macroeconomic notes

National income accounting

Methods used to measure the total value of production, income, and expenditure in an economy over a period.

Output Approach

Measures the total value of all goods and services produced in an economy (value added by each producer).

Income Approach

Measures the total income earned by factors of production (wages, rent, interest, profit).

Expenditure Approach

Measures the total spending on goods and services by households, firms, government, and the foreign sector.

Gross Domestic Product (GDP)

The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

Gross National Income (GNI)

The total income received by the residents of a country, regardless of where the income was earned. Calculated as GNI = GDP + Net factors income from abroad.

Nominal GDP/GNI

Measured at current market prices; reflects changes in both quantity and price.

Real GDP/GNI

Nominal GDP/GNI adjusted for inflation; reflects only changes in quantity produced.

Real GDP/GNI per person (per capita)

Real GDP or GNI divided by the total population; used to measure average income/output per person.

Purchasing Power Parity (PPP)

PPP-adjusted figures account for differences in the cost of living and inflation rates between countries for more accurate comparisons.

Business cycle

Describes the cyclical ups and downs in economic activity over time, including phases like Boom, Recession, Trough, and Recovery.

Potential Output

The maximum quantity of goods and services an economy can produce when it is using all its resources efficiently; represents the long-term growth trend.

OECD Better Life Index

Compares well-being across countries based on 11 topics like housing, income, jobs, and health.

Happiness Index

Aims to measure societal happiness and well-being, often incorporating factors beyond economic indicators.

Happy Planet Index

Measures sustainable well-being, combining indicators of well-being, life expectancy, and ecological footprint.

Aggregate Demand (AD)

The total demand for all goods and services produced in an economy at a given price level and in a given time period.

Aggregate demand curve

Shows the relationship between the overall price level in an economy and the total quantity of output demanded; it is downward sloping.

Components of AD

Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X - M), or AD = C + I + G + (X - M).

Short-run aggregate supply (SRAS) curve

Shows the total quantity of goods and services supplied by firms at different price levels in the short run.

Determinants of SRAS

Wage rates, prices of other factor inputs, taxes on firms, subsidies to firms, supply shocks.

Monetarist/new classical view of LRAS

LRAS is vertical at the full employment level of output (potential output), assuming perfectly flexible wages and prices.

Keynesian AS curve

Upward-sloping at low levels of output, steeper as output approaches full employment, and vertical at full employment; wages and prices can be sticky downwards.

Deflationary/Recessionary Gap

Occurs when equilibrium output is below potential output, characterized by high unemployment and spare capacity.

Inflationary Gap

Occurs when equilibrium output is above potential output, characterized by low unemployment and upward pressure on wages and prices.

Short-run equilibrium

Achieved where the Aggregate Demand (AD) curve intersects the Short-run Aggregate Supply (SRAS) curve.

Monetarist/New Classical Model Assumptions

Flexible wages and prices, rational expectations, self-correcting economy.

Keynesian Model Implications

Government intervention (fiscal and monetary policy) is necessary to stabilize the economy, especially to address recessionary gaps.

Economic growth

Short-term: actual growth (percentage change in real GDP); Long-term: potential growth (increase in productive capacity/LRAS).

Unemployment

People of working age who are without work, available for work, and actively seeking employment.

Unemployment rate

Calculated as (Number of unemployed / Labour force ) imes 100.

Cyclical unemployment

Caused by a lack of aggregate demand during a recession.

Structural unemployment

Caused by changes in the structure of the economy that render certain skills obsolete.

Seasonal unemployment

Occurs during specific times of the year due to seasonal work.

Frictional unemployment

Short-term unemployment when people are in between jobs or are new entrants to the labour force.

Natural rate of unemployment

The sum of structural, seasonal, and frictional unemployment; the lowest rate an economy can sustain without causing inflation.

Inflation

A sustained increase in the general price level.

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services.

Inflation rate

Annual percentage change in the CPI.

Demand-pull inflation

Too much money chasing too few goods; caused by an increase in AD.

