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Flashcards in Y1 Macroeconomics Deck (193):
1

Name Four main Economic Objectives

Low and stable inflation
Real Economic Growth
Low Unemployment
Balance of payments

2

Name three secondary objectives

Income distribution (equality)
Environmental externalities
Balancing budget

3

Measures for Unemployment (2)

Claimant Count
Labour Force Survey

4

Why is the LFS usually higher than the Claimant Count?

Not all members of a household will claim benefits, while some will still unemployed
- People may be unemployed but not eligible for benefits

5

What are the criteria for the LFS?

Monthly survey
60,000 households
Uses International Labour Organisation definition of u/e
- looked for work past 4 weeks, ready to start in 2 weeks

6

What is GVA

Gross value added (value of resources used to produce goods and services)

7

How is GDP calculated

GVA + taxes - subsidies

8

How do you calculate Real values with indices

= nominal * base year/current year

9

National Output is theoretically the same as...

National income and national expenditure

10

What is capital depreciation

loss in value of capital due to capital consumption and depreciation

11

GDP + NPIA = ?

GNI

12

What is NPIA

Net property income from abroad (international earnings)

13

Why is GNP a better measure than GDP?

It includes overseas and domestic earnings

14

NNI =

GNI - depreciation

15

What is the best estimate for a country's national income

Net National Income (NNI) = GVA + taxes - subsidies + NPIA - capital depreciation

16

What type is excluded from National Income calculations?

Transfer payments as they have no corresponding outputs

17

Name a transfer payment

2nd hand trade
Government benefits
Pocket Money

18

What is the most common value used for comparing country's national income?

GDP pc - accounts for population size and is readily available data

19

Name 5 weaknesses with GDP pc when comparing countries

Purchasing power
Quality of G+S may differ
Income distribution is ignored
Externalities ignored
Unrecorded Economy may differ in size

20

What is GNP

Value of G+S produced domestically and internationally by residents

21

What is the accelerator equation?

Investment = a (change in income)
a is the capital-output ratio (ratio of capital needed to goods produced)

22

Name 3 positives of investment

Uses profits
Improves effeciency
Raises capicity
Capital can substitute labour (cheaper)
Exploit economies of scale
Provides barrier to entry so start ups can't compete

23

Net investment =

Gross investment - capital depreciation/consumption

24

What is investment in economics?

Adding of CAPITAL stock to the economy

25

What is the balance of payments?

Record of all financial dealings between two countries

26

What is the balance of payments split into (and which bit is more important for year 1 macro)

Current Account (Important), capital and financial accounts

27

What is the current balance

Net trade (difference between exports and imports)

28

Current account surplus =

Exports>Imports

29

Current account deficit =

Imports>exports

30

Why are current account deficits problems in the long run?

means a country is living beyond its means -leads to debt

31

What is the current account split into?

Visibles (goods) and Invisibles (services)

32

What is Hot Money?

IR proportional to ER
Higher interest rates increase saving which increases speculative money flows into the UK, appreciating the pound

33

What are Primary and Secondary incomes in the current account?

Primary is investment income
Secondary is transfers between organisations or governments

34

What goes from households to firms in the circular flow model?

Factors of Production, Expenditure

35

What goes from firms to households in the circular flow?

Wages etc, G+S

36

What are the injections?

Investment, Exports, Government spending

37

What are the withdrawals?

Saving, imports, taxes

38

How is inflation measured?

Typical basket of goods (600 items)
Consumer Price Index and Retail Price index

39

What is disinflation?

A decreasing rate of inflation

40

What is Stagflation?

High inflation during a recession

41

What is the opposite of inflation?

Deflation

42

What is Money Illusion?

Wage increase may not equate to a real change in income, yet people feel richer

43

3 Costs of high inflation

Economic disruption as planning is difficult
Less international competitiveness
Redistribution costs (disrupt fixed incomes/taxes)
Shoe-leather costs - money lost as decisions put off
Menu costs - shops have to change prices
Wage Price Spiral - higher wages mean higher prices which mean higher wages etc

44

Types of inflation (2)

Demand pull
Cost push

45

6 causes of unemployment

Frictional
Seasonal
Structural
Cyclical/demand deficient
Real Wage - minimum wage
Benefits trap

46

3 Costs of unemployment

Loss of household income - less spending
Emotional difficulties for unemployed
Reduces available capital workers
Employers don’t want the long term unemployed
Can lead to increases crime and violence
Costs the government's large amounts in welfare
Loss of economic output
Demand is less

47

Equations for the multiplier

1/(1-MPC) =
1/(MPW) =
1/(MPT + MPM + MPS)

48

2 examples of supply-side shocks

Commodity price rise
Trade Union wage rise

49

2 Demand-side shocks

Stock Market Crash
IR rise
Sharp pound appreciation
World economic recession

50

What is hysteresis?

