theme two Flashcards
(186 cards)
1
Q
GDP
types of GDP?
A
- measure of final output/ value added to an economy
- real GDP
- nominal GDP
- green GDP
2
Q
seven macroeconomic objectives?
A
- economic growth
- low unemployment
- low and stable rate of inflation
- balanced government budget
- protection of the environment
- reduce income inequality
- balance of payment equilibrium of current account
3
Q
AD =
A
C + I + G + (X - M)
4
Q
AD formula meaning?
A
c - consumption i - investment g - government spending x - total export revenue m- total import revenue
5
Q
aggregate demand
A
total demand for goods and services produced within an economy
6
Q
circular flow of income
A
model of the economy
shows the flow of goods, and income around the economy
7
Q
circular flow of income
A
model of the economy
shows the flow of goods, and income around the economy
8
Q
economic growth occurs when
A
there is an increase in GDP
9
Q
real vs nominal GDP
A
real - adjusted for inflation
nominal - not adjusted for inflation
10
Q
GNI
A
GDP + income earned from abroad - foreigner earnings
11
Q
GNP
A
GDP + the income received from overseas sources
12
Q
gross investment
A
buying new capital goods
13
Q
capital stock
A
amount of capital goods in the economy
14
Q
define net investment
A
- change in capital stock
- gross investment - depreciation
15
Q
accelerator effect & formula
A
- when a increase in GDP results in a proportionally larger rise in investment
- says that investment is directly linked to the rate of change of GDP
- It=a(yt-y(t-1))
16
Q
investment
A
- firms spend money on capital goods
- to increase their productive capacity
17
Q
if interest rates are low..
A
- cost of borrowing = low
- firms have greater incentive to borrow
- reduce incentive to save
- lower monthly mortgage repayments
- rising asset prices (people feel wealthier)
- depreciation in exchange rate
- investments will increase
- AD shifts right
18
Q
business confidence determined by
A
- future expected profit
- future expected demand
19
Q
determinants of investment (6)
A
- interest rates
- business confidence
- level of competition
- corporation tax
- spare capacity
- price of capital
20
Q
corporation tax
A
tax imposed on the net income of a company
21
Q
reasons to change public expenditiure
A
- level of GDP
- size and age of population
- political priorities
- redistribution of income
- need for discretionary fiscal policy
- debt interest
- differences between role of the state (USA vs FINLAND)
- financial crisis?
22
Q
appreciation / deprecitiaon
A
increase / decrease in value of currency
23
Q
determinants of household consumption
A
- disposable income
- wealth
- access to/ cost to borrow
- demographics
- confidence
24
Q
define average propensity to consume (APC)
A
the proportion of a households total income that is spent
25
marginal propensity to consume (MPC)
the proportion of every extra unit of income a household earns which is spent
26
components of government spending
- transfer payments
- current expenditure
- capital expenditure
- national debt interest repayments
27
disinflation
when there is still inflation, but the rate of inflation has decreased
eg. 5% inflation to 2% inflation
28
deflation
consistent decrease in the general price level
29
inflation
persistent increase in general price level
| over a given period of time
30
factors in the long run are…
variable
31
LRAS is determined by…
- size of workforce
- size of capital stock
- level of education
- productivity
32
costs of productions AS
- wages
- raw material
- oil prices
- business taxes (VAT)
- import prices (SPICED)
33
why is the keynesian graph horizontal ?
to increase output without increasing any prices
34
positive output gap
actual economic growth > potential
35
negative output gap
potential > actual economic growth
36
keynes was a
demand-side economist
| that means policies that shift AD
37
why is the LRAS curve vertical?
quality and quantity of factors of production do not change with changes in the price level
38
what causes a movement along the AD curve
change in the overall price level
39
animal spirits
describes the instincts, emotions that guide human behaviour eg. can be measured in consumer confidence
40
what impacts net trade (x-m)
- exchange rates
- inflation rates
- relative income
- spare capacity
- protectionism
41
what impacts net trade (x-m)
- exchange rates
- inflation rates
- relative income
- spare capacity
- protectionism
42
most important factor that can shift LRAS outwards?
