Econs definitions + formulas

Real GDP per capita formula

real gdp/population

GNI formula

GDP + net income abroad (from abroad - sent abroad)

price deflator

100+ inflation rate

price deflator formula

nominal GDP / Real GDP x100%

real GDP formula

nominal/price deflator x100%

to calculate inflation rate

new-old / old X 100%

unemployment rate formula

number of unemployed/no.of people in labour force X 100%

economic growth rate formula

Real GDP in year_s-real GDP in year_s-1 /Real GDP in year_s-1

national income = national output = national expenditure / formula for national income

add up all income earned from production (do not double count)

• either count final good

• or value added at each stage

national expenditure approach

consumption + investment + govt spending + (export-import)

national output approach

calculate all value added, dont double count

aggregate supply

refers to the total amount of goods and services all industries in the economy are willing and able to produce at every given price level

SRAS

refers to the period of time when price of resources remain inflexible or roughly constant

SRAS curve

curve that shows the total amount of goods and services firms are prepared to produce in the short run at every given price level

Long run aggregate supply curve

curve that shows the total amount of goods and services firms are prepared to produce in the long run at every given rice level

LRAS

refers to the period of time , when price of resources , including labour , are flexible and changes along with price

aggregate demand

total spending on domestically produced goods and services in an economy, at various price levels, in a period of time purchased by firms , government , households and trade sectors

consumption

spending by households on goods and services

wealth

stock concepts , refers to value of a persons assets at a certain period of time

income

the recipe of money per period of time

transfer payment

money transferred from one party to another without any production taking place

components of AD

consumption + investment + government expenditure +(export-import)

disposable income

household income after tax deductions

investment

the addition of capital stocks in an economy

export

domestic goods and services purchased by foreigners

export revenue

spending on domestic goods and services by foreigners

import

goods and services purchased from foreign sectors

import revenue

spending on gods and services form foreign sectors by domestic residents

full employment level of output / unemployment at natural rate

maximum output that can be produced and sustained in the long run if all available resources in the economy have been fully and efficiently utilised

economic growth

refers to an increase in real GDP over a period of time, typically in a year

standard of living

refers to the level of income , wealth and consumption of goods and services, including healthcare

economic growth rate

percentage change in real GDP

short term/actual growth

refers to an increase in real output caused by increased employment and efficiency of existing factors of production

long term growth

refers to an increase in real output caused by an increase in potential output

who is considered in labour force

• unemployed / actively seeking for a job+ employed

• not everyone

unemployment

refers to the people who are part of the labour force but are currently without a job and active looking for one

underemployment

refers to people of working age with part time jobs when they would rather work full time or with jobs that make full use of their skills and education

cyclical unemployment (not at Y_f)

occurs during downturns of the business cycle , when the economy is in a deflationary gap

frictional unemployment

occurs when people are in between jobs

structural unemployment

occurs as a result of the changing structure of an economy

seasonal unemployment

natural in many economies for some workers to be employed on a seasonal basis (ski resorts) —> after winter demand for workers fall

• unemployed during specific times of the year

national income statistics

indicators that measure the level of economic activity in a given period of time

GDP

the total market value of final goods and service produced within an economy ,in a given year, regardless of who owns the FOP

real GDP

measures value of current output at a constant price

• adjusted for inflation / nominal GDP adjusted for inflation

GNI

the total income earned by a country’s businesses and residents , in a given year, regardless of of where their assets are located

Real GNI/ Nominal GNI

GNI adjusted for inflation

nominal : GNI not adjusted for inflation

Happiness index

incudes GDP per capita , social support , healthy life expectancy

indication of happiness / ranks countries by happiness level

OECD better life index

• measures quality of life

happy plant index

• measures sustainable well being for all

composite indicators

measures multidimensional concepts that cant be captured using a singular indicator

standard of living

refers to the level of well being of an individual o a household within a country

material SOL

refers to the quantity of goods and services available to an individual in a particular year, measured by real GDP per capita

purchasing power parity

total amount of a countries currency that can purchase the same quantity of local goods and services with USD1

• real GDP per capita adjusted to PPP : across space measuring SOL

PPP exchange rate

an exchange rate between currencies that can make their buying power equal to the buying power of USD1

circular flow of income

a model that shows the flow of income in an economy between different economic agents

injections

• inflow of income into the economy

• investment, government expenditure , exports

leakages

• outflow of income from the economy

• taxes, imports , savings

circular flow of income diagram

what happens when L>I

1. circular flow of income contracts

2. total expenditure in the economy decreases (because there are lesser goods and services being purchased)

