economics chpt 8-10 + consumer behaviour (2.6)

income approach to national income accounting

adds up all income earned by factors of production that include wages, profits, rent and interest within a country over a year

gross domestic product (GDP)

defined as the market value of all final goods and services produced in a country within a given time period

output approach to national income accounting

measures total value of final goods and services produced in a country within a year

gross domestic income (GNI/GNP)

total income received by residents of a country regardless of where the income comes from

nominal value

value in terms of the prices that prevail at the time of measurement

real value

measure of value that takes into account changes in price by using base year prices

purchasing power parity

quantity of goods and services that can be bought with money

price index

measure of average prices in one period relative to average prices in a base year

business cycle

consists of short term fluctuations in the growth of real output, which are alternating periods of contractions and expansions

material standard of living (SOL)

quantity of goods and services available to people in a country

non-material standard of living (SOL)

factors that affect quality of life

aggregate demand

total quantity of aggregate output that all buyers in an economy want to buy at different possible price levels, ceteris paribus

consumer expenditure

all purchases by households on final goods and services, excluding housing

investment spending

spending by firms on capital goods and on new construction

government spending

purchases by the government of factors of production and investment by the government on capital goods, including schools, roads, hospitals etc

aggregate supply

total quantity of goods and services produced in an economy over a period of time at different price levels

short run (in macroeconomics)

period where prices of resources such as wages are inflexible in spite of changes in prices

long run (in macroeconomics)

period where prices of resources including wages are flexible and change along with changes in price level

consumer confidence

measure of how optimistic consumers are about their future and the future of the economy

wealth

value of assets that people own, including jewellery, houses, stocks, bonds etc minus the debt owed to banks or other financial institutions

indebtedness

how much money people owe from borrowing in the pass

business confidence

how optimistic firms are about future sales and economic activity

exchange rates

price of one country's currency in terms of another country's currency

trade protection

government intervention in international trade through the imposition of trade restrictions to prevent free entry of imports into a country and protect the domestic economy from foreign competition

supply shocks

events that have a sudden and strong impact on short run aggregate supply (SRAS)

deflationary/recessionary gap

situation where real GDP is less than potential GDP due to insufficient aggregate demand

inflationary gap

situation where real GDP is more than potential GDP due to excess aggregate demand

completeness

ability to rank goods according to preference

transitivity

preferences among alternative choices are consistent

non-satiation

consumer always prefer more of a good to less

perfect information

knows about all alternatives

rule of thumb

simple guidelines based on experience and common sense to simply complicated decisions that would have to be based on complex consideration of every possible choice

anchoring

involves the use of irrelevant information to make decisions, usually because it is the first piece of information that the consumer comes across or it is the first experience of buying a good

framing

deals with how choices are presented to decision-makers

availability

refers to information that is most recently available, which people tend to rely more heavily on, even though there is no reason to believe that this information is more reliable than earlier information

bounded rationality

idea that rationality is limited to consumers' insufficient information, the costliness of obtaining information and the limitations of the human mind to process large amounts of information

bounded self-control

idea that people in reality exercise self-control only within limits

bounded selfishness

idea that people are only selfish within limits

choice architecture

design of particular ways of environments in which people make choices

default choice

doing the option which results when one does not do anything

stakeholders

individuals or groups of individuals who have an interest in something and are affected by it

expansion

occurs when there is employment of FOPs, general price level increases and unemployment falls due to increase in aggregate demand

contraction

occurs when there is growing unemployment of FOPs due to fall in AD

welfare loss

lost of social surplus due to market failure

expenditure approach to national income accounting

measure total amount of spending to buy final goods and services in a country within a year

limitations of using national income to compare SOL over time/between cities (6)

1. ignores factors affecting non-material SOL (e.g. working conditions, stress, working hours, externalities)
2. differing price levels across countries
3. difficulty in measuring the true value of output in an economy as GDP and GNI do not include non-marketed output and output sold in underground markets
4. GDP and GNI do not take into account quality improvement in goods and services
5. Non-reflection of education attainment, life expectancy, health
6. No information on distribution of income and output

alternative measures of well-being (3)

1. happiness index
2. happy Planet Index
3. OECD better life index

causes of change in consumer expenditure (5)

1. changes in consumer confidence
2. changes in interest rates
3. changes in wealth
4. changes in personal income tax
5. changes in the level of household indebtedness

causes of change in investment spending (6)

1. business confidence
2. changes in interest rates
3. improvements in technology
4. changes in business taxes
5. level of corporate indebtedness
6. legal changes

causes of change in government spending (2)

