Macroeconomics Core Concepts

National income

A measure of the total economic activity that takes place within an economy.

Injections

The flows of money that come into the circular flow of income from outside: investment, government spending and exports.

Leakages

The flows of money that leave the economy: savings, taxation and imports.

Gross-domestic product (GDP)

The total monetary value of all final goods and services produced within an economy in a given period of time.

Gross-national Product (GNP)

The total monetary value of all final goods and services produced by factors owned by the country's citizens in a given period of time.

Gross-national Income (GNI)

Refers to the total income of a nation's people and businesses.

Advantages of GDP for measuring economic activity

Allows comparison across countries, Informs policy makers to successfully achieve economic growth, Gives an indication of average income of population.

Disadvantages of GDP for measuring economic activity

Overestimates the quality of life, does not account for disparity in income distribution, Contains inaccuracies, does not account for improvements in quality of output.

Consumption

The expenditure by households on goods and services in the product market.

Three approaches to measuring national income

The output method, the income method and the expenditure method.

Output method

Using this method of accounting, firms are surveyed for their output during a given period; only the value added at each stage of production is counted.

Income method

This method of accounting involves adding up all the income earned by groups when the factors of production are sold in resource markets.

Expenditure method

This involves adding up total sales receipts for goods and services sold in the economy, including government spending, investment and net exports.

Nominal GDP

This refers to the GDP calculated in a given year without consideration for inflation.

GDP per capita

This refers to the GDP divided by the population of a country, giving an average income per citizen.

Purchasing power parity (PPP)

Compares economic productivity and standards of living between countries on the basis of relative costs of goods and services.

Economic growth

When a country produces more goods and services in one period than in a previous one, usually measured by changes in the real GDP.

Indicators of Happy Planet Index (HPI)

Economic well being and satisfaction of residents, life expectancy, income inequality, ecological footprint.

Income effect

When consumers' real income increases as the price of a product declines, allowing consumers to buy more of a product.

Substitution effect

When consumers substitute relatively lower-priced goods when the prices of those goods decline, thereby consuming more of them.

Aggregate demand

The total value of goods and services demanded by different groups at a given price level in an economy.

Determinants of aggregate demand

Consumption expenditure, Investment spending, Government revenue, Trade balance.

Investment spending

The expenditure by firms on capital stock, such as building factories and purchasing machinery.

Exchange rates

The value of a currency in terms of another.

Trade policies

The regulations and agreements that control imports and exports to foreign countries.

Trade protectionism

A set of policies designed to protect domestic firms from the competition of foreign firms in the domestic firms market.

Aggregate supply

Refers to the total output that all firms in a country are able to produce at any given price level.

Short-run-aggregate-supply (SRAS)

The supply of the nation in the short run, or when resource prices/cost of production for most firms will remain constant, especially wages.

Determinants of short-run aggregate supply (SRAS)

Resource prices/average cost of production, government intervention, government subsidies, supply shocks.

Full employment Output (Potential GDP)

This is produced when all factors of production are fully employed by the economy.

Equilibrium level of output

The level of output produced at the intersection of aggregate demand and short-run aggregate supply.

Shifters of Long-run-aggregate-supply curve (LRAS)

New discoveries of Land and resources, increasing labour force, improvements in the quality of capital and technology and Increases in efficiency.

Inflationary gap

Where the economy overheats, and produces above full employment. It creates upward pressure on the price level.

Recessionary/Deflationary gap

Where the economy slows and operates below full employment. It creates unemployment.

New classical model reset to potential output (falling demand)

As prices are already falling in the economy, firms might cut wages instead, retaining the ability to produce but at lower costs.

New classical model reset to potential output (rising demand)

Rising demand causes inflationary gap and increase in price level, putting upward pressure on wages, increasing the cost of production for firms and shifting the SRAS curve to the left.

Assumptions of new classical model

Disequilibrium corrected by market forces, Unemployment is a sign that the labour market is in disequilibrium, Trade unions and minimum wages will reduce the ability of labour market to establish equilibrium, Government should support markets to be able to return to equilibrium and implement labour market policies to improve competitiveness.

Government borrowing

Crowds out private investment.