3. total output decreases (lower prices + cut down on production by firms)

4. demand lesser FOP + unemployment increase

5. household income decrease

6. induces second round

deflationary gap

exists when the real national output equilibrium is below the full employment level of output . Actual economic growth rate is below the average trend of growth

inflationary gap

exists if actual national output exceeds full employment level of output. Actual GDP exceeds potential GDP

supply shocks

factors that affect COP

demand pull inflation

sustained increase in APL due to an increase in AD

cost push inflation

sustained increase in APL due to an increase in COP or supply side shocks

market based supply side policies

“market based” — focuses on allowing markets to operate more freely , with minimal government intervention

• Aim : raising LRAS by increasing the incentives of different economic agents/households

3 categories of supply side market based policies

1. policies to encourage competition

2. labour market reforms

3. incentive related policies

privatisation

involves a transfer of ownership from the government to private owners

deregulation

refers to reduction or elimination of govt regulations on an industry

labour market reforms

refers to policies intended to increase labour market flexibility or reduce labour market rigidity

4 categories of interventionist supply side policies

1. investment in human capital

2. investment in infrastructure

3. investment in new technology

4. industrial policies

interventionist supply side policies

refers to measures aimed at increasing the long run AS , hence achieving economic growth and growth in potential output

• based on the idea that the government plays a fundamental role in actively managing macroeconomic issues. Gov intervenes in the economy to directly increase the productive capacity of the economy.

investment in human capital

an increase in govt spending on training , re-training , education

infrastructure

large scale physical capital

industrial policies

policies intended to promote a specific industry

inflation

sustained increase in general price levels of goods and services in a country over a period of time , usually a year

deflation

sustained decrease in general price level of goods and services in a country over a period , usually a year

disinflation

decrease in the rate of inflation

formula for percentage change in real income / rate of inflation formula

% change in nominal income - %change in price level

Costs of inflation

1. loss of purchasing power

2. effect on savings

3. effect on interest rate

4. effect on international competitiveness

5. uncertainty

6. labour unrest

policies to solve demand pull inflation

1. fiscal policy

2. monetary policy

hyperinflation

refers to extraordinary high and uncontrollable rates of inflation that causes serious macroeconomic problems

price index formula

price year_n / price base year X100

• no units

Consumer price index (CPI)

a measure of the cost of living or cost of goods and services purchased by the typical household in an economy

inflation rate

percentage change in CPI over a period of time

• CPI₂-CP1₁ / CPI₁ X 100%

Limitations of using CPI to measure inflation

1. CPI does not account for disproportionate impact

2. CPI may not reflect the true cost of living for all individual families

3. CPI may overstate inflation if it does not accurately adjust for the better quality of goods and services

4. CPI basked updated infrequently , might not represent current spending patters of consumers at any given moment

fiscal policy definition

refers to changes to govt spending and taxation designed to influenced AD in order to achieve governments macroeconomic aims

expansionary fiscal policy

• implemented during recession/economic downturn/ below Yf / cyclical unemployment / negative economic growth

• Aim: truing to expand economy by increasing AD

• Increase G + reduce taxes

contractionary fiscal policy

• Aim : trying to reduce AD to achieve price stability and correct demand pull inflation

• implemented during an inflationary situation (excessive demand)

• raise taxes or lower G

monetary policy

carried out by central bank which aims to change interest rates to influence AD

• money supply + interest rate

interest rate

refers to the amount a lender chargers a borrower and is a percentage of the principal

money supply

total amount of money circulating in an economy at any one time

equality

a positive concept that refers to the extent other which income is distributed equally

equity

a normative concept that refers to income distribution which is fair

income inequality

arises from difference in how evenly income is distributed in a population. There is income inequality when there is a gap between the rich and the poor

income

flow concept , refers to the Money an individual earns through work , investments or other sources measured over a period of time

wealth

a stock concept that refers to total value of a person asset minus debt

income shares

income can be distributed by quintiles or deciles of the population

quintiles

20% of a country population

deciles

10% of the population

Lorenz curve

used to show the degree of income inequality in an economy