Y1 Macroeconomics Flashcards
1
Q
Name Four main Economic Objectives
A
Low and stable inflation
Real Economic Growth
Low Unemployment
Balance of payments
2
Q
Name three secondary objectives
A
Income distribution (equality) Environmental externalities Balancing budget
3
Q
Measures for Unemployment (2)
A
Claimant Count
Labour Force Survey
4
Q
Why is the LFS usually higher than the Claimant Count?
A
Not all members of a household will claim benefits, while some will still unemployed
- People may be unemployed but not eligible for benefits
5
Q
What are the criteria for the LFS?
A
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
Q
What is GVA
A
Gross value added (value of resources used to produce goods and services)
7
Q
How is GDP calculated
A
GVA + taxes - subsidies
8
Q
How do you calculate Real values with indices
A
= nominal * base year/current year
9
Q
National Output is theoretically the same as…
A
National income and national expenditure
10
Q
What is capital depreciation
A
loss in value of capital due to capital consumption and depreciation
11
Q
GDP + NPIA = ?
A
GNI
12
Q
What is NPIA
A
Net property income from abroad (international earnings)
13
Q
Why is GNP a better measure than GDP?
A
It includes overseas and domestic earnings
14
Q
NNI =
A
GNI - depreciation
15
Q
What is the best estimate for a country’s national income
A
Net National Income (NNI) = GVA + taxes - subsidies + NPIA - capital depreciation
16
Q
What type is excluded from National Income calculations?
A
Transfer payments as they have no corresponding outputs
17
Q
Name a transfer payment
A
2nd hand trade
Government benefits
Pocket Money
18
Q
What is the most common value used for comparing country’s national income?
A
GDP pc - accounts for population size and is readily available data
19
Q
Name 5 weaknesses with GDP pc when comparing countries
A
Purchasing power Quality of G+S may differ Income distribution is ignored Externalities ignored Unrecorded Economy may differ in size
20
Q
What is GNP
A
Value of G+S produced domestically and internationally by residents
21
Q
What is the accelerator equation?
A
Investment = a (change in income)
a is the capital-output ratio (ratio of capital needed to goods produced)
22
Q
Name 3 positives of investment
A
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
Q
Net investment =
A
Gross investment - capital depreciation/consumption
24
Q
What is investment in economics?
A
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