Assumptions of Keynesian model

Some markets can exist in disequilibrium for longer periods. Unemployment should not be allowed to persist as long-term unemployment reduces economic potential. Wages are downward inflexible or 'sticky'. Government must intervene with government spending during a recession, even if the government must borrow. No crowding out during recessions.

Unemployment rate

The number of unemployed people in relation to the size of the labour force.

Unemployment

The status of people who are in the workforce, actively seeking employment, but unable to find it.

Disequilibrium unemployment

Occurs when there is a fall in demand for labour in the economy, but sticky wages prevent the market from reaching equilibrium.

Cyclical unemployment (Demand-deficient unemployment)

Occurs when a lack of or reduced aggregate demand in the economy forces firms to make workers redundant.

Natural rate of unemployment (NRU)

The percentage of people who are unemployed for structural, seasonal and frictional reasons, irrespective of the level of GDP of the economy or its position in the business cycle.

Real wage unemployment

Refers to a gap between the number of jobs available and the number of people willing and able to work at the prevailing wage rate.

Frictional unemployment

Those who are between jobs or between schooling and a job and are therefore unemployed.

Seasonal unemployment

Those who are unemployed as their skills are only needed during certain times of the year.

Structural unemployment

A mismatch between the supply and demand for labour caused by labour market rigidity and changes to industries.

What happens when an industry relocates?

It is unlikely that all employees will move with the industry.

What is a consequence of an industry relocating?

It can result in a reduced size of industries and decreased demand for labor.

What are labor market rigidities?

Factors that make it difficult for people to change jobs and job types.

How does employment legislation affect labor supply?

It can prevent the easy firing of ineffective workers, reducing the supply of labor.

What happens to the willingness to work if the labor market becomes increasingly rigid?

The number of people willing to work will decrease.

Labour market rigidities

Factors that make it difficult for people to change jobs or job types, reducing the supply of labor.

Costs of unemployment

Includes loss of GDP, loss of tax revenue, increased cost of unemployment benefits, loss of income for individuals, and greater income disparities.

Inflation

A sustained increase in the general price level over a period of time.

Hyperinflation

Price level rises that are more than 50% a month.

Consumer price index (CPI)

A weighted basket of typical goods and services bought by a typical family, used to measure changes in inflation.

Disinflation

Occurs when the rate of inflation reduces.

Producer price index (PPI)

A measurement of the average change over time in the selling prices received by domestic producers for their output.

Demand-pull inflation

Arises when the demand for goods and services outstrips supply.

Cost-push inflation

Occurs when the costs of production rise or when short-run aggregate supply falls.

Deflation

A sustained decrease in the general price level over a period of time.

Budget deficit

Arises when government expenditure is greater than tax revenue.

Debt servicing costs

Increases as the debt-to-GDP ratio rises, requiring more budget allocation for paying interest to creditors.

Lorenz curve

Plots the cumulative share of the population against the cumulative share of income earned, with a 45° line representing perfect equality.

Absolute poverty

Refers to people earning below internationally defined levels of income, currently USD 1.90 per day.

Relative poverty

Refers to a low level of income that is country-specific and relative to the average earnings in that country.

Single indicator

One factor, such as GNP per capita, used to measure the development of a country.

Composite indicator

Compiled of several single indicators that form an index to measure multi-dimensional concepts such as poverty.

Indicators of Human Development Index (HDI)

Includes GDP per capita, life expectancy, and years of schooling (mean vs expected).

Indicators of Multidimensional Poverty Index (MPI)

Includes health, education, and living standards, such as sanitation levels and access to clean drinking water.

Direct taxation

Taxes that are paid directly to governments, such as income tax.

Progressive taxation

A system that taxes people at higher rates the more they earn, with the percentage paid rising.

Regressive taxation

When a higher percentage of tax is paid the less a person earns.

Proportional taxation

A fixed rate of tax levied on all individuals, where everyone pays the same percentage.

Average tax rate

The share of income that an individual pays in taxes, usually lower than marginal tax rates.

Marginal tax rate

The tax rate imposed on an individual's last dollar of income.

Recession

Refers to negative economic growth occurring over two or more quarters.