1. changes in political priorities
2. changes in economic priorities

changes in X-M (3)

1. changes in national income abroad
2. changes in exchange rates
3. changes in trade policies or the level of trade protection

reasons resource (wage) prices remain constant in SR (4)

1. minimum wage legislation
2. labour unions resisting wage cuts
3. poor worker motivation
4. labour contracts

causes of shifts in SRAS (4)

1. indirect taxes
2. subsidies
3. supply shocks
4. changes in resource prices

factors affecting shift in LRAS/Keynesian AS (6)

1. increase in quantity of FOPs
2. increase in quality of FOPs
3. tech improvements
4. lower NRU
5. increase in efficiency of production
6. institutional changes

assumptions of consumer rationality (4)

1. completeness
2. transitivity
3. non-satiation
4. utility maximisation

limitations of assumptions (4)

1. rule of thumb
2. anchoring
3. framing
4. availability

alternative theories of consumer behaviour (4)

1. bounded rationality
2. bounded self-control
3. bounded selfishness
4. imperfect information

choice architecture (3)

1. default choice
2. restricted choice
3. mandated choice

unemployment

people of working age who are actively looking for a job but who are not employed

underemployment

people of working age with part-time jobs when they would rather be working full-time, or with jobs that do not make full use of their skills and education

labour force

number of people who are employed + number of people of working age who are unemployed

difficulties in measuring unemployment (6)

1. discouraged workers who stop looking for a job drop out of the labour force
2. no distinction between part-time and full-time workers
3. no distinction on type of work done
4. does not include people who chose early retirement or workers undergoing retraining
5. does not include people in the underground economy
6. cannot account for differences in unemployment due to region, gender, ethnic groups age, occupation and education attainment

economic consequences of unemployment (6)

1. loss of real GDP
2. loss of income of unemployed workers --> lower material SOL
3. loss of tax revenue for government
4. costs of the government of dealing with social problems resulting from unemployment
5. more unequal distribution of income
6. unemployed workers may find difficulty in finding work in the future due to loss of skills

structural unemployment (3)

caused by changes in the structure of the economy where some industries decline and some grow

occurs when there are changes in:

1. demand for particular types of labour skills

2. change in geographical location for jobs

3. labour market rigidities

frictional unemployment

occurs when people are between jobs because
1. retrenched
2. waiting for new job to start
3. searching for better jobs

seasonal unemployment

occurs when the demand for labour in certain industries changes on a seasonal basis because of variations in needs

cyclical unemployment

occurs due to lack of AD

inflation

sustained increase in the general price level

deflation

sustained decrease in the general price level

disinflation

when inflation occurs at a lower rate

consumer price index (CPI)

measures the cost of goods and services purchased by a typical household in an economy

problems with CPI (8)

1. different rates on inflation for different income earners
2. different rates of inflation depending on regional and cultural factors
3. changes in consumption patters due to consumer substitutions when relative price changes
4. changes in consumption patters due to increased use of discount stores and sales
5. changes in consumption patterns due to new products or older products becoming less popular
6. changes in product quality not accounted for
7. international comparisons is limited
8. cannot compare in the LR

losers during inflation (5)

1. fixed income owners
2. people who receive incomes that increase less rapidly than the rate of inflation
3. holders of cash
4. savers
5. lenders

gainers during inflation (3)

1. borrowers
2. payers of fixed income
3. payers of income that increase less than rate of inflation

costs of inflation (6)

1. retribution effects (gainers and losers)
2. uncertainty
3. discourages savings
4. international export competitiveness
5. allocative inefficiency
6. social and personal cost unequally distributed

hyperinflation

consist of very high rates of inflation, resulting from significant increase in the supply of money

costs of deflation (6)

1. retribution effects
2. uncertainty
3. increase in real value of debt, increasing risk of bankruptcies and financial crisis
4. risk of deflationary spiral
5. allocative inefficiency
6. policy ineffectiveness

philips curve

relationship between unemployment and inflation

LRAS curve

a curve that shows the relationship between price level and real GDP produced when wages change to reflect changes in the price level, ceteris paribus

happiness index

based on: real GDP per capita, perception of corruption, healthy life expectancy …

infrastructure

numerous types of physical capital resulting from investments, making major contributions to EG and ED by lowering COP and increasing productivity

rational consumer choice

consumers make decisions that maximise their utility

GDP deflator

it is a price index used to convert nominal GDP to real GDP

keynesian aggregate supply curve

shows the relationship between price level and real GDP on the assumption that prices and wages are inflexible downward