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Macroeconomics
The study of the economy as a whole
Microeconomics
Focuses on individual markets
4 examples of major macroeconomic issues
Economic growth / unemployment / inflation / balance of payments and exchange rates
What is the equation for aggregate demand?
Gov. Spending + consumer spending + investments + exports - imports
What is the fiscal policy? (Three facts)
When the gov. Uses taxes or government spending to control growth within the economy / can be expansionary or contractionary / if you want expansionary policy = need to cut taxes = more disposable income
What is the monetary policy? (Three facts)
It uses interest rate to control the economy / involves interest rate and credit / high interest rates = less borrowing = decrease level of investment
Define GDP (Gross Domestic Product)
the total market value of all final goods and services produced in a country for a given period
What is nominal GDP?
GDP measured in current prices
What do changes in nominal GDP reflect?
Changes in both output and prices
How do you calculate nominal GDP?
sum of the (Price x Quantity) of each item
Define Real GDP
GDP at prices of chosen base year (aka constant price GDP)
How do you calculate real GDP?
(Nominal GDP/GDP Deflator) x base year
What is chain-linking?
Calculate changes in aggregate demand in consecutive pairs of years (e.g. 2011 & 2012) to give us a series of percentage changes year to year
When we look at GDP, what do we need to consider?
Take account of inflation / population (use of capita measures) / exchange rates (use of PPP measures)
What are the PPP measures?
Purchasing power parity - a technique used to convert the wealth of one currency to acquire the same goods and services in one country in respect to another country
Define unemployment
People of working age who are without work, available for work, and actively seeking employment.
What are the two official measures of unemployment?
Claimant unemployment & standardized unemployment
Define claimant unemployment
Where the government exclude people claiming benefits from the statistics
What is Standardized unemployment based on?
Is based on the labor force survey
Define unemployment rate
the percentage of the people in the labor force who are unemployed
Define labor force
All workers, employed and unemployed
Define labor force participation rate
the percentage of the adult population that is in the labor force
How do we calculate labor force participation?
(Labor force / adult population) x 100
How do we calculate unemployment rate?
(Number of Unemployed) / (Labor Force) x 100
What are the three main costs of unemployment?
Is a waste of human resource / increase in government expenditure - through unemployment benefits / reduction in tax revenue
What is the duration of unemployment affected by?
The level of unemployment (AKA the stock) / inflows to and outflows from the stock of unemployment / the phase of the business cycle
Name 2 disadvantages of unemployment rate as an indicator
It isn't perfect / doesn't measure the quality of jobs or how well people are suited to the jobs
What is the GDP deflator? (Four facts)
Is a measure of the average prices of goods and services in the economy / presents a broader view of how prices are changing in the economy / includes consumer price index / is a measure of price level
How do you calculate GDP deflator?
Nominal GDP/Real GDP x 100
Define business cycle
a cycle or series of cycles of economic expansion and contraction.
What are the four phases of the businesss cycle?
Phase 1 - the upturn Phase 2 - expansion phase Phase 3 - peeking out Phase 4 - slow down / recession phase
Give two facts about the upturn phase
Is where the economy is just recovering from a recession / slow down When the economy is starting to develop a positive change
Give three facts about the expansion phase
Where the economy starts to grow There is a positive, strong rate of growth It has the highest rate of growth within the economy
Give two facts about the peeking out stage
When the economy starts to slow down The growth is positive but slow or at a standstill
Give two facts about the recession phase
When the economy starts to decline There is a negative growth
Define output gaps
Where potential output and actual output aren't the same
What are positive output gaps?
Where the actual output exceeds the potential output
What are negative output gaps?
Where the actual output is less than the potential output (means there is slack in the economy)
What is the business cycle like in practice? (Three facts)
There are fluctuations in actual growth The lengths of phases aren't standard The magnitude of phases vary - e.g. greater depth for recession phase
Define international business cycle
Is the synchronicity of countries' business cycles / is the interaction with the foreign part of the economy
Give five factors influencing the business cycle
Fluctuations in aggregate demand Fluctuations in private sector expenditure Role of financial sector Fluctuations in aggregate supply Fluctuations of potential output
How does fluctuations in aggregate demand influence the business cycle?