Cost-push inflation

Caused by an increase in the costs of production, shifting SRAS left.

Deflation

A sustained decrease in the general price level (negative inflation rate).

Disinflation

A decrease in the rate of inflation (prices are still rising but at a slower rate).

Good deflation

Caused by an increase in SRAS (e.g., technological advances).

Bad deflation

Caused by a decrease in AD (e.g., reduced consumer confidence).

Government (national) debt as a percentage of GDP

Total accumulated government borrowing, expressed as a ratio to GDP to assess affordability.

Phillips curve

Illustrates the inverse relationship between the rate of unemployment and the rate of inflation in the short run (HL only).

Equality

Everyone has the same share or identical treatment.

Equity

Fairness; often means that people get what they need or deserve, leading to unequal outcomes but a fair distribution of opportunities/results.

Economic inequality

Unequal distribution of income and/or wealth.

Lorenz curve

A graphical representation of income or wealth distribution; farther from the line of absolute equality means greater inequality.

Gini coefficient (index)

A numerical measure of inequality, derived from the Lorenz curve; varies from 0 (perfect equality) to 1 (perfect inequality).

Absolute poverty

A condition where people lack the basic necessities of life, typically defined by a specific income threshold.

Relative poverty

A condition where people lack the minimum income needed to maintain the average standard of living in their society.

Progressive tax

Tax rate increases as income increases (e.g., income tax).

Regressive tax

Tax rate decreases as income increases (e.g., sales tax).

Proportional tax

Tax rate remains constant regardless of income (e.g., flat tax).

Direct taxes

Taxes levied on income, profits, inheritance.

Indirect taxes

Taxes levied on goods and services (e.g., VAT, sales tax).

Monetary policy

Actions undertaken by a central bank to influence the availability and cost of money and credit to achieve national economic goals.

Process of money creation by commercial banks

Commercial banks create money through fractional reserve banking by lending out a portion of deposits (HL only).

Interest rates (monetary policy tool)

Key tool; central bank sets target policy rate influencing commercial bank rates (HL only).

Open market operations

Buying and selling government securities to inject or withdraw money from the banking system (HL only).

Reserve requirements

The minimum fraction of deposits that banks must hold in reserve (HL only).

Quantitative easing/tightening

Large-scale asset purchases/sales used in unconventional circumstances (HL only).

Nominal interest rate

The rate of interest before adjustment for inflation.

Real interest rate

Nominal interest rate minus the inflation rate (Real Interest Rate = Nominal Interest Rate - Inflation Rate$$).

Expansionary monetary policy

Decrease interest rates, increase money supply to shift AD right and close a deflationary/recessionary gap.

Contractionary monetary policy

Increase interest rates, decrease money supply to shift AD left and close an inflationary gap.

Fiscal policy

The use of government spending and taxation to influence the economy.

Sources of government revenue

Direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets.

Government expenditures

Current expenditures, capital expenditures, transfer payments.

Expansionary fiscal policy

Increase government spending, decrease taxes to shift AD right and close a deflationary/recessionary gap.

Contractionary fiscal policy

Decrease government spending, increase taxes to shift AD left and close an inflationary gap.

Spending multiplier

The ratio of the total change in real GDP to the initial change in government spending or investment (1 / (1 - MPC)) (HL only).

Tax multiplier

The ratio of the total change in real GDP to the initial change in taxes (-MPC / (1 - MPC)) (HL only).

Balanced budget multiplier

A simultaneous equal increase in government spending and taxes leads to an increase in real GDP equal to the change in spending/taxes (multiplier is 1) (HL only).

Crowding-out effect (fiscal policy)

Government borrowing increases interest rates, reducing private investment.

Supply-side policies

Policies aiming to increase an economy's productive capacity over the long term by improving the quantity and/or quality of factors of production.

Market-based supply-side policies

Policies to encourage competition (deregulation, privatization), labour market policies (reducing union power), incentive-related policies (lower taxes).

Interventionist supply-side policies

Government investment in human capital (education, health), new technology (R&D subsidies), infrastructure, industrial policies.