productivity growth
43
savings ratio
savings as a proportion of disposable income
44
increase in investment
- purchasing capital stock
- adds to capital stock of the country
- increase in productive capacity
- leads to rise in output
- increase in profit for firms
- people earn more income
- more consumption, keeps the cycle going
- increase in employment
- future economic growth
- ad shifts out
- LRAS shifts out
EVAL - ONLY 15% OF AD
45
MPC
marginal propensity to consume
| increase in consumption / increase in income
46
MPS
marginal propensity to save
| increase in saving / increase in income that caused it
47
MPT
marginal propensity to tax
| increase in tax revenues / increase in income
48
MPM
marginal propensity to import
| increase in imports / increase in income
49
MPW definition?
and formula
marginal propensity to withdraw
increase in withdrawals from the the circular flow
(S + T + M) / increase in income
ALSO = MPS + MPT + MPM
50
multiplier formulas (3)
1/ 1-MPC
1/ MPS + MPT + MPM
1/ MPW
51
multiplier effect
a change in one of the components of aggregate demand can lead to a multiplied final change in the level of GDP
52
budget deficit
when government spending exceeds tax revenue
| an increase / decrease in deficit causes shifts in AD
53
factors affecting national happiness
| UN LIST
```
real GDP per capita
health and life expectancy
perceived freedom to make life choices
freedom from corruption
generosity
having someone to count on
```
54
richard layard national happiness list
```
family
financial situation
work
community and friends
health
personal freedom
personal values
```
55
boom or peak
- period of time when economy = strong
| - operating above productive potential
56
demand-side shock
-sudden and large impact on AD
57
full capacity
- no extra production can take place
- shown by classical long run AS
- or shown by vertical part of keynesian AS
58
injections in circular flow of income
- investments
- government spending
- exports
59
output gap
-difference between actual GDP and productive potential of economy
60
standard of living
- how well off economy is
- measured by complex mix of variables
- eg. income, health, environment, political freedom.
61
supply side shock
-sudden and large impact on AS
62
supply side shocks
- factors such as wage rate or commodity prices
| - causing SRAS to shift
63
unemployed
-those not in work, but seeking work
64
wealth effect
- change in consumption following change in wealth
- why?
- wealth = 'feeling' rich, as assets are worth more, so you spend more due to this
65
withdrawals/ leakages from circular flow of income
- savings
- taxes
- imports
66
percentage change
difference / original x 100
67
index number calculation
new / base x 100
68
real vs nominal wage
- real = wage without inflation
- nominal = wage with inflation
- real = nominal - inflation
69
why do classical LRAS not want to shift AD?
- consumers and firms would benefit more from an increase in AS
- believe that changes in marginal tax rates heavily influence economic behaviour
70
cost-push inflation
- AS to left
- if COP increases
- price level increases
71
demand-pull inflation
- people are buying more goods
- fixed amount of goods
- increase price of goods
- people will pay more, causing inflation
72
demand pull inflation (why does this happen?)
-greater pressure on existing factors of production to produce more output
-becoming scarcer
-more pressure = higher prices
=inflation
73
demand pull inflation causes
- decrease in interest rates
- decrease in taxes
- increase in confidence
- increase in government spending
- weak exchange rate (x-m)
74
cost push inflation (how does it work?)
