Macro (AD, AS, CFI)

Circular flow of income

model of the economy which shows the flow of goods, services and factors and their payments around the economy

Closed economy

an economy where there is no foreign trade

Income

rent, interest, wages, profits earned from wealth owned by economy actors

Injections - def

in cfi spending which is not generated by households

injections - eg

investments, exports, government spending

National income

the value of the output, expenditure or income of an economy over a period of time

open economy

an economy where there is foreign trade

wealth

a stock of assets which can be used to generate a flow of production or income

withdrawals / leakages - def

in the cfi spending by households which does not flow back to domestic firms

withdrawals / leakages - eg

savings, imports, taxes

Households to firms

Rent FOP, Expenditure on g+s

National output -def

value of the flow of g+s from firms to hosueholds

national output eg

h = Rent fop, F = g+s

national expenditure - def

value of spending by households on g+s

what do households do in cfi

rent out fop, save money, pay tax, import g+s, consume g+ s

what do firms do in cfi

produce/supply g+s, employ fop, invest in capital, import input, export, pay tax

if injections > withdrawals

gdp up

if injections < withdrawals

gdp down

injections = withdrawals

gdp equilibrium 

reasons for downward slope of AD

real income effect, wealth effect, interest rate effect

wealth effect 

As AP increases, the purchasing power of households decreases and the AD falls

Factors that influence SRAS

changes in cost of raw materials + energy, exchange rates, tax rates

Factors influencing LRAS

changes to quantity or quality or productivity of FOP

Net BoP

always = 0

Positive value towards BoP

credit, imports

Negative value to BoP

debit, exports

Components of current account

balance of trade in g+s, income, net transfers

Balance of trade in goods

Measure of the revenues received from the exports of goods - expenditure spent on the importing of goods

balance of trade in services

Measure of the revenues received from the exports of services- expenditure spent on the importing of service

trade surplus

export revenue > import expenditure

trade deficit

import expenditure > export revenue

income / primary income definition

measure of the net monetary movement of profit, interest and dividends moving into and out of the country over a given period of time, as a result of financial investment.

Components of primary income

dividends, interest, profits

Current/net transfers

measurement of the net transfers of money, net unilateral transfers from abroad

components of current/net transfers

government and individual level

components of capital account

capital transfers, transactions in non produced, non financial assets

example of transactions in non produced, non financial assets

purchase or use of natural resources e.g. land, water, airspace

components of financial

direct and portfolio investment, reserve assets, lending

reserve assets

the reserves of gold and foreign currencies which all countries hold

If capital account is in deficit, financial account is in

surplus

if capital account is in surplus, financial account is in

deficit, but reserve assets increase

example of capital transfers

debt forgiveness, investment grants

policies to reduce cyclical unemployment

fiscal policies, monetary policies

monetary policies to decrease cyclical unemployment

decrease interest rates to increase C+I, increase supply of money to decrease IR, depreciate exchange rate to increase net export

fiscal policies to reduce cyclical unemployment

reduce direct taxes like income tax, corporate tax, increase Gs

4 reasons for structural unemployment

sectoral shifts, technological advances, increased competition overseas, change of taste or preferences

example of sectoral shift that led to structural unemployment

coal mining, primary, to finance, tertiary

factors that cause frictional unemployment

unwilling to take up low pay jobs, regulation to make hire and fire more difficult, too generous unemployment benefits, lack of information

Economic growth

an increase in a country’s real Gross Domestic Product (GDP) over time

Actual economic growth

Increase in real gdp over a period of time, it occurs when AD intersecting SRAS,

Potential economic growth

Increase in the productive capacity of an economy, as a result of an Increase in quantity of FOP or improvement of quality of fop, AD intersecting LRAS

GDP

Gross domestic product, total value of final goods and services produced within a country, over a given period of time, usually a year

GNP

Gross National Product: the total market value of all final goods and services produced by a country's residents and businesses in a given period (usually one year), regardless of whether the production occurs domestically or abroad

GNI is the same thing as GNP

Gross national income: the total income that is earned by a country's factors of production, regardless of where the assets are located

formula for GNP or GNI

GDP + net income earned from abroad

GDP per capita

measures the average output per person

gdp per capita formula

total gdp / total population

green gdp

gdp - environmental costs

purchasing power parity (ppp)

estimates the amount of adjustment needed on the exchange rate between countries, in order for the exchange to be equivalent to each currency’s purchasing power

inflation

persistent increase in general price level of the economy

deflation

persistent decrease in general price level of the economy

disinflation

decrease in the rate of inflation

demand pull inflation

persistent increase in the general price level of the economy due to increasing AD

cost push inflation

persistent increase in the general price level of the economy due to increasing costs of production

consumer price index

the measure of the change in prices of a representative household basket of g+S consumed by the average household

inflation rate equation

percentage of increase in the APL, cpi1 - cpi2 / cpi1

unemployment

when people of working age are actively seeking work but cannot find a job

hidden unemployment

unemployment not captured in official statistics due to workers being overqualified for the job or they are part time workers even though they prefer to work full time

demand deficient / cyclical unemployment

unemployment caused by insufficient AD during recession

frictional unemployment

temporary unemployment while workers move between jobs

seasonal unemployment

unemployment due to seasonal patterns in demand

real wage unemployment

unemployment caused by labour market inflexibility

reasons for real wage unemployment

too generous unemployment benefits, trade union power, minimum wage

unemployment rate equation

people unemployed/total population

balance of payment

record of all economic transactions between residents in a country and the residents in the rest of the world

components of BoP

current, capital, financial account

current account

records trade in goods and services and income flows, including balance in the trade of goods, services, net income and current transfer

financial account

records flows of direct investment, portfolio investment, reserve assets and lending

capital account

records capital transfers and transactions in non produced, non financial assets

current account deficit

export revenue > import expenditure

current account surplus

import expenditure > export revenue

direct investment

measure of the purchase of long term assets where the purchaser is aiming to gain a lasting interest in a company in another country

portfolio investment

a measure of stock and bond purchases, which are not direct investment since they do not lead to a lasting interest in a company