Macroeconomics - week 1 - 3

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?

1) where the good being sold is illegal
2) 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