- firms are suffering from higher costs of production
- passing on costs to consumers
- via higher costs
75
cost push inflation causes
- increase in raw materials price
- increase in wages
- increase in business taxes (VAT)
- increase in imported raw materials price due to a weaker exchange rate
76
CPI
- consumer price index
- measures inflation
- doesn't include any housing costs
- takes into account, when prices rise, people will switch to a product that has gone up by less
- covers all incomes, of all households
77
RPI
-retail price index
-includes housing costs
^^eg, mortgage, interest payments and council tax
-generally higher than CPI
-excludes top 4% of income earners, and low income pensioners
^^only 'average' households
-no longer the best method :(
78
RPI
- retail price index
- includes housing costs (eg, housing costs, such as mortgage + interest payments + council tax)
- generally higher than CPI
- excludes top 4% of income earners, and low income pensioners -> not average
79
effects of inflation on the consumer
- real value of savings fall as prices rise
- the purchasing power of those on fixed incomes fall as prices rise
- high levels of debt = benefit, those owed that money = at a loss
- shoe leather costs
80
shoe leather costs
- opportunity cost of time and effort
- people have by holding less cash in order to reduce inflation tax they would pay on cash holdings when there is high inflation
- these are:
- additional trips to bank
- not being able to make changes
- not being able to make unexpected purchases
81
effects of inflation on firms
- loss of international competitiveness
- increases uncertainty
- investment from abroad might decrease (the money that people invest will be worth less)
- menu costs
82
menu costs
-administrative costs to have to constantly change prices
83
effects of inflation on the government
-a little inflation is good, acts as a cushion against deflation
84
the effects of inflation on the workers
- if they don't receive yearly pay rises w/ the rate of inflation, they will be worse off
- deflation could cause some staff to lose their jobs as there is a lack of demand
- ^deflation causes real value of debt to increase, decreasing spending power of firms and consumers
- less power to hire workers
85
employment
-the number of people in work
86
unemployment
-the number of people who are willing and able to work, but do not have a job
87
underemployment
- when people are counted as looking for an additional job
- or actively searching for a new job with longer hours
88
unemployment rate =
number of unemployed / labour force x 100
89
employment rate =
number of employed / population of working age x 100
90
measures of unemployment
- claimant count
| - the labour force survey
91
types of unemployment
- cyclical
- structural
- frictional
- seasonal
- real wage
- long term
92
seasonal unemployment
-predictable fluctuations in demand in a market throughout the year
93
cyclical unemployment
- unemployment caused by recessions
| - demand deficient unemployment
94
structural unemployment
- unemployment caused by labour immobility
| - ^(the inability of workers to work in different markets, industries, or sectors of the economy)
95
-two types of immobility? +explain
-geographical immobility - inability of workers to perform diff jobs in diff locations
EG - someone in kent might find it hard to find a job vs living in ldn
-occupational immobility - inability of workers to perform jobs given their skillset
EG -construction worker will find it harder to find a job outside of construction than someone with a degree in maths (versatility)
96
frictional unemployment
-workers unemployed short term, while looking for a job
97
hysteresis
- cause of employment
- workers who have been unemployed for a long time
- lose skills, motivation and ability to work
- much less likely to ind a hob than the short term unemployed
98
define balance of payments
- records all financial transactions made between consumers, businesses and the government in one country with all other nations
- a big spreadsheet that measures the inflows + outflows of money into and out of a country
- measures international transactions
99
balance of payments three components
- current account
- capital account
- financial account
100
current account (BOP)
- balance of trade in goods
- balance of trade in services
- net primary income (interest, profits, dividends and migrant remittances)
- net secondary income (transfers, i.e contributions to the EU, military aid, overseas aid)
101
capital account (BOP)
- sale/ transfer of patents, copyrights, franchises, leases, and other transferable contracts (eg, international buying and selling go land by businesses)
- debt forgiveness/ cancellation - forgiving debt counted as a negative
- capital transfers of ownership of fixed assets
102
financial account (BOP)
- net balance of foreign direct investment flows
- net balance of portfolio investment flows
- net balance of banking flows
103
costs of unemployment
- loss of skills, and other human capital, hard to get back into the labour market
- government revenue falls, so government spending more likely to fall
- social cost, more crime, social disintegration
104
accelerator coefficient represents?
