Unit 4, National income statistics, circular flow of income, and aggregate demand and aggregate supply analysis flashcards

national income

a country’s total output

national income statistics

measures of the total output (income and expenditure) of an economy

gross domestic product (GDP)

the total monetary value of all finished goods and services produced within a country's borders during a specific period

gross national income (GNI)

GDP plus net income from abroad

net property income from abroad

receipts of profit, rent and interest earned on the ownership of foreign assets, minus the payments of profit, rent and interest to non-residents

compensation of employees

income of workers who work in another country for a short period of time

gross national disposable income

GNI plus net transfers of workers’ income to their relatives to and from other countries

multinational companies (MNCs)

firms that operate in more than one country

circular flow of income

a simplified view of how income flows around the economy

output method

a way of measuring GDP by calculating the total production of final goods and services of the country

value added

the difference between the price at which products are sold and the price of goods and services used in their production

income method

a way of measuring GDP by totalling all the incomes earned in producing the country’s output

expenditure method

a way of measuring GDP by totalling all the spending on the countrys output

market prices

prices paid by consumers; they take into account indirect taxes and subsidies

basic prices

prices charged by producers before the addition of indirect taxes and the deduction of subsidies

gross investment

total spending on capital goods within a specific time period

net domestic product (NDP)

GDP minus depreciation

net national income (NNI)

GNI minus depreciation

net investment

the difference between gross investment and depreciation, indicating the actual increase in capital stock.

depreciation (of capital goods)

the value of capital goods that have become worn out or become out-of-date

open economy

an economy that is involved in trade with other economies

closed economy

an economy that does not trade with other economies

injections

additions to the circular flow of income (investment, imports and government spending)

leakages

withdrawals from the circular flow of income (savings, exports and taxes)

equilibrium income in a two sector economy

S=I

equilibrium income (circular flow of income)

the level of income where total injections equal total leakages, resulting in no net change in the economy.

equilibrium income in a four sector economy

I+G+X = S + T + M

constituents of a two sector economy

households and firms, where households supply factors of production and firms provide goods and services.

constituents of a three sector economy

households, firms, and the government, where households provide factors of production, firms produce goods and services, and the government regulates and provides public services.

constituents of a four sector economy

households, firms, government, and foreign sector, where households provide factors of production, firms produce goods and services, the government regulates, and the foreign sector engages in international trade.

aggregate demand (AD)

the total demand for an economy’s goods and services at a given price level in a given time period, C+I+G+(X-M)

consumer expenditure

spending by households on goods and services

factors influencing consumer expenditure

disposable income, distribution of income, rate of interest, availability of credit, future expectations, and wealth

dissaving

when consumer expenditure exceeds income, with people or countries drawing on past savings or borrowing

saving

disposable income minus consumer expenditure

investment

spending on capital goods

factors influencing investment

consumer demand, the rate of interest, technology, the cost of capital goods, expectations, and government policy

government spending

the total of local and national government expenditure on goods and services

factors influencing government spending

government policy, tax revenue, and demographic changes

net exports

the value of a country's total exports minus its total imports

factors influencing net exports

the country’s GDP, other countries’ GDPs, the relative price and quality competitiveness of the country’s products and its exchange rate

exchange rate

the price of one currency in terms of another currency

effects that cause AD to change when price level changes

wealth effect, international effect, interest rate effect

wealth effect of a price level change

a rise in the price level will reduce the amount of goods and services that people’s wealth can buy, the purchasing power of savings held in the form of bank accounts and other financial assets will fall resulting in decreased consumer spending and thus aggregate demand

international effect of a price level change

a rise in the domestic price level will reduce demand for exports as they will become less price competitive while imports will become more price competitive, leading to a decrease in net exports and aggregate demand

interest rate effect of a price level change

a rise in the price level will increase demand for money to pay the higher prices, this in turn will increase the interest rate leading to a reduction in consumption and investment and thus aggregate demand

factors causing a shift in aggregate demand

consumer expenditure, investment, government spending, net exports

aggregate supply

the total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period

short-run aggregate supply (SRAS)

the total output of an economy that will be supplied when there has not been enough time for the prices of factors of production to change

long-run aggregate supply (LRAS)

the total output of an economy supplied in the period when prices of factors of production have fully adjusted

reasons for the upward slope of the SRAS curve

profit effect, cost effect, misinterpretation effect

profit effect of a price level change (SRAS)

as the price level increases, the prices of factors of production such as wages do not change, so as the price level rises the gap between output and input prices widens and the amount of profit increases

cost effect of a price level change (SRAS)

average costs may rise as output increases, due to overtime payments to workers as well as the costs of recruiting more workers, these extra costs are incorporated into and resulting in higher prices

misinterpretation effect of a price level change (SRAS)

producers may confuse changes in the price level with changes in relative prices, taking the rise in price as a signal of their products popularity and thus producing more

shifts in the short-run aggregate supply curve (SRAS)

a change in the prices of factors of production, taxes on firms, factor productivity/quality of resources or a change in the quantity of resources

average cost

the cost per unit of output

supply-side shocks

large and unexpected changes in short-run aggregate supply, may or may not have a significant impact on productive potential in the long-run

long-run aggregate supply curve (LRAS)

shows the relationship between real GDP and changes in the price level when there has been time for input prices to adjust to changes in aggregate demand

Keynesians

economists who agree with the view of the economist John Maynard Keynes that government intervention is needed to achieve full employment

new classical economists

economists who believe that the LRAS curve is vertical and that the economy will move towards full employment without government intervention

causes of a shift in the LRAS curve

a change in the quantity and/or quality of resources, both of which affect the productive potential of the economy

causes of an increase in the quantity of resources in the long run

net immigration, an increase in the retirement age, more women entering the labour force, net investment, discovery of new resources, land reclamation

causes of an increase in the quality of resources in the long run

improved education and training, advances in technology

macroeconomic equilibrium

the output and price level achieved where aggregate demand equals aggregate supply