IB Economics SL (Macro)

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List the six macroeconomic objectives

1. Steady economic growth - income earnt, income spent, output produced are al increasing

2. low unemployment rate

3. low and stable rate of inflation

4. sustainable level of goverment debt

5. equitable distribution of income

6. favourable trade balance - export revenue > import expenditure

Define and list factors of production

all resources used in the production process. firms buy the factors of production, and use them to produce goods and services. households own the factors of production, and sell them to firms in exchange for income

land, labour, capital, entrepreneurship

Define land as a factor of production

all natural resources used in the production process

Define labour as a factor of production

all human resources used in the production process

Define capital as a factor of production

all man-made resource

Define entrepreneur as a factor of production

the owner who organises the land, labour and capital in order to produce new products

What do firms pay households in exchange for labour, land, capital and entrepreneurship respectively?

wages, rent, interest and profit

Draw the (full) circular flow of income model

What happens when the circular flow of income is growing (economic growth)

when injections > leakages.

• households are earning more income

• households spend more money

• firms produce more output

• firms employ more workers (factors of production

What happens when the circular flow of income is shrinking (recession - two or more consecutive quarters of negative economic growth)

when leakages > injections

• households are earning less income

• households spend less money

• firms produce less output

• firms employ fewer workers (factors of production)

Write the equation regarding the circular flow of income model

National Income (earned by factors of production) = National Expenditure (on goods and services) = National Output (value of goods and services produced)

Describe what an injection is with regards to the circular flow of income model, list them

when firms receive income that does not come from domestic household expenditure

• investment

• exports

• government spending

Describe leakages with regards to the circular flow of income model, list them

when households receive income but do not spend it on domestic goods and services

• savings

• imports

• tax

Define GDP

a measure of the total value of all goods and services produced within an economy in a given time period. this is the same as the size of the circular flow of income

Describe the output method as a way of meaasuring GDP

adding the value of all final goods and services produced

sum the value added by all firms in the economy:

value added = value fo final good produced - value of intermediate goods (the resources that are actually factored into the final product)

Describe the income method as a way of measuring GDP

adding up all income earned by the factors of production within a country. this includes all income earned by land, labour, capital and entrepreneurs in the country

GDP = rent (land) + wges (labour) + interest (capital) + profit (entrepreneur)

Descrie the expenditure method as a way of measuring GDP

adding up all spening on final goods and services across all sectors of the economy. this includes all economic agents that can spend money on domestic goods and services

GDP = C + I + G = (X-M) where C is consumption, I is investment, G is government spending , X is exports and M is imports

Define consumption (C)

spending by domestic households on goods and services

Define investment (I)

expenditure by firms on capital stock

Define exports (X)

spendign by foreign households on domestic goods and services

Define imports (M)

spending by domestic households on foreign goods and services

Define GNI, state the equation

the total income earned by a country’s factors of production, regardless of where they are located, within a given time period

GNI = GDP + Net Factor Income

What happens when a country’s GNI > GDP?

• it must have a positive net factor income

• more is earned abroad by domestic factors of production than is earned here by foreign factors of production

What happens when a country’s GNI < GDP?

• it must have a negative net factor income

• more is earned here by foreign factors of production than is earned abroad by domestic factors of production

Distinguish between real and nominal GDP

nominal = value of output produced

real = amount of output produced, it is nominal GDP adjusted for inflation. It is a measure of how productive the economy is, rather than its sole value

Define GDP per capita

the GDP per head of population

When must real statisitics be used? 

when analysing the performance of an ecoonomy over time 

When must per capita statistics be used?

when comparing the national income of two or more different countries

Define aggregate demand, and how to calculate it

the amount of all products (output) that all stakeholders in the economy are willing and able to buy, or the total spending on all goods and services across all sectors of the economy in a given time period

AD = C + I + G + (X-M)

Describe explain, and draw the aggregate demand curve

the curve is a downwards slope, as the average price level increases, people swap domestic output for foreign output, so the output demanded decreases, thus decreasing the net exports

Describe how a movement along the aggregate demand curve arises

When there is a change in the average price level

Describe how a shift in the aggregate demand curve can arise

When there is a change in one of the components of aggregate demand

List and describe things that shift the aggregate demand curve to the right

1. Consumer confidence - consumers feel less need to save, so can spend more

2. Wealth - (eg. house prices increase) consumers feel more confident in the value of their assets, thus making them feel richer

3. Expectation of future price increases - consumers rush to buy products before they become more expensive…this flashcard is not fiished

Define aggregate demand and give the equation

the amount of output that all stakeholders in the economy are willing and able to buy

the total spending on all goods and services across all sectors of the economy in a given time period

AD = C + I + G + (X - M)

Describe how a movement along the AD curve can occur

an increase in the average price level causes people to swap domestic for foreign ouput, meaning the total output demanded within the economy decreases as there is a decrease in net exports

Describe briefly how the AD curve shifts when there is a change in one of the components

• a decrease in one of the components shifts AD left

• an increase in one of the compon