- capital to output ratio
- capital = how much is being produced
- output = how much is sold
105
accelerator theory rationale (why)
- consumer demand increases
- firms get close to full capacity
- firms increase investment to meet demand
106
effects on uk economy if investment decreases
- increase in unemployment, which has effects of its own
- inflation from as shifting in, less investment in capital goods = less production
- PPF shifts inwards
- fall in output
- loss of international competitiveness, and worsening of the current account deficit
- fall in productivity, having long run consequences
107
why is GDP a good measure of living standards
- best option/ method we currently have
- living standards are not quantifiable, so can’t measure - therefore GDP is good
- very useful in the wider context of a composite indicator
- universally well understood, and agreed upon
108
why GDP is a bad measure of living standards
- ignores distribution of income
- ignores population changes (discussion of GDP per capita = better)
- real vs nominal? real = ignores inflation, impractical
- GDP ignores factors, such as self produced goods, or black market
109
problems of comparing economic growth between countries using GDP
- black market may be more prominent in other countries, which may undervalue the real output
- spending on investment may increase future welfare at the expense of current welfare
- quality of life issues, eg spending on education, or wealth
- population growth in developing countries may account for most growth in GDP
110
long term unemployment (issues with it)
- hysteresis
- people unemployed for long time, lose skills + motivation
- long term unemployment = less likely to be hired
111
real wage unemployment + eval
| if can - try drawing graph- check online if correct
-minimum wage raises the wage in the labour market above equilibrium
-creating excess supply of employment
-excess supply of labour
HOWEVER - EVAL
-in competitive labour market, wages would return to equilibrium
112
effects of decrease of real income
- lower purchasing power, less goods consumed
- negative multiplier effect, leads to unemployment, further falls in income + fall in standard of living
- consumer = scared of future = higher savings ratio, less consumption
- lower tax revenue for government, less government spending on public goods w positive externalities
- may worsen government budget deficit spending > revenue
113
standard of living definition
-a measure of the welfare of people living in an economy
114
why low inflation = undesirable
- expectation of falling prices in the future discourages purchases today, consumption/ AD fall
- cycle that is difficult for an economy to get out of
115
why low inflation = desirable
- exports increase, imports decrease = improve UK trade balance + international competitiveness, improves exchange rate (SPICED)
- may lead to higher wages, or less erosion of fixed incomes, hence, less spending
- could lower interest rates, encourages borrowing
- encourages business borrowing, hence - more investment
- benefits of falling oil prices
116
if interest rates are high
- monthly mortgage repayments = higher = less spending
- reduced business investment = due to higher borrowing costs
- stronger currency = imports cheaper,
117
shifts in classical LRAS curve
- technology changes
- changes in productivity
- changes in education and skill
- changes in government regulations
- changes in demographics and migration
- factor mobility
- improvements in infrastructure
118
what shifts keynesian LRAS
-increase in capacity of the economy
119
full capacity define
- the level of output where no extra production can take place with the existing resources
- shown by classical long-run AS curve
- or vertical part of keynesian AS curve
120
output gap define
- a measure of the difference between actual and potential GDP/ growth/ output
- potential = economy at full output
- in exam, draw output diagram
121
effects of negative output gap
- unemployment
- standard of living decrease
- international competitiveness
- investment
- real GDP decrease/ economic growth
122
crowding out
-economic theory that an increase in public sector spending drives down, or even eliminates private sector spending/ investment
122
crowding in
- higher government spending
- increases economic growth
- encourages firms to invest
123
two scenarios for crowding in
- via unemployment
| - via economic growth
124
accelerator theory
-theory that level of investment is related to past changes in income
125
active population
- those in work, or actively seeking work
| - aka the labour force
126
determinants of public expenditure (5)
- level of GDP
- size and age of population
- ideological differences
- need for discretionary fiscal policy
- redistribution of income
127
three types of tax
- progressive tax
- regressive tax
- proportional tax
128
progressive tax
- tax where the higher the income of the taxpayer
