the Macroeconomy 4 Flashcards
(105 cards)
1
Q
What does National Income Statistics do?
A
it measures the total output of income and expenditure of an economy to assess it’s performance.
(because income is produced from output)
The higher the output, the greater the living standard.
2
Q
What is GDP & what is it used for?
A
Gross Domestic Product
used to assess what the total output produced / spent / bought in a country per year is.
3
Q
What is GNI and what is it used for?
A
Gross National Income
goes further than GDP to focus on all productions and earnings regardless from where earned.
(GDP + net income from abroad)
GNI can also include other sources like: compensation of employees, net property income from abroad, gross national disposable income.
4
Q
What is the difference in countries’ GDP and GNI?
A
Most countries’ GDP & GNI are similar.
Except when it’s GDP is higher than GNI, because of MNC & foreign workers contributing to the country’s output.
High GDP attracts foreign investment, resulting in net OUTFLOW of profits & other income.
Countries’ with higher GNI than GDP receive a net INFLOW of profits from their MNC operating overseas and investing in them.
5
Q
What are the 3 ways to measure GDP?
A
1) outcome
2) income
3) expenditure methods
(All facets of the circular flow of income - how income flows around an economy.
6
Q
Describe how the Output Method is used:
A
it measures GDP by calculating the total production of goods and services of a country.
It measures the value added at each stage in production to give a figure to the total market value of the finished product produced.
7
Q
Describe how the Income Method is used:
A
it measures the GDP by totaling all the incomes earned in producing the countries’ output. Measures rent, interest, profits, wages; and NOT transfer payments, subsidies or welfare checks.
8
Q
Describe how the Expenditure Method is used:
A
calculates GDP by totaling all the spending on a country’s output. (adding up consumer expenditure - stocks, investment, gov support)
It adds the expenditure on exports & deducts the expenditure on imports.
9
Q
What are GDP and GNI measured in?
A
1) market prices - prices paid by customers,
including indirect taxes imposed and
deduct subsidies given to producers.
2) basic prices - prices charged by producers
(equal to income paid for making of
output) before addition of indirect
taxes & deduction of subsidies.
10
Q
What is the difference between gross and net values.
A
“Gross” refers to the total amount of something before any deductions are made, while “net” refers to the amount remaining after all relevant deductions have been taken out.
11
Q
Define depreciation of capital goods:
A
the value of capital goods that have worn out or become out-of-date
12
Q
What is the difference between an open and closed economy?
A
Open economy: an economy involved in the
trade with international countries.
Closed economy: an economy that doesn’t
trade with other economies. (no import/
export)
13
Q
Briefly describe the circular flow of income in a closed economy.
A
Between households and firms, transactions such as factor payments, factor services, goods & services and consumer spending is exchanged.
(Fig 16.3)
14
Q
Briefly describe the circular flow of income in an open economy.
A
15
Q
Define Injections
A
Additions to the circular flow of income.
What adds to the expenditure of an economy: gov spending, investment, foreigners spending on country’s exports.
16
Q
Define Leakages
A
Withdrawals from circular flow of income. That which reduces spending in an economy: saved income, spending on imports.
17
Q
What happens when injections = leakages?
A
Income remains unchanged
18
Q
What happens when injections more than leakages?
A
extra spending in the economy, causing income to rise.
19
Q
What happens when injections are less than leakages?
A
more spending leaves the economy, causing income to fall.
20
Q
what does the circular flow of income show us?
A
how and why macroeconomic equilibrium can change.
21
Q
what are some links between injections and leakages
A
22
Q
What factor determines the quantity of output in an economy?
A
The total demand & supply for goods and services.
23
Q
Where does the demand for a countries’ products come from?
A
from it’s local households, firms and government & the households, firms and governments of other countries.
24
Q
What is an economy’s output?
A
the products produced by the private and public sector.
25
Define aggregate demand
the total demand for a country's goods and services at a given price level and time period.
26
What factors influence the components of demand?
1) consumer expenditure
2) investment
3) government spending
4) net exports
27
What is the main influence on consumer expenditure?
1) The level of disposable income - when
income rises, total spending usually
follows.
2) Distribution of income - income more
equally spread when rich are taxed &
poor are given benefits.
3) Rate of interest - households spend more
when rates are low, return from saving
are low and its easier to obtain loans.
4) Availability of credit
5) Expectations of future economic
prospects - (NB influence) pessimistic
people don't save, whereas optimistic
people's income rises with secure jobs;
thus spend more.
6) Wealth - more income is saved as income
rises.