When a variable does not return to the same trend when dramatically changed

51

What are the factors of production?

Land, labour, capital, enterprise

52

Name three transfer payments?

Pocket money
2nd hand trade
Government benefits

53

Why is real GDP pc better than just GDP

Real adjust for inflation
pc adjust for population time

54

formula for real

nominal x base year/current year

55

Why is unemployment bad?

Wastes scarce resources and means the economy is underperforming

56

What is inflation

increase in average prices

57

Why is high inflation bad

unstable prices and therefore consumers misinterpret and therefore there is misallocation of resources

58

When is there a current account surplus?

Exports>imports

59

When is there a current account deficit

Imports>exports

60

How is the current account deficit financed?

borrowing and selling assets of the general population

61

Equation is Ad

AD = C + I + G +X-M

62

What is the interest effect?

Reason for AD sloping down
- If PL increases people have to borrow more to finance it, this increases demand for loans increasing the cost of money (interest rates), this reduces Consumption and investment therefore AD decreases

63

What is the wealth affect (in terms of AD)?

Reason for AD sloping down
As PL increases, consumer purchasing power decreases reducing RO

64

What is the international effect?

Reason for sloping AD
As PL increase then international competitive decreases and therefore exports decrease reducing AD

65

What are durable and non-durable goods?

Durable - proivdese.g. car
Non-durable - used up or perishes soon after purchase e.g. food

66

What is MPC?

Marginal propensity to consume =
change in consumption/change in income
= dC/dY

67

What is APC

Average propensity to consumer =
C/Y

68

What is the wealth effect?

Large change in asset prices change consumer confidence as they feel wealthier or poorer

69

What is APS

Average propensity to save
= S/Y

70

What is MPS

marginal propensity to save
dS/dY

71

What is the UK APC approx

~90% - high and suggests under investment

72

What is investment?

spending on capital stock

73

What are the positives of investment? (3)

Uses profits
Raises capacity
Capital can substitute labour
Improves efficiency
Exploit economies of scale
Creates barrier to entry

74

Variables that affect investment (5)?

Costs
Interest rates
The rate of economic growth
Business expectations/confidence
World economy
Retained profit
access to credit
government regulations

75

D exogenous

non-economic variables have influence

76

What does "ring-fenced" mean?

When areas of G spending are unlikely to change bc they are too supported
(i.e. a government would struggle to cut education spending)

77

G and T in a deficit/

G>T

78

How is a government deficit financed?

Government borrowing

79

What factors affect net trade? (3)

Price (labour/production costs)
Real income - incomes up raise imports
Exchange rate - SPICED
World economy
Protectionism (FREE TRADE)
quality

80

What happens in teh short run

at least one factor of production is fixed

81

Why is the SRAS upward sloping

As price levels increase, business can make more profit so their output increases

82

Why is the SRAS shallow?

As businesses can repsond quickly in the short run to a small increase in price (overtime working for e.g.)

83

What affects SRAS?

Supply side shocks

84

Name some supply side shocks

Wage rates
Raw material prices
taxes
exchange rates
productivity

85

What curve works in a similar way to the LRAS

PPF

86

What cause shifts in the LRAS (5)

Technological advancements
Productivity increase
Education/skills
Regulation
Size of workforce
COmpetition policy
New enterprise
Mobility of FoP
Economic incentives (e.g tax breaks)
Institutional structure (politics)

87

What is the issue with classical LRAS

Doesn't account for long times of mass unemployment

88

What are the types of LRAS?

Classical Keynesian

89

Why is the keynesians model more realistic

Modern economies have minimum wages therefore stopping wages falling very low when labour is in excess supply

90

Events in the economic cycle

Peak/boom
Downturn/contraction
Regression/depression/slump
Recovery/expansion

91

Circular flow equation

O=E=Y

92

Name the injections

Investment
Government spending
Exports

93

Name the withdrawals

saving
taxing
imports

94

What goes from firms to households in the circular flow diagram

Goods and services
Wages/rents/interest/profit

95

What goes from households to firms in circular flow

Expenditure (on G+S)
Land, labour, capital

96

When is an economy in equilibrium

injections=withdrawals

97

what is not necessarily independant in macro?

