Studied by 5 peoplewhat is the circular flow of income
is used to explain how economic activity and national income are determined
explain the factors of the flow of income
Income to household and spending to firms
factors of production to firms and goods and services to households
leakages and injections in the economy
Leakages: savings, taxes, imports
injections: gov. spending, investments, expenditures
ways to measure economic activity
expenditure approach
income approach
output approach
what is the expenditure approach, and its components
counts the total spending on final new goods and services in a given year
spending: consumptions, investments, government spending, net exports (exports-imports)
what is the income approach? and its components
adds up all income earned by the factors of production within a country over a given Time period
components: wages earned by labour, rent earned by land, interest earned by capital, profits earned by entrepreneurship
output approach
measures the value of each good and service produced in the economy over a particular period of time and then sums them up in order to obtain the total value of output produced
GDP
the value of output that has been procured by factors of production within the country, regardless of who owns them
GNI
the sum of incomes of residents of an economy in a given period, regardless where they come from
nominal GDP
the GDP that isn’t adjusted for inflation
Real GDP
animal GDP adjusted for inflation
Inflation
price levels increase
deflation
price levels decrease
GDP per pcapita
an average based on national income of the country divided by country’s population
GDP deflator
nominal/real GDP *100
how can GDP overestimate well-being
adding negative social behaviours and transactions eg. environmental damage, unhealthy products etc..
underreporting loss of natural resources eg. degredation of forests, destruction of species etc…
How can GDP underestimate well-being
the living period of people isn’t included
underground markets aren’t included
unpaid output not included
Why does GDP not provide enough info
the composition of output unknown
Misses out on many of aspects determining quality of life
no info on income distribution
doesn’t account for purchasing power
Business cycle
describes the fluctuations of national income from expansion to contraction to recovery
trough: lowest point go recession
recovery: an increase in GDP from recessionary period, that matches previous GDP before recession
expansion: economy growing beyond previous level of output
Peak: highest point in expansion
Recession: two consecutive quarters of declining national output.
Green GDP
an estimate of a countries GDP aggregate output, that attempts to factor any output losses created by environmental degradation.
OECD
better quality index: tool to measure and compare quality of life across different countries. takes into consideration; housing, income, jobs etc..
Happiness index
ranks countries based on their happiness
happy planet index
(well being * life expectancy)/ ecological footprint
how well nations are doing at achieving long happy, sustainable lives
Aggregate demand
total demand for a nations goods and services from domestic households, firms the government and foreigners at a given price level and a given time period C.T
what are the components of AD
C, G, I, X-M
movement of AD curve
caused by changes in the PL
Shift of AD curve
if any of the 4 components change
determinant of C
level of national income
wealth
real interest rates
debts
consumer confidence and expectations
how does wealth affect C
the net worth of an individual or household including the value of all its assets minus their liabilities
How does real interest rates affect C
If IR goes up Consumption will decrease
How do Debts affect C
the amount of money owed by households to lenders, inlcluding borrowing from banks.
in the short run consumption increases as they ahem more to spend
in the long run consumption decreases as they need to pay back
government debt: if government has high debt they will have low government spending
how does consumer confidence + expectations effect C
in economic growth confidence is high meaning higher consumption
in economy recession confidence is low so less consumption
Determinant of I
interest rates
business confidence
changes and improvements in technology
business taxes
level of corporate indebtedness
legal and institutional changes
how does business taxes and level of debt effect I
with higher taxes of profits, firms profits will falling meaning less likely to invest
with a high level of debt firms will invest less
Determinant of G
political or economic priorities
What are forms of government spending
schools, national defence, roads, hospitals, subsidising firms
Aggregate supply
total amount of goods and services that all the firms in all th industries in a country will produce at every price level in a given time period C.T
Short run in Macro
period of time when prices of resources are roughly constant or inflexible (also true for wages)
long run in Macro
Time period where all resource prices are flexible and changing including wages
wages in the SR
in the short run changes in wages are not changing a lot
due to:
minimum wagę law
fix wage contracts for a period of time
workers + labour unions resist wage cuts
wage cuts—> lower productivity
what can cause shifts in the SRAS curve
changes in wages
changes in labour resource prices
changes in business taxes
changes in subsidies offered
supply shocks
Types of LRAS
Keynesian model
new classical model
what is the new classical model
LRAS is perfectly inelastic at the full employment level of output.
employment can’t be changed in the long, because or NRU
in the New classical model if the price level increases it doesn’t have any effect on the level of output.
