Macroeconomics Theme 2 <3

ceteris paribus

all other things stay the same

aggregate demand

the total amount of planned spending on goods and services

aggregate demand formula

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

shift in AD

changes to components of AD

consumption

spending by households on goods and services

disposable income

The amount of money that households have available for spending and saving after taxes

marginal propensity to consume (MPC)

the proportion of additional income that is spent on goods and services

marginal propensity to save (MPS)

the proportion of additional income that is saved not spent

MPC

change in consumption/change in income

MPS formula

1-MPC

wealth

the value of assets owned

income

flow of money

collateral

an asset that a borrower pledges to a lender as a security for a loan

interest rates

the reward of saving and cost of borrowing

wealth effect

increase in house prices
higher perceived wealth
increase consumption

investment

accumulation of capital stock

gross investment

total amount that the economy spends on new capital

net investment

gross investment - capital depreciation

factors that affect investment

1 rate of economic growth
2 confidence levels
3 interest rates
4 government decisions
5 access to credit
6 regulation
7 animal spirits (not rational)

recession

2 consecutive quarters of negative real GDP

budget deficit

G > T

budget surplus

G < T

austerity

decrease spending to lower the budget deficit

automatic stabilisers

factors that automatically work toward stabilising the economy by reducing the short term fluctuation of the business cycle(income tax and unemloyment benefits)

fiscal stimulus

increasing the growth of the economy through fiscal policy and government spending

trade balance (net exports)

the value of exports - the value of imports

exchange rate

the value of one currency against another

current account deficit

M > X

current account surplus

M < X

marginal propensity to import (MPM)

the proportional increase in imports from an increase income

SPICED

strong pound imports cheap exports dear

WPIDEC

weak pound imports dear exports cheap

short run aggregate supply

atleast on factor of production is fixed

factors of production

1 land
2 labour
3 capital
4 enterprise

shifts in SRAS

1 changes in cost of raw materials
2 changes in the level of international trade
3 changes in exchange rate
4 changes in tax

long run aggregate supply

all factors of production are variable

shifts in LRAS

changes in productivity or quantity of factors of production

classical LRAS curve

in the LR the economy will have full capacity

keynesian LRAS curve

in the LR there is spare capacity

gross domestic product (GDP)

the total value of all goods and services produced annually in an economy

real GDP growth

percentage increase in the total value of good and service adjusted for inflation

economic growth

real GDP growth

actual growth

% increase in real GDP

potential growth

shift in LRAS

sustainable growth

an increase in GDP that can be maintained without creating other problems

output gap

the difference between actual and potential GDP

factors that influence a reccession

1 fall in GDP growth
2 fall in confidence
3 fall in consumption
4 fall in global trade
5 increasing unemployment

benefits of growth

1 more employment
2 more investments
3 more tax revenue
4 increase in living standards

cost of growth

1 inequality in wealth
2 inflation will go above 2%
3 negative externalities
4 leakages from the circular flow of income

characteristics of a boom

1 high rates of economic growth
2 near full capacity or positive output gaps
3 low unemployment
4 high inflation
5 High confidence
6 budget surplus

characteristics of a recession

1 negative economic growth
2 lots of spare capacity and negative output gaps
3 high unemployment
4 low inflation
5 low confidence
6 budget deficit

business cycle

alternating periods of economic booms and economic recessions

negative output gaps

where the economy is producing less than potential output

positive output gap

where the economy is producing more than potential output

production possibility frontier (PPF)

maximum combinations of goods and services that can be produced if all resources are used efficiently

circular flow of income

a model of the economy that shows the flow of goods, services and factors of production around the economy

injection

investment
exports
government spending

withdrawal

spending
imports
taxes

multiplier effect

an increase in spending, increases national income and consumption greater than the initial amount spent

multiplier formula

1/(1-MPC)

MPW formula

MPW = MPS + MPT + MPM

MPC formula

1 - MPW

Change in GDP formula

change in GDP = change in injections x multiplier

measuring GDP

total output = total income = total expenditure

problems with GDP

1 underground markets
2 income distribution
3 size of public sector
4 quality of data

gross national income (GNI)

GNI = GDP + net income from abroad

nominal GDP

GDP measured in current prices not adjusted for inflation

real GDP formula

(nominal GDP/price index) x 100

GDP per capita formula

real GDP/population

purchasing power parity (PPP)

the amount of money needed in one country to purchase the same goods and services in another country

base year

benchmark year which other years are compared against

price level

average value of goods and services as an index value

inflation

sustained increase in the general price level

deflation

a sustained decrease in the general price level

disinflation

a fall in the inflation rates

consumer price index (CPI)

weighted average of basket of good

basket of goods

weighted by percentage expenditure compared to income

percentage change

change/original x 100

problems with CPI

1 might not be relevant to everyone
2 not measured accurately
3 ignores substitution effect
4 ignores changes to quality of goods

retail price index (RPI)

a measure of inflation

demand pull inflation

increase in AD

cost push inflation

decrease in SRAS

wage price spiral

expected inflation
wage bargaining
increase in cost
increase in inflation

effects of high inflation

borrowers - real value of debt decreases
savers - value of your saving decreasing

cost of inflation

1 higher cost of living
2 wage price spiral
3 decrease the value of savings
4 increase in unemployment
5 value of exports decreases
6 bad for people with fixed incomes

benefits of deflation

1 increase in value of savings
2 technology improvements and decrease in costs of production
3 increase in current account

cost of deflation

1 value of our debt increases
2 downward wage price spiral
3 unemployment
4 investments are shifted abroad

causes of deflation

increase in LRAS
decrease in AD

measures of unemployment

claimant count
ILO measure

claimant count

The number of people claiming jobseekers allowance

international labour organisation (ILO)

a survey asked to people aged 16-65 if they have been out of work for the past 4 weeks and if they are ready to work within the next 2 weeks

unemployment formula

unemployed/(unemployed + employed) x 100

types of unemployment

1 frictional
2 structural
3 cyclical
4 seasonal

frictional unemployment

when people are between jobs

structural unemployment

mismatch of skilled workers and skills demanded

cyclical unemployment

when demand for labour is low in a recession

seasonal unemployment

demand for labour is relatively low in certain times of the year

underemployment

workers are overqualified for their jobs or work fewer hours than they would prefer

occupational mobility of labour

The ability to change occupations

geographical mobility of labour

The ability to move from one location to another for work