macroeconomics

What is economic growth?

an increase in the amount of goods and services produced per head of the population over a period of time.

what is the uk's long run trend of economic growth?

2.5% is the gov'ts aim to have sustainable growth for the long run

why would gov'ts aim to increase economic development before economic growth?

this is because in emerging markets and developing economies economic development will improve living standards, life expectancy, literacy rates

Income vs wealth

Income is assets EARNED (e.g. cars, houses, money etc) while wealth is assets already OWNED.

consumer spending

C
spending on goods/services

gov't spending

G
public sector demand

investment

I
spending on capital goods

exports

X
overseas markets

imports

M
goods bought overseas

national income = ?

y= GDP

savings

S
Deferred spendings - not spent

leakages/ withdrawals

spending (income) that flows out of the circular flow.
T = taxation
S = savings
M = imports

injection

income going into circular flow
G = gov't spending
X = exports
I = investments

How to achieve equilibrium

injections = withdrawals
X+G+I = S+T+M

what does it mean if national income is rising

I+G+X > S+T+M
inflation

what does it mean if growth is declining

I+G+X < S+T+M
recession
- increase gov't spending
- reduce tax
- lower interest rates

circular flow of income

A simplified model of the economy that shows the flow of money through the economy.

what does national income measure

national income is the total value of goods and services a country purchase. it is the output in one year and can be measured by GDP, GNI and GNP

What is nominal GDP?

the production of goods and services valued at current prices

Define the circular flow of income model. Why is this model important?

- model that represents the exchange between firms and households
- benefits both of them mutually
- represents the flow of money and goods in the economy

What does investment spending represent spending on ?

Productive physical capital

When is unemplyment likely to occur?

When savings are greater than investments
- leakages > injections

Real GDP = ?

Nominal GDP x 100/price index

What is real GDP?

Ajusted for inflation expressed at current prices (chosen by base year)

Nominal vs real GDP

- GDP goes up when prices go up - inflation (nominal)
- GDP goes up when more/better goods & services are produced (real) - measures 2nd type of growth - controls inflation - if price hasnt changed

Measure of living standards = ?

Real GDP/ real GDP per capita
- declines during a recession - increase in unemployment

What is purchasing power parity ?

- when the buying ability of different currencies is = across countries , the foreign exchange market is in equilibrium
- the purchasing power of the $

The problems w/ using GDP per capita as a measure of economic performance

- GDP per capita is average - takes no account of inequaity i.e. the way money is distributed
- the informal sector - price of goods & services deliberstely not declared
- subsistence and barter
- exchange rate differences (PPP)
- quality of goods - certain goods improve over time
- social indicators impact living standards

The happiness agenda - criticisms

- definition of happiness is subjective
- measurement
- policy implementation
- does income actualy correlate w/ happiness

How do we measure inflation?

Consumer Price Index (CPI)
- a measurement of the price level in the economy based on the prices of a collection of products (basket)

What is inflation?

a general increase in prices and fall in the purchasing value of money.

What is inflation rate?

Annual rate of change of the avg. price of goods & services

What is disinflation?

If inflation reduces from 3% to 2%, prices are still going UP, just at a slower rate than before.

What is deflation ?

Prices are FALLING
- decline in general price level in the economy - leads to a spiral

What is the process of calculating CPI ?

- living costs and food survey :
- 7,000 families are asked to keep a record of what they spend over 2 week. Used to produce typical basket of 700 goods & services.
- each year basket changes to reflect consumers change
- the basket of goods & services is weighted. - what is more important ( proportion of total expenditure)mfoe each good/service.

- second survey records how much these goods & services have changed

Main causes of inflation ?

- Demand pull inflation
- cost push inflation
- administered prices

What is demand push inflation?

Aggregate demand from customers - scarcity

What is cost push inflation ?

Cost rising for businesses - raw materials and components costs & overseas suppliers - rising imports due to falling exchange rates

What is administered prices?

Changes in regulated prices - bills - changes in taxes

CPI weighting

CPI basket

contains the goods and services represented in the index, each weighted by its relative importance

Price value = ?

Price value = A(pxw) + B(pxw) + C(pxw) + D(pxw) = Pv

Index for year x = ?

Index for year x = price value of year x /price value of base year X100

Percentage change when comparing with base year = ? ( calculating index)

(New - old)/ old X 100

CPI measurement problems

- changes in quality - measuring price change doesnt measure quality
- changes in expenditure - spending patterns change quickly
- potential sampling error - not all households could answer survey accurately

CPI vs RPI

- population base - RPI excludes high and low income households
- housing costs - CPI includes actual rents but not owner occupiers housing costs

GPD deflator

Nominal gdp/real gdp X 100

What is trade surplus?

Exsist when value of exports is > value of imports

What is meant by a fall in GDP at constant prices?

constant-price GDP factors out the impact of inflation and allows for easy comparisons by converting the value of the dollar in other time periods to present-day dollars.

When GDP declines for two consecutive quarters or more, by definition the economy is in a recession

What is the possible impact on the distribution of income of negative economic growth ?

High levels of inequality are linked to economic instability, financial crisis, debt and inflation