AD and AS

98

Which side of LRAS is negative output gap

left

99

What is the name for the output gap on the right side of the LRAS

positive

100

Where does an economy always end up long run in classical economics

On the LRAS as LR there is full employment

101

3 equations for the multiplier

1/(1-mpc)
1/mpw
1/(mps+mpt+mpm)

102

Principle of the multiplier

as money flows around an economy it causex a domino effect by boosting NI more than the initial investment

103

What is the negative multiplier effect

What is resultant after a large withdrawal (knock on effects)

104

What are the difficulties with the multiplier (3)

Hard to measure
based on the circular flow model
Not instantaneous

105

Difference between real and nominal

Real = adjusted for inflation
Nominal = unadjsuted prices

106

What is a transfer payment

movement of money without a corresponding output

107

Difficulties with measuring economic growth? (4)

Statistical innaccuracies
Hidden economy (black market)
Home produced services
Public sector (non marketed goods can be difficult to value)

108

Flaws with comparing NI over time (3)

Population changes
quality may chnage
defence costs are not invested
measures are innacurate
C is SR growth but I is LR growth
income inequality

109

What is a Purchasing power parity

comparison between GDP taking into account cost of living

110

Why is a PPP better than an exchange rate

weaker economies are often undervalued even though their population has a high purchasing power

111

What is wealth?

a stock of assets that produce a flow of income over time

112

What is the easterlin paradox?

Happiness and income only correlate at low incomes
- only relative income matters once necessities are covered

113

Name indicators of happiness? (5)

Economy
personal finace
location
type of work
health
relationships
well being
government trust
education/skills

114

What is stagflation

rising inflation and unemployment

115

definition of a recession

tow sucessive quarters of negative growth

116

Name some demand side shocks (3)

housing bubble burst
stock market crash
sharp IR rise
Sharp tax raise
World economic recession
sharp appreciation in the pound

117

What does actual GDP above the trend line represent?

Output gap positive
- overworked, unsustainable

118

Why is a positive output gap unsustainable in the long run?

Economy is overworked
In the LR workers may demand higher wages for extra hours

119

What is hysterisis?

Variable does not return to its former trend
- e.g. shock creates new trend level

120

Why does economic hysterisis occur?

A shock can cause long term struxtural unemployment

121

What are the factors on the function of output?

Land, labour, capital, technical progress, effeciency

122

How can AD affect long term growth?

An increase in demand by cause the need for business investment

123

How long does it take for a government to double at a growth at
i) 3%
ii) 5%
iii) 10%

i) 25
ii) 14
iii) 7

124

What is sustainable growth?

Must increase productive potential as well as AD
shift AD and LRAS

125

What occurs in unsutainable growth?

Scarce resources and used up and increase in price reducing consumption
suppliers try and find alternatives
consumers switch products

126

impact on consumers and producers of economic growth

Consumer incomes rise over time, may become unequal
Producers - sales increase, but some markets may disappear

127

impact of economic growth on government?

rising tax revenue
rising demand for public goods

128

Impact on environment of economic growth

usually negative but depends on regulation

129

What is reflation

recovering growth after a recession (QE for e.g.)

130

What two measures are used to measure inflation

CPI - consumer price index
RPI - retail price index

131

Is the CPI or RPI usually higher

RPI

132

How is inflation calculated?

using a typical basket of goods (650 items) and their average change in price
items are weighted and then added proportionately

133

2 main causes of inflation?

demand pull
cost push

134

What influences demand pull inflation

increases in C I G or X
decreases in M

135

What causes cost push inflation

increases in costs for firms
increase in regulations
wage changes

136

Costs of high inflation (5)

growth and unemployment (planning difficult)
decreases competitiveness world trade
redistributional costs - real values change dramatically
Price increases are unpopular
Shoe-leather costs - money lost as decisions put off
Menu costs - changing prices
Inflationary noise - ineffecient allocation
Wage price spiral - workers want higher wages which pushes up costs, which means workers need more money etc

137

Problems of deflation (3)

depressed demand
lowers confidence
encourages saving

138

Benefits of low inflation

money illusion
AD is steady
doesn't affect saving
investment can repay long term borrowing