It mimics what we see in the economic growth
How does the financial sector role influence the business cycle?
It can bring everything to a halt
How can fluctuations in aggregate supply influence the business cycle?
It can have an impact on business supply, business confidence and unemployment
How can fluctuations of potential output influence the business cycle? What is it based on?
It is based on changes within the capacity of the economy
What are two determinants of the course of a business cycle?
Booms and recessions
What is the most important effect of a recession
The effect on the ability of workers to find and hold jobs
Define recessions (three facts)
They are two or more consecutive quarters where real GDP (output) shrinks To pinpoint it, you need quarterly GDP data 3 D'S
What are the 3Ds of a recession?
Depth, duration, determinant
What are three characteristics of economic growth?
Economies are inherently unstable / explanations often focus on aggregate demand / volatility in the demand for a firm's goods and services
What are the three main methods of measuring GDP?
Product method / income method / expenditure method
What is the product method?
is the sum of Measuring the cost of production for all outputs
What is the income method?
Adding factor earnings There are some qualifications: stock appreciation, transfer payments, direct taxes
What is the expenditure method, also the equation for?
The equation for aggregate demand
Define Gross National Income (GNI)
It only includes contributions from people who are nationals of a particular country
What does net national income (NNI) adjust for?
It adjusts for depreciation
What items are excluded from measuring national income?
Non-marketed items and the underground economy
Why is production a poor indicator of welfare? (Five reasons)
Production doesn't equal consumption There are human costs to production Externalities Production of 'regrettables' Distribution of income
What happens to inflation in regards to real and nominal GDP?
Real - do adjust for inflation Nominal - don't adjust for inflation
What are the two types of underground economy?
where the good being sold is illegal
where the good is legal but the transaction is illegal
Give three examples of the impact the underground economy has on the economy
Gov. Loses out on tax revenue Communities can't develop if there's no legal money in the economy GDP isn't accurate if it produces more revenue than the normal economy Misuse of resources
How do we calculate NNI?
GDP - depreciation + net income from abroad
Define 'final goods'
The product produced at the end
Define intermediate goods
Raw materials
What is inflation?
The rate at which prices are going up
Define circular flow of income model
A model of the determination of the size of the economy
Give five facts about the circular flow of income model
Is a demand driven model Prices are assumed to be constant It models the total demand for final goods and services produced Shows how changes in demand impact the economy's output Illustrates economic interdependencies between major players in the economy
What is in a 2 sector model?
Households and firms
define factor payments
the income people receive in return for supplying factors of production
Define injections
Expenditures on domestic output from outside the inner flow
Define withdrawals
Incomes not passed round the inner flow e.g. net savings
Define net savings
A withdrawal. It is the net flow from households to financial institutions
Define gross fixed capital formation (GFCF)
A form of investment made into factories, offices, machinery and business vehicles for production purposes
Define inventory investment
A change in stocks of unsold final output during the period OR change in stocks of raw materials during the period
Who is added to the 3 sector model?
Public sector
Who is added to the 4 sector model?
The foreign sector e.g. overseas households, overseas firms and overseas government
Name three factors influencing consumption
Disposable income / expected future income / the financial system
Name five factors influencing investment
Increased consumer demand / expectations / cost and efficiency of capital equipment / rate of interest / availability of finance
Name two factors influencing government spending
National Income / types of spending
Name two factors influencing expenditure / imports
National income / exchange rates
Define potential output
What can be produced if the economy uses all of it's resources
A household's disposable income is equal to...
GNY - taxes paid by firms + subsidies received by firms - depreciation - undistributed profits - personal taxes + benefits
Define transfer payment
A government payment to a household or firm for which the payer receives no good or service in return
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