Economics 3.5 (AS 91403) NCEA Level 3

Aggregate Demand (AD)

The total demand in the economy from all sectors, at each price level.

Its components are C, I ,G AND (X-M)

Consumption spending (C)

Investment (I)

Government spending (G)

EXport receipts (x)

IMport payments (M)

or NET exports (X-M)

Aggregate Supply (AS)

The total output by producers in an economy, at each price level.

Appreciation

When the value of the New Zealand dollar (NZD) increases in relation to another currency. (Benefits importers)

Balance of Payments

The accounts that record the inflows and outflows of money between NZ and the rest of the world. Has 3 parts:

The Current Account

The Capital Account

The Financial Account

Budget

The annual plan of the government's revenue (T) and expenditure (G). (See also Fiscal Policy, Operating Balance and Deficit, Surplus)

Budget Deficit

When government spending (G) is greater than government revenue (T). A negative Operating Balance. A net withdrawal from the economy.

Budget Surplus

When government spending (G) is less than the government revenue (T). A positive Operating Balance. A net injection into the economy.

Business Cycle

Business Cycle or Trade Cycle

Shows the fluctuations in Real GDP over time.

Model - business cycle diagram

Contractionary Fiscal Policy

When the government decreases its spending AND/OR increases tax rates. It decreases aggregate demand (AD).

Current Account

It shows a country's income flows in relation to the rest of the world.

Has 4 parts: Balance on Goods, Balance on Services, Balance on Income, Balance on Current Transfers

(NZ's large, negative Balance on Income means has a deficit overall.)

Current Account Deficit

When a country's earnings (current inflows) are less than its current expenditure (current outflows).

Deflationary/Recessionary Gap

Where the AS/AD equilibrium is BELOW full employment/Real GDP. (Ye is below Yf)

Depreciation

When the value of the New Zealand dollar (NZD) decreases in relation to another currency. (Benefits exporters)

Direct Tax

A tax levied on income e.g. PAYE (Pay As You Earn)or company tax

Economic Growth Rate

The % change in Real GDP per year.

Expansionary Fiscal Policy

When the government increases its spending AND/OR decreases tax rates. It increases aggregate demand (AD).

Expenditure Approach for Calculating GDP

C + I + G + change in R + (X - M) where

C = Consumer expenditure (household spending)

I = Gross fixed capital formation (Investment)

G = Government expenditure (local and central govt)

Change in R = Change in inventories/stocks

X = Export receipts

M = Import payments

(X-M) + net exports

Financial Account

It records money flows involving a country's assets and liabilities in relation to the rest of the world, e.g. repaying overseas loans, foreigners buying NZ assets.

Fiscal Policy

When the government changes its level of spending and/or income in order to influence the level of economic activity.

Foreign Exchange Market

Where one currency is exchanged for another, to enable trade and international investment. Model - demand and supply

Gross Domestic Product (GDP)

The money value of all final good and services produced in an economy per year. Same as nominal GDP since it isn't adjusted for inflation.

Income Approach for Calculating GDP (formula)

W + P + D + NIT

W = Compensation of employees (Wages)

P = Gross operating surplus (Profits)

D = consumption of fixed assets (depreciation)

NIT = Net Indirect Taxes = Indirect taxes minus Subsidies

Indirect Tax

A tax levied on good and services which is collected by the seller and passes onto the govt e.g. GST (goods and services tax)

Inflationary Gap

Where the AS/AD equilibrium is ABOVE full employment NY level (i.e. Ye is above Yf). Can only exist in the SR and will correct itself. Model - AD/AS graph

Loose (expansionary) Monetary Policy

When the OCR is lowered in order to increase the level of economic activity i.e. to prevent a recession in the future. (This will increase AD, ceteris paribus.)

Marginal Propensity to Consume (MPC)

The proportion of each dollar of income that is SPENT. MPC +MPS = 1

Marginal Propensity to Save (MPS)

The proportion of each dollar of income that is SAVED. MPC +MPS = 1

Monetary Policy

When the RBNZ uses interest rates (through the OCR) to influence the level of economic activity.

Multiplier (The Spending Multiplier)

Measures the total effect on the money supply of a change in spending.

Formula = 1 / (1-MPC) x increase in the component)

Nominal GDP

The current dollar value of all final goods and services produced in an economy per year.

(An increase in NOMINAL GDP means that the value in current dollars of the gds and services produced has increased.)

Open Market Operations (OMOs)

When the RBNZ trades in govt bonds to influence the money supply, in order to protect the OCR.)

Operating Balance (or "an operating surplus" or an "operating deficit")

The difference between (Crown) revenue (R) and expenses (E) in a given year.

Operating Surplus means R > E

Operating Deficit means R < E

PTA Target

Policy Target Agreement = Inflation to be kept between 1 - 3 % on average over the medium term.

Public Debt

The total amount owed by the NZ govt (both to NZers and to foreign lenders.)

Real GDP

Where Nominal GDP has been adjusted for inflation so that it shows changes in the QUANTITIES being produced.

(An increase in REAL GDP shows that MORE goods and services have been produced. (Whereas an increase in GDP (nominal GDP) may be due to an increase in output OR due to an increase in PRICES charged OR a combination).

Real GDP (formula)

Nominal GDP / CPI x 1000

Supply-side Policies

Govt policies which aim to increase productivity and reduce production costs so that AS increases, ceteris paribus e.g. improved literacy, better broadband, incentives to use new technology, indirect tax cuts.

(An increase in AS raises Real GDP but lowers inflation rates.)

Terms of Trade

Measures the import-buying power of our exports through measuring changes in the prices of our exports and imports

Formula: Px / Pm x 1000

Px = eXport Price index

Pm = iMport Price index

Tight (Contractionary) Monetary Policy

When the OCR is raised in order to decrease the level of economic activity i.e. to prevent inflation above 3% in the future.

(This will increase AD, ceteris paribus.)

Trade Weighted Index (TWI)

Measures the value of the New Zealand dollar against a basket of currencies from our major trading partners. The currencies are weighted according to their country's importance as a trading partner.