- the larger the proportion of income
- eg. income tax, corporation tax, inheritance tax
129
regressive tax
- tax where the higher the income of the taxpayer
- the smaller the proportion of income is paid in tax
- eg. VAT
130
proportional tax
- a tax where as the income of taxpayers increases
- the same proportion of income is paid in tax
- eg. NIC’s
131
direct tax tends to be…
progressive
132
indirect tax tends to be
regressive
133
economic effects of changes in tax
- incentives to work
- income distribution
- FDI flows
- real output and employment
- tax revenues (laffer curve)
134
laffer curve
- a rise in the tax rate does not necessarily increase tax revenue
- eg. if people were taxed at 100% they would not do any work and this means that tax revenue is 0 at both 0% and 100%
- there is an optimal tax revenue, which maximises revenue
135
poverty trap
- little incentive for workers earning a low income to earn extra income
- would result in having to either pay higher tax and/ or losing some of their benefit payments
136
fiscal policy
changing in government spending and taxation by the government very year to control AD
137
supply-side policies
-policies to increase LRAS
138
demand-side policies
-policies to regulate AD
139
monetary policy
-performed by the bank of england
140
policies to increase AD (demand-side)
-expansionary or inflationary policies
141
policies to decrease AD (demand-side policies)
-contractionary or deflationary policies
142
discretionary vs regular fiscal policy
fiscal policy is changing the governments budget to influence aggregate demand
- e.g. changing taxes and spending
- discretionary fiscal policy means the government make changes to tax rates and or levels of government spending
- e.g. cutting VAT in 2009 to provide boost to spending.
143
potential vs actual economic growth
- potential = changes in LRAS
| - actual = changes in AS or AD
144
market based methods (supply side policies)
- focuses on the power of the free market
- allowing the forces of supply and demand to eliminate equilibrium imbalances
- eg. reducing income/ corporation tax
145
```
interventionist methods (supply-side policies)
definition and example
```
- focuses on the need for the government to intervene in markets to achieve a goal
eg. increasing government spending on education/ healthcare
146
FDI
- foreign direct investment
| - investment from one country into another
147
portfolio investment
- when people / businesses from one country buy shares, such as bonds in other nations
- eg. a UK investor buying shares in google
148
monetary policy is performed by...
the central bank
149
fiscal policy is performed by...
the government
150
monetary policies examples
- the base rate
| - quantitative easing
151
the base rate
- the interest rate which the BOE charges on its loans
| - BOE only lends to banks
152
monetary policy define
changes to interest rates, the money supply and the exchange rate by the central bank - in order to influence AD
153
expansionary monetary policy
(policies to increase AD)
- increase inflation
- increase growth
- reduce unemployment
154
contractionary monetary policy
| definition and what effects it has
-policies to reduce AD
- reduce inflation
- reduce excess debt
- promote saving
155
transmission mechanisms
-central bank cut interest rates
-lower credit rates
(consumers borrow more)
OR`
-weaker exchange rate = savers will loos for better interest rates to save (money leaves economy) = hot money outflows !
156
transmission mechanisms
-the process through which monetary policy decisions affect the economy in general and the price level in particular
EXAMPLES
-central bank cut interest rates
-lower credit card interest rates (consumers borrow more
-decrease in savings (interest rates on savings fall)
-decrease in mortgage rates = ^consumption
-decrease on business loans = incentivise to invest more (borrowing more)
-weaker exchange rate = savers will loos for better interest rates to save (money leaves economy) = hot money outflows !
157
expansionary monetary policy transmission mechanism effects
- AD will shift out
| - LRAS will shift out (due to an increase in business investment)
158
how does investment shift out LRAS
- increase in capital
- increase in quality of capital
- improvement in productive efficiency of economy
159
quantitative easing
| what is it? and what does it aim to do?
- monetary policy
- central bank buys financial assets in order to increase the domestic money supply
- encourages borrowing and lending in the economy
160
process of quantitavive easing
| part one
- central bank creates electronic money
- purchases bonds from financial institutions
- financial institutions then issue bonds to the central bank
161
process of quantitavive easing
| part two
- demand for bonds then increase
- increases prices of bonds
- higher price of bonds = less risky investment
162
alongside quantitative easing...
| graph?