28
What changes influence the amount of Investment (spending on capital goods)?
1) Consumer demand - if rise, firms buy
more capital equipment to expand
capacity.
2) Rate of interest - if falls, stimulates short
term rise in investment.
3) Technology - advances raise the
productivity of capital goods and
stimulate more investment.
4) Cost of capital goods - a reduction in
capital equipment prices also raises
investment.
5) Expenditure - expectations have NB
influence on investment. Optimistic
firms have greater spending and expect
higher demand for their products.
6) Government policy - to increase private
sector investment, gov can cut
corporate tax and provide investment
subsidies.
29
What factors influence the amount of Government spending
(gov spending like education, healthcare, investment on infrastructure, etc)
1) Tax revenue - if high, the gov can spend
more without having to borrow, which
allows the overall spending to increase
to boost economic activity.
2) Gov policy
3) Demographic changes - can pressure gov
to increase it's spending in a certain
area
30
What factors influence the amount of Net Exports?
net export = exports - imports
1) The country's GDP - when the GDP
increases, the demand for imports
follows
2) Other countries' GDP - when income rises
abroad, the demand for the country's
exports follows suit.
3) The competitiveness of countries -
demand for exports rise when the
competitiveness improves because if
good marketing and productivity.
4) The exchange rate - if falls, a country's
exports become cheaper and the
imports, more expensive.
If the demand for imports and exports
are elastic, export revenue will rise, while
import revenue falls; causing net exports
to fall.
31
How does a contraction in aggregate demand occur?
from a rise in price level
32
How does an extension in aggregate demand occur?
from a fall in price level
33
What does AD curve do?
shows the different quantities of total demand for economies products at different prices.
34
Why does AD fall when price level rises and rise when price level falls?
1) The wealth effect - a rise in the
price level reduces the amount of g&s
people can afford. The purchasing
power of savings & assets fall.
2) The international effect - a rise in price
level reduces the demand for net
exports, as it becomes less price
competitive. Conversely, imports
become more price competitive.
3) The interest rate effect - a rise in price
level increases the demand for money,
resulting in higher prices & interest
rates. Higher interest rates causes
reduced consumption and investment.
35
What factors cause movement of the AD curve.
Changes in price can cause movement of the curve, but changes in non-price factors - like consumption, investment, gov spending, net exports - cause the WHOLE curve to shift left or right.
35
What factors would cause the AD to increase and how?
1) Consumer expenditure
- rise in consumer confidence
- cut in income tax
- increase in wealth
- rise in money supply
- increase in population
2) Investment
- rise in business confidence
- cut in corporate tax
- advances in tech
3) Government spending
- desire to stimulate economic activity
- desire to win political support
4) Net exports
- fall in exchange rate
- increase in incomes abroad
- rise in quality of locally produced
products.
35
Define Aggregate Supply
total output (real GDP) that producers in an economy are willing and able to supply at a given time period.
36
What is a Short-run supply curve?
the total output of an economy that will be supplied when there hasn't been enough time for prices of the factors of production to change.
36
Define long-run aggregate demand curve.
the total output of a country supplied in a period when prices of factors of production is fully adjusted.
36
What causes shifts in the SRAS curve?
1) Change in price of factors of production -
a rise in wages not matched by a rise in
labour productivity. Raw material costs
cause fall in SRAS and a left shift on the
curve.
2) Change in taxes on firms - reduction of
corp./indirect tax causes increased
SRAS.
3) Change in factor productivity/ quality of
resources - rise in labour/ capital
productivity, increases the AS in short &
long run.
4) Change in quantity if resources - in the
short-term the supply of inputs is
influences by the supply-side shocks,
which have big impact on the
productive potential in the long run.
36
As the price level rises, producers are willing to supply more goods and services.
What are 3 reasons for this positive relationship?
1) The profit effect - the price level may
increases, but the prices of factors of
production remain unchanged. Meaning,
as the price level rises, the gap between
input & output prices widens, increasing
the profit.
2) The cost effect - assuming wage rates,
costs and input prices stay unchanged
in SRAS curve; average cost rises as
output increases. To cover costs of
more output, raise prices.
3) The misinterpretation effect - producers
confuse change in price level with
changes in relative price. Thinking
higher prices equals product
popularity, they produce more.
36
What do Keynesians economists believe?
Economists who agreement that government intervention is needed to achieve full employment.
They represent the LRAS curve as perfectly elastic at low rates, then sloping upward at range of output, then finally perfectly inelastic.
In the long term, they emphasize that the economy can operate at any level of output, and not just at full capacity.