Where is the equilibrium in an inflationary gap
on the right of the LRAS
where is the equilibrium in a recessionary gap
on the left of the LRAS
where is the equilibrium at full employment level
on the LRAS curve
what is a deflationary gap
not enough total demand in economy for firms to produce at full employment level
what is an inflationary gap
too much demand In economy, so firms cannot keep up
What is the Keynesian model
the Keynesian model assumes inflexible price and wages meaning that economy cannot move to the long run
what is section one in the kaynesian model
real GDP is low and the PL is constant, also a high unemployment
what is section 2 in the Keynesian model
GDP is increasing PL is increasing and employment increases
what is section 3 in the Keynesian model
the real GDP cannot increase more, PL is increasing rapidly, GDP can’t increase more due to firms using all available labour and other resources
what can shift the LR(AS) curve
increasing Q of FOP
quality of FOP’s
Improvements in technology
increasing efficiency
reduction in natural rate of unemployment
the macroeconomic equilibrium
a state of the economy in which aggregate demand equals aggregate supply. changes in either of them can effect PL, unemployment and inflation
SR equilibrium positions
deflationary gap
inflationary gap
full employment
LR equilibrium positions
No deflationy gaps because a fall in demand causes a recsionnary gap decreasing price levels, a fall in the PL leads to a decrease in wages shift AS back to LRAS
No inflationary gap because and increase in the price levels causes wages to increase, shifting AS back to the equilibrium
what are demand side policies and what do they focus on.
focus on changing AD to achieve several macroeconomic goals
monetary and fiscal
Commercial banks
Carry out the monetary policy, financial institutions whose main fucntions are to hold deposits for customers, make loans, transfer funds and buy government bonds
what is the central bank
a government financial institution with many responsibilities such as:
banker for the government
banker to commercial banks
regulators of commercial abnks
conduct monetary policy
what are the goals of monetary policy?
low/ stable inflation
ow unemployment
reduce business cycle fluctuations
external balance between exports and imports
what is monetary policy
where the central bank uses money supply and interest rate to manage the economy.
inflation targeting
a public announcement of the target inflation, the target is between 1.5- 2.5 ±1
when does central bank use contractionary monetary policy
if the inflation is higher than the target
when does the central bank use contractionary monetary policy
if the inflation is lower than the target
money market
where demand and supply for money determined the equilibrium rate of interest
rate of interest
the price of money services
can the supply of money change
the supply of money remains unchanged unless the CB decided to change the money supply
what does an increase Sm do the IR
decrease in IR
what does a decrease. in Sm do to the IR
increases the IR
money creation
when individual deposit money bank must only keep a small percentage(reserve requirement) the remaining money they can lend
tools of monetary policy
minimum reserve requirements: if reserve requirement decreases, commercial banks have more money to lend increasing the Sm and decreasing Sm
changing the central banks minimum lending rate: if the lending rate set by central banks decreases than IR will decreases
what happens in expansionary monetary policy
if CB increases money supply, IR decreases, increasing C and I shift to the right of AD
what happens in Contractionary monetary policy
if Cb decreases money supply, interest rate increases, meaning C and I decreases shifting Ad to the left
real interest rate
interest rate that has been accounted for inflation
animal interest rate
interest quoted by commercial banks not accounted for inflation
government revenue
all funds that flow towards the government eg. taxes, sales of goods and services(electricity), sales of gov owned assets
Government current expenditure
spending on a day to day items that are reoccurring and that are used or consumed, school, medical supplies, proviso of subsidies
governmentt capital expenditure
public investments or production of physical capital eg roads, harbours, schools
Goverment trasnfer payments
payments to vulnerable groups eg unemployed, child support
government budget outcomes
revenue = expenditure (balanced budget)
revenue>expenditure (budget surplus)
Revenue< expenditure (budget deficit
fiscal policy
manipulation by governments own expenditures to influence Level of AD, can mainly influence G
goals of fiscal policy
low/stabel inflation
low unemployment
reduce business cycle fluctuations
promote stable economic environment for long term growth
external balance
distribution of income
types of fiscal policy
Expansionary: increasing in gov spending, decrease in personal income tax, decrease in business tax
contractionary: decrease in Gov spending, increase in personal income tax, increase in business tax
crowding out theory
if government uses expansion fiscal policy by increasing G without increase R. it is forced to borrow money increase the Dm, causing IR to increase —> lower investments by private firms or crowding out of private investments.
increase in Gov spending—< increase in AD
increasing in sending increase Dm
increasing IR
leading to fall in AD
Note
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