-domestic money supply increases
-lowers interest rate
-increase in money supply
=banks have more money to give out loans
-repackage extra money to loan out to consumers
163
aims of quantitative easing
- improve money supply
| - encourage lending by banks
164
philips curve
- states that inflation and unemployment have an inverse relationship
- low levels of unemployment = high inflation
- high levels of unemployment = low inflation
165
PPP
-purchasing power parity
-method of converting between currencies which adjusts for price differences
-works by assuming that value of goods = identical across countries
money required to purchase these goods must be equivalent in value
166
determinants of consumption
WII EU TIT
- wealth
- income
- interest rates
- expectations
- unemployment
- taxes
- inflation
- technology
167
determinants of saving
GAFIIES
- government policy
- age
- real disposable income
- interest rates
- consumer confidence
- saving schemes
168
investment determinants
CuTE SPIRIT Pc
- capacity utilisation (if close to full capacity more likely to invest)
- technology advancements
- expectations about the future (deflation = expecting cheaper future prices)
- subsidies
- profits
- income
- relative factor prices (other costs)
- interest rates
- tax
- price of capital
169
how do interest rates affect investment?
| an increase in interest rates
-increase in interest rates will decrease investment
-borrowing money for investment = more expensive
-firms will anticipate consumer spending falling, because borrowing is more expensive, so less likely to invest
-increase opportunity cost of investment
^(sacrificing money that could've been saved in bank)
170
net exports determinants
HAPPIER
- household real disposable income
- abroad real disposable income
- price level (inflation)
- productivity
- innovation
- exchange rate
- restrictions (govt.)
171
wealth effect
-when households become 'richer' (due to inflation) -> rise in prices
^as a result of a rise in asset values,
-such as corporate stock prices or home values
-they spend more and stimulate the economy
171
what makes economic growth sustainable
- can continue over time
| - does not endanger future generations ability to expand productive capacity
172
ways to achieve sustainable growth
- investment
- avoiding non-renewable resources
- not having consumption-led growth
173
claimant count
- a measure of unemployment that includes those receiving unemployment related benefits
- does not include those with partners who are in work
- or people u18
174
how is CPI calculated
- select base year
- family expenditure survey (6,000 households asked to keep record of expenditure)
- create basket of goods and services
- products = put into different categories w/ different 'weights'
- weights = importance
- weights/ items = changed every year
- prices = compared over time
- weights x price changes
- weighted price changes are then totalled to work out inflation rate
175
how is CPI calculated
- select base year
- family expenditure survey (6,000 households asked to keep record of expenditure)
- create basket of goods and services
- products = put into different categories w/ different 'weights'
- weights = importance
- weights/ items = changed every year
- prices = compared over time
- weights x price changes
- weighted price changes are then totalled to work out inflation rate
176
CPI =
updated cost / base period cost x 100
177
consequences of unemployment
BOTS CH
- benefits expenditure
- output lost
- tax revenue lost
- spenditure pressure on government
- costs to the unemployed themselves (health, self-worth)
- hysteresis
178
marshall-lerner condition
-currency depreciation will only correct a current accounted deficit if...
PEDx + PEDm > 1
179
j-curve
an economic theory that states that after currency depreciation, the trade deficit will initially worsen before it improves
180
automatic stabilisers
- ongoing government policies
- automatically adjust tax rates and transfer payments
- intended to stabilise incomes, consumption, and business spending over the business cycle
181
keynesian LRAS curve implies that there may have....
-negative output gap in the long run
182
hot money inflows
- increase in UK interest rates
- better return on savings
- more money enters the economy
- increased demand for sterling
- appreciation
183
hot money outflows
- decrease in interest rates
- low return on savings
- people will go to other countries to save there
- money leaves the economy
- demand for sterling decreases
- depreciation
184
quantitative easing
- central bank creates artificial money
- increases money supply in the economy
- shifts out supply = decreases ‘price of money’
- decrease in interest rates for commercial bank
- people can borrow for less
- more consumption in economy = increase AD