*explain the stages of the curve
37
What do new classical economists believe?
Economists who think that the LRAS curve is vertical and the economy will move towards full employment without government intervention.
They believe that in the long run, the economy can operate at full capacity
Rise in AD increases output in the short-run and encourages firms to make use of existing resources. Yet, long term, intensive use of resources raises production costs.
The output will return to initial level but at higher price level.
* explain the curve
37
What does the Long-run aggregate supply curve indicate?
the relationship between GDP and changes in price level when there is time for input prices to adjust to changes in the AS.
37
What causes the LRAS curve to shift?
changes in quality/quantity of resources.
38
What factors cause increase in quantity of resources in the long run?
1) Net immigration - increased size of
labour force.
2) Increase in retirement age - increased
size of labour force.
3) More women enter labour force -
increased size of labour force.
4) Net investment - total invec=stment
exceeds deprecation, there are additions
to capital stock.
5) Discovery of new resources - increasing
at country's productive potential.
6) Land reclamation - adding to total land
area.
39
What factors cause the quality of resources to increase?
1) Improved education and training -
increase the skills of workers and raises
labour productivity.
2) Advances in technology - reduces costs of
production and increase productive
capacity.
40
How is the macroeconomic equilibrium determined?
the output and price level where AD = AS.
41
What happens when the aggregate demand or supply changes?
the economy moves to a new macroeconomic level.
42
What is the key indicator of economic growth?
economic growth
43
how does economic growth occur?
the output must increase more than the growth of the population (GDP per capita must increase)
44
Hoe is economic growth measured?
in terms of the changes in real GDP (country's output). The rate is the % change in real GDP from year to year, by measuring prices.
44
define nominal GDP
total output measured in current prices. (not adjusted for changes in price level)
44
Define real GDP
Total output measured in constant prices
45
How can economists see what a country's output is?
By analysing the the nominal and real GDP
46
How to calculate real GDP?
measure GDP at constant prices in a base year, so that inflation doesn't distort nominal GDP.
= nominal GDP x prices index in base year /
price index in current year
46
Why is nominal GDP a misleading way to see a country's preformance?
Nominal GDP doesn't necessary rise when the amount of g&s are increased, but rather when prices are increased.
47
define price index
a way of comparing price change over time. It is used to convert nominal GDP (aka GDP deflator)
48
What happens when government spending reduces interest rates and taxes?
output and the applied factors of production increase.
48
How does spare capacity happen?
when output increases because of a rise in AD.
49
What happens when consumer confidence rises?
consumer expenditure increases, resulting higher AD.
50
What causes the quantity of resources increases?
1) higher supply of labour/entrepreneurs:
- from a natural result of increased
population
- net immigration of working ages.
- result of government policy measures
(deregulation, privatisation, raise
retirement age)
2) supply of capital goods increase - form
net investment
3) discoveries increase the quantity of land.
51
What causes the quality of resources to increase?
1) Greater productivity of factor inputs
2) Better education, healthcare, training -
improving the quality of labour and
entrepreneurship
3) Advances in technology - raises the
quality of capital goods
52
What happens when there is negative economic growth and the GDP falls?
Leads to recession, a decline in real GDP for 2 consecutive quarters; because of a decrease in AD/AS.
53
What are the benefits of economic growth?
1) Economic development
- more g&s available
- higher living standards
- easier to combat poverty
- greater tax revenue from high
incomes and spending
- higher employment
- greater AS, resulting in g&s
being more internationally
competitive
- increased real GDP, for higher
AD.
2) Stable growth
- increased business
opportunities and consumer
confidence, resulting in higher
investment.
- encourages more economic
growth, giving the country
prestige and power
internationally
54
What are the costs of economic growth?
1) Opportunity cost - (short run:)
reduced g&s resources moved from
consumer goods to capital goods.
- (long run:)
increased investment, resulting in more
capital and consumer goods.
2) Other - higher stress and anxiety
- dynamic changing economy can
leads to the expansion, then
decline of industries
- workers struggle to cope or learn
new skill
- increased working hours and
pressure for improvements
- depletion of resources and
damage to environment from the
high output required
55
How is the unemployment rate calculated?
nr of people unemployed / nr people in labour force x 100
56
What is the stock of unemployment?
unemployment measured at a particular time
57
What is the flow of unemployment?
unemployment measured over time
58
What are the two measures of unemployment?
1) Claimant count measure - measure
unemployment based on nr of
unemployment benefits claims
2) Labour force survey measure - measure
of unemployment from surveys
identifying people actively seeking
jobs.
