IB Economics HL - Macroeconomics

Circular flow of income model

Circular flow of income model

a diagram showing the movement of income within an economy where injections increase it’s size and leakages reduce it

expenditure approach

C (Consumption) + G (Government spending) + I (Investment) + (X (Exports) - M(Imports))

income approach

W (Labour) + R (Rent) + I (capital interest) + P (Profit from entrepreneurship)

Output approach

adds up the value of finished goods and services produced

nominal GDP

a measure of the value of production within a country’s borders

Real GDP and GNI

the value of all goods an services produced in an economy over a one-year period which is adjusted for inflation

Purchasing power parity (PPP)

a conversion factor that can be applied to GDP and GNI showing the number of units of a country’s currency that are required to buy a product in the local economy

business cycle

a model of the changes in real GDP that occur in an economy over time, fluctuating above and below the long-term trend growth rate

positive output gap

the growth of real GDP that is above the trend growth

negative output gap

the growth of real GDP that is below the trend growth

aggregate demand

the total demand for all goods and services in an economy at any given average price level

aggregate supply

the total supply for all goods and services produced in an economy at any given average price level

Classical view of the LRAS

the belief that the LRAS is perfectly inelastic at a point of full employment of all available resources

Keynesian view of the LRAS

the belief that the LRAS is more L-shaped with an elastic section, a relatively elastic section and a perfectly elastic section at a point of full employment

inflationary output gap

occurs when the real GDP is greater than the potential real GDP

deflationary output gap

occurs when the real GDP is less than the potential real GDP

classical adjustment process

the belief that in the long run the economy will always return to its full potential level of output, only changing the average price level

equilibrium in the Keynesian model

the belief that the economy can be in long term equilibrium at any level of output, but will not always return to full employment, getting stuck below

employment

the economic use of labour as a factor of production

unemployment

someone who is not working but actively seeking employment

labour force

all workers actively employed plus the unemployed

full employment

describes the ideal situation when everyone in the economy who is willing and able to work has a job

underemployment

workers who are either working less hours than they want to or working in a job that requires lower skills than they have

hidden employment

when workers lose their jobs and then attempt to find a new job for a long period of time after which they give up and no longer being considered to be unemployed

real wage unemployment

occurs when wages are inflexible at a point higher than the free-market equilibrium wage

minimum wage

a legally imposed wage level that employers must pay their workers

structural unemployment

when there is a mismatch between jobs and skills as the structure of an economy changes and there is no longer a need for specific type of workers

cyclical unemployment

caused by a fall in AD, typically during a recession and as output falls in the economy, firms lay off workers

seasonal unemployment

as certain seasons come to an end and labour is not required until the next season

frictional unemployment

occurs when workers are between jobs, voluntarily searching for a new position or recently entering the workforce

natural rate of unemployment (NRU)

the lowest achievable level of unemployment in an economy

inflation

the sustained increase in the average price level of goods and services

deflation

the sustained decrease in the average price level of goods and services

disinflation

when the average price level is still rising, but at a lower rate than before

demand pull inflation

caused by an excess demand in the economy, bidding up prices for goods and services

cost push inflation

caused by increases in the costs of production in an economy, bidding up prices for goods and services

demand side deflation

caused by a fall in total AD in an economy leading to a decrease in the average price level

supply side deflation

caused by an increase in the productive capacity of an economy creating a condition of excess supply

sustainable levels of government debt

a situation where the governments borrowing and debt levels are manageable and are able to balance repayments without placing an economy at risk

government debt

the total amount of money that a government owes to creditors, including domestic and foreign entities

budget deficit

occurs when a government’s total expenditures exceeds its total revenues within a specific fiscal year

budget surplus

occurs when a government’s total revenues exceeds its total expenditures

short-run philips curve

suggests that there may be a trade-off between unemployment and inflation making it difficult for governments to achieve both low unemployment and low inflation

long-run philips curve

suggests there is no trade-off between inflation and unemployment in the long run

equality

describes situations where economic outcomes are similar for different people or different social groups

equity

the idea of economic fairness in a society

income inequality

the unequal distribution of income to households

wealth inequality

the differences in the amount of assets that households owns

absolute poverty

a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence

relative poverty

a situation where household income is a certain percentage less than the median household income in the economy

lorenz curve

a visual representation of the income inequality that exist between households in an economy

expansionary monetary policy

a policy which aims to shift aggregate demand to the right to boost economic growth

contractionary monetary policy

a policy which aims to shift aggregate demand to the left to slow down economic growth or reduce inflation

open market operations

the buying and selling of government securities (e.g. bonds) by the Central Bank in the open market

minimum reserve requirements

the regulations set by the Central Bank that mandate the minimum percentage of customer deposits that commercial banks must hold as reserves

base rate

the interest rate at which the Central Bank lends money to commercial banks

quantitive easing

a monetary policy tool used by Central Banks to stimulate the economy when traditional monetary policy measures such as interest rate cuts, have become less effective

fiscal policy

involves the use of government spending and taxation to influence aggregate demand in the economy

expansionary fiscal policy

includes reducing taxes or increasing government spending with the aim of increasing AD

contractionary fiscal policy

includes increasing taxes or reducing government spending with the aim of decreasing AD

Keynesian multiplier

the ratio of change in real income to the injection that created the change

marginal propensities

the proportion of the next $ earned that a consumer saves, consumes, is taxed, or purchases imports with

supply-side policies

policies which aim to shift the long-run aggregate supply

interventionist supply side policies

policies which require government intervention in order to increase the full level of employment level of output

market-based-supply-side policies

policies which aim to remove obstructions in the free market that are holding back improvements to the long-run potential