139

What is the money illusion

low inflation causes people to believe that their wages are increasing when they aren't in real terms

140

Causes of unemployment (6)

Frictional
Seasonal
structural
Demand-deficient/cyclical
Real wage
benefits trap

141

What is the benfits trap

people would rather claim benefits then work

142

What is the real wage cause of unemployment

a minimum wage stops firms being able to employ as many people as they want

143

What are three target areas for governments looking to increase employment

women
older workers
Disabled workers

144

Pros of migration

Fills skills gap
circular flow of income creates jobs

145

Negatives of migrations

decreases wage rates
put jobs owned by UK citizens under pressure

146

Costs of unemployment (5)

emotional
loss of human capital
loss of income and tax revenue
can lead to crime
large costs to government in welfare
reduced AD and output

147

Benefits of small amounts of employment?

flexible workforce
career changes can boost productivity
deflationary
defers strikes

148

Name top five global trading nations

usa
china
japan
germany
uk

149

What is the balance of payments?

A record of all financial transactions between two countries over a period of time

150

What is the balance of payments spilt up into

curent account
capital and financial account

151

What is the current account?

Payment for the purchases and sale of goods and services

152

What are invisibles

intangible services

153

Example of invisible credit export

foreigner staying in UK hotel

154

Example of invisible debit import?

foreign holiday

155

what are goods traded

visibles

156

Money move in an export?

into the UK

157

Name for net money flowing into the UK

Current account surplus

158

What type of current account does the uk have

deficit

159

What is the current account made of

millions of private and public transactions

160

issue of a long term deficit on the current account

lead to increasing private debts

161

Point of Hot money

IR proportional to ER

162

Two parts of demand side policies

Fiscal
Monetary

163

Who desides monetary policy

Monetary policy commitee (9 people chaired by Mark Carney)
Part of Bank of England
Independant from government

164

What are the main types of monetary policy

IR - conventional
QE - unconventional

165

Is a rise interest rates generally regressive or progressive

regressive as the wealthy have larger savings and the poor borrow more

166

What is quantitative easing

Government buys financial assets (usually bonds) with newly printed money to increase borrowing and lending

167

IR target

2% +- 1%

168

What is key to the analysis marks

the transmission mechanism

169

What is government expenditure split into?

Capital
Current

170

How is government expenditure financed?

Taxing and borrowing

171

What is PSNB

Public Sector Net borrowing - government borrowing

172

What is accumulated when PNSB>tax revenue

Public sector net debt (PSNB)

173

What is the PSNCR

Public sector net cash requirement

174

q.175 what is the current (nov 2017) debt as a percentage of GDP

87.2%

175

What are automatic stabilisers?

Smooth the business cycle with progressive taxes and benefits systems

176

What are the arguments for running a budget deficit

More G and multiplier
Low IR borrow now instead of later
growing economy will be able to cope with future debts

177

Types of fiscal

loosening, tightening

178

What does expansionary fiscal policy do

shift AD out

179

What type of policy can shift AD in

Contractionary demand side poicies

180

Weaknesses of demand-side policies (5)

time lag 1-2 years
Can increase debts
Multiplier has little effects in the short run
Difficult to quantise output gap or multiplier
Very easy to overstimulate economy

181

What would a keynesian economist say about demand side policy

only way out of a recession (diagram)

182

Name some supply side policy (5)

incentives
promoting competition
reforming the labour market
improving labour quality
improving infrastructure
removing red tape

183

Why is supply-side sometimes more advantageous than demand side

long term and deflationary

184

Problems with supply side

can cause output gap
can increase income inequality (cutting min wage)

185

what happens when AD is raised

Increase Real output
Lower unemployment
Inflationary pressure (especially if small output gap)
Reduced international competitiveness → balance of payments deterioration

186

AS shift what happens?

Improve or worsen all 4 main macroeconomic objectives (growth, inflation, employment, balance of payments)
Can have knock on effects on wages and the labour force

187

What are on the axis of the short run Philips Curve

unemployment
Rate of change of moeny wage (inflation)

188

What is key to the trade off?

Where the current equilibrium is on the LRAS (keynesian)

189

What is the accelerator equation

It = a (Yt - Yt-1)

190

How do you calculate the accelerator coefficient

ratio of capital to goods

191

What does the CPI exclude

mortage payments
council tax
tv licences

192

Name of the survey used for inflation calculation

Living costs and food survey (LCF)

193

D productivity

output per unit of input