59
Explain Claimant count measure
Cheap and easy to calculate - gov collects it as they the benefits.
But, people seeking jobs/ a big proportion of unemployed people don't appear on official figures.
60
Explain Labour force survey measure
Involves a survey for people not included in the claimant count. It provides info on the type of qualifications these job seekers have.
But, the data is more expensive and long to collect than claimant count. The risk of sampling errors with regards to the survey is difficult to combat.
61
What are the three types of unemployment
1) Frictional unemployment
2) Structural unemployment
3) Cyclical unemployment
62
What is Frictional unemployment?
temporary unemployment that arises when workers are in-between jobs
63
what is Structural unemployment?
unemployment caused from a changing in the the structure on economic activity.
64
What is Cyclical unemployment?
unemployment from lack of aggregate demand.
65
Explain the types of Frictional unemployment
= unemployment temporarily arises when
workers are in-between jobs.
1) Voluntary unemployment - when people
don't accepts jobs at the going wage
rates and working conditions, this can
be influenced by the unemployment
benefits.
2) Search unemployment - when a worker
takes time to search a job, before
accepting it. The provision of more/
better quality info can reduce this.
3) Casual unemployment - when people
leave their short-term job for another
short-term job. (eg: actors)
4) Seasonal unemployment - arises at a
certain time when demand for product
falls. (tourism)
66
Explain the types of Structural unemployment
= caused by changing structure of economic
activity
1) Regional unemployment - decline of jobs
in certain area. Industries contract /
expand as demand and supply changes.
2) Technological unemployment - caused by
advances in tech, changing methods of
production. Unemployed can have mix-
matched qualifications/ experience.
3) International unemployment - when
country loses international
competitiveness in producing a
product. demand switches from
domestic industries to competitive
foreign industries.
67
Explain the types of Cyclical unemployment
unemployment that results from lack of aggregate demand / a fall in it.(demand deficient) It affects the whole economy, and will persist regardless of if wage rate falls, because demand will still fall.
68
What are the consequences of unemployment.
Workers - fall in income
- longer out of work, in which
they loose confidence , well-
being worsens, miss out on
training, out of touch with tech
Firms - can expand to get bigger choice of
workers
- can respond to changes in in
demand and supply
- workers may fear asking for a raise,
because of loosing job
- lower demand on g&s
Economy - lower tax revenue
- more gov spending on benefits
- opportunity cost of less output
and less revenue
69
How significant is unemployment?
Effects of depend on rate, duration, type.
it gets more serious the longer people are unemployed. Skills become outdated, workers become discourages, low incomes and employers are more reluctant to hire them.
Fric & Struc: the least serious and is
unavoidable in a changing economy.
Cyclical: very serious problem, because of
the high amount of unemployment it
causes and how long its duration lasts.
A certain level of unemployment will always exist, because the demand and supply of labour is always changing. Countries try to avoid structural and cyclical and minimize frictional.
Low unemployment is a sign of a strong economy, but underemployment is also bad.
70
What does price stability mean?
Low and stable inflation rate. When prices increase by small percentage and avoids fluctuations in price level. All governments want countries to experience this.
70
Define inflation rate
percentage rise in an economy's price level over a period of time.
71
What is the price level?
the average of all prices in an economy. When it rises, the money value falls along with it's purchasing power, and each unit of the currency will buy less.
72
What are the degrees on inflation?
1) low inflation rate - stable& low is no issue
- steady & low would
encourage economy to
produce more
2) Hyper inflation - high rate that can cause
people to loose confidence in the
currency. When inflation rises by
more 50%, it become out of control,
and people begin to barter, because
g&s have higher value than the
actual currency. A new unit of
currency must be introduced.
73
What is disinflation?
a fall in inflation rate, that still remains positive. The price level is still increasing, but at a slower rate. (8% to 6%)
74
What is deflation?
a sustained fall in price level that results in a rise of value of money and each unit of currency having a greater purchasing power. (-3%)
75
What are the two ways of measuring the inflation rate?
1) Annual average method:
compare average prices in 1 year with
that of the previous year.
2) Year-on-year method:
comparing percentage change of price
level of a given month with that of the
same month in the previous year.
75
Define consumer price index (CPI)
a measure that shows average change in prices of a representative basket of products purchased by households.
76
How do governments construct a CPI ?
1) select a base year
2) carry out a survey to find people's
spending patterns.
3) attach weights to the different categories
4) find out the price changes
5) multiply weights by price changes
(difficulties of measuring changes in the price level occur at most stages of CPI)
77
What is the difference between money values and real data?
Real data is data adjusted for inflation in real terms.
