GNI)


GNI=___= ___



What is GNE?

Gross National Expenditure.  Gross National Expenditure alue of total spending by households. 


What is GNI?

Value of the services of the factors of pproduction hired by the firms


Define microeconomics?

Microeconomics attempts to explain relative prices


Explain macroeconomics?

Macroeconomics explains behaviour of level of prices of all goods/services taken together

- Inflation/deflation

Also concerned with behaviour of total income and total output, unemployment


GNP = ___

C (Consumer goods produced) + I (Investment/capital goods produced)


Define Entrepreneurs/managers 

combine capital and labour to produce goods and services


Discuss Long-term solution to poverty?

Long-term solution to poverty is not transfer of food and clothing – rather assistance in establishing capital stock and labour force In the short run there is virtually nothing a nation can do to internally acquire resources but it can avoid wasting them


GNI = ___

C (Consumer goods purchased) + S (Savings)


If consumer goods produced exceed consumer goods planned for purchase then?

- Unsold goods will increase inventories
- Firms will begin to produce fewer goods
- Firms will require fewer resources
- Household income will fall
- Households will purchase fewer goods

Gap will widen until inventories fall below desired levels then process will be reversed

These processes called “Business cycle”
- Creates waste
- Government has tools to alleviate tendency


Aggregate demand consists of expenditure from 4 groups:

- Consumers (households)
- Firms
- Government
- International (households, firms and governments)

Each of these groups’ expenditures can be affected by governmental policies; consequently the policies enacted by government can influence aggregate demand.



Discuss Actual output

  • Gross National Product (GNP) = Sum of prices of all goods produced
  • Gross National Expenditure – value of total spending by households
  • Gross National Income – value of services of factors of production hired by firms


GNP = C (Consumer goods produced) + I (Investment/capital goods produced)

GNI = C (Consumer goods purchased) + S (Savings)


State the macroeco-nomic relationships

Let the symbol Y stand for Gross National Product.

Thus GNP ≡ GNE ≡ GNI ≡ Y

(NOTE: ≡ indicates an identity, i.e. something that is necessarily true by definition.)

For a domestic economy, aggregate demand equals consumption expenditure (C) plus investment expenditure (I) plus government expenditure (G).

Thus domestical-ly GNP ≡ Y ≡ C + I + G


Y (GNP) = C (consumption expenditure) + I (investment expenditure) + G (government expenditure in an international  economy

However, in an international setting, part of a nation’s resources are allocated to the production of export goods (X) and simultaneously households, firms and govern-

ments may buy goods from foreign nations, in other words imports (Z).

Thus internationally Y ≡ C + I + G + X ― Z

This last equation is known as the national income identity, and policy makers must never lose sight of it.


Y = C + I + G + X (export) – Z (import)


Define Fiscal policy 

– control of government expenditure and tax rates
- Income taxes, sales taxes, customs, excise taxes, corporation taxes


Define Monetary policy 

Supply of money which directly affects interest rates


Explain Output gap / employment gap

 - aggregate demand is less than potential output

– idle labour and unused capacity in capital stock


Explain Inflationary gap 

  • Aggregate demand is higher than potential output
  • prices rise, marginal buyers drop out of market


Potential output (Q) expands regardless of government action due to supply-side factors:

- Growth in quality and quantity of capital stock
- Growth in quality and quantity of labour force
- Technological change


Government has three mechanisms to affect equivalent growth in aggregate demand (Y). Explain.

  • Increase government expenditure
  • Reduce tax rates
    • Increase disposable incomes
  • Increase money supply
    • Decrease rate of interest (R)


Macroeconomics goals generally accepted as desirable are:

o Low inflation
o Low unemployment
o Balanced budget
o Positive balance of trade
o Stable currency


Inflationary bias of market economics 

- At full employment inflation rate is positive
- Zero inflation might require a very high unemployment rate


Explain full-employment rate of unemployment

Known as the natural rate of unemployment and this rate varies according to the socio-economic
characteristics of each nation’s labour force


Explain full-employment rate of down-time

unused capacity


Discuss Gross domestic product (GDP).

GDP defines the economy as existing within the country’s

GDP measures the output of an economy based on location


Explain Gross National Product versus Gross Domestic Product

  • We have already defined GNP as the value of all final goods and services pro-
    duced in the economy in a given period, and GDP measures the same thing
  • The difference is that GDP defines the economy as existing within the country’s
    borders, while GNP defines the economy according to the ownership of factors of production
  • While GDP measures the output of an economy based on location,
    GNP measures the output of an economy based on ownership
  • GNP = GDP + Net Income from Abroad


What doe sit mean if we assume potential output in the short run is fixed?

The ability of a government to affect aggregate demand means that government policies can affect the
unemployment rate and the inflation rate.

Probelm with policies:

  • Time lag
  • Moving target (output continuously increasing)
  • Households and firrms:
    • Households expenditure is variable and unpredictable
    • Firm expenditure even more volatile
    • Depend on managers long-term expectations
  • Exogenous shocks (e.g. oil price spikes, ooil cartel)


Name the policies categories that gorment has control fall into

fiscal policy and monetary policy


Explain inflationary gap.

But what happens if households, firms and governments combined (the aggre- gate demand) attempt to buy more than the economy can produce.

The answer is that prices will rise and we will have what is known as an inflationary gap, the extent of the gap and therefore the inflationary forces being dependent upon by how much aggregate demand exceeds full-employment output. Prices will rise, marginal buyers will drop out of the various markets, and the economy will return to full-employment equilibrium but at a higher price level. Why, you might ask, cannot this excess aggregate demand be satisfied with imports? It can be, as long as your country is creditworthy abroad, i.e. as long as other nations are willing to loan you the use of some of their resources – the resources that produce the imported goods and services. The debt, of course, will have to be serviced regularly and be repaid in the future.