Money values are values at the prices operating at the time in nominal values.
78
How is real data estimated?
by deducting change in inflation rate from the change in money value
79
What is the formula for converting money values to real data
figures x price index in base year / price index in current year
80
What are the causes of inflation ?
1) cost-push inflation
2) demand-pull inflation
81
What happens in cost-push inflation?
It is inflation caused by an increase in costs of production and price level because of a decrease of AS. Wages can increase more than labour productivity, resulting in overall higher labour costs. wage-price spiral occurs.
Higher prices may have been caused by a fall in the exchange rate/ depletion or damage of resources/ increased business profit margins.
82
What happens in demand-pull inflation?
It is inflation caused by increase in AD that isn't matched by equivalent increases in AS.
A rise in AD could be a cause of rise in consumer expenditure/ gov spending/ exports/ investments/ etc. This has a big impact on the price level if the economy is closer to full capacity.
Increase in gov spending and investment is not inflationary in the long run.
A rise in AS could be caused by excessive growth in money supply (monetaristic). When the supply on money grows more than the output, it could drive up the price level, which causes inflation.
83
How does the Monetaristic viewpoint compare with the Keynesian viewpoint with regards to the inflationary causes of increased money supply?
M: economists believe that inflation is
caused by growth of money supply that
is caused by higher AS.
K: economists argue that it is inflation that
causes increase in money supply (not
other way around) If costs rise, firms
borrow more from the banks, increase
the quantity of money supply.
84
What is the link between demand-pull and cost-push inflation?
1) High demand riving up costs: When
demand is very high, companies may
need to increase wages to attract
more workers or pay more for raw
materials to meet production needs,
leading to increased production costs
and ultimately higher prices for
consumers.
2) Wage-price spiral: In some cases, high
demand can lead to workers
demanding higher wages to
compensate for rising costs of living,
which can further push up production
costs and fuel inflation.
85
What are the potential benefits of inflation?
1) Stimulates output: low stable inflation
increases demand and makes firms
optimistic of the future. If the prices rise
more than the costs, profit increases. As
investment rises the rate of interest falls
and consumer spending will rise as
incomes increase.
2) Reduces the burden of debt: interest
rates fall with inflation, stimulating
consumer expenditure, increasing
output and employment.
3) Prevents some unemployment: inflation
reduces the real costs of labour; it will
either then rise with inflation or remain
constant. Inflation allows workers strong
bargaining power to resist cut wages.
86
What are the potential costs of inflation?
1) Reduction of net-exports - inflation
reduces international competitiveness,
increasing import spending and
decreasing export revenue
2) Unplanned redistribution of income -
borrowers gain and lenders and savers
loose; inflation doesn't boost interest
rates
3) Menu costs - cost of business changes
due to price changes of inflation
4) Shoe leather costs - cost of moving
money around in search of highest
interest rate.
5) Fiscal drag - income of people and firms
being adjusted into higher tax brackets
as result of inflation, cause higher taxes.
6) Discouragement of investment - creates
uncertainty, making it hard for firms to
plan ahead, affecting economic growth.
7) Inflationary noise - confusion over
relative prices caused by inflation;
misallocated resources
8) Inflation causing inflation - expecting
higher prices, it causes further inflation.
This is hard for gov to control.
87
What factors affect the consequences of inflation?
1) The cause of inflation - D.p is less harmful
than C.p.
2) The rate of inflation - high rates are more
harmful than low rates
3) If rate in inflation is stable / accelerating -
fluctuating rate is harmful
4) If inflation rate was expected -
unexpected discourage investment and
spending. Expected is less harmful and
people makes adjustments
5) How the inflation rate compares with
other countries - if below, the country in
more internationally competitive.
88
What can deflation do?
Depending on the cause, it could increase the burden of debt, or increase the real interest rate (menu costs). Which can be good/ bad.
89
How does good deflation come to be?
it is a result of increase in AS (fall in price level and rise in real GDP) Advances in tech is a likely cause, resulting in lower costs, higher output, higher employment and greater international competitiveness.
90
How does bad deflation come to be?
when the price level is driven down by a fall in AD, resulting in less output, delayed purchasing, lower demand, less employment and investment, and higher levels of unemployment. Ultimately lowering the economic activity.
91
In conclusion, what should be done with regards to inflation?
The gov should aim for low and stable inflation rate, rather than decreasing the price level. A low rate of demand-pull inflation can promote economic growth. The measures of inflation overstate the inflation rate, because they don't see the full account of quality improvements, resulting in consumers choosing low-priced products.
