Macroeconomics and Economic Growth

Flashcards covering macroeconomic concepts including GDP, GNI, Aggregate Demand, Index Numbers, Real vs. Nominal values, and Potential Economic Growth.

What is Gross Domestic Product (GDP)?

The total value of goods and services produced by a country over a period of time.

How is Gross National Income (GNI) calculated from GDP?

GNI is calculated as GDP plus net income from abroad.

What is GNI per capita, and what formula is used to calculate it?

GNI per capita is the average level of GNI per head of population, calculated using the formula $\text{GNI per capita} = \frac{\text{GNI}}{\text{population}}$.

In this business cycle diagram showing Real GDP over time, what phase is identified when real GDP falls for two consecutive quarters?

Recession.

What is Aggregate Demand (AD), and what is its equation?

Aggregate Demand is the total spending on goods and services in an economy, calculated using the equation $AD = C + I + G + (X - M)$.

In the Aggregate Demand formula $AD = C + I + G + (X - M)$, what do each of the components represent?

$C$ = Consumption (spending by households), $I$ = Investment (spending by businesses), $G$ = Government spending (spending on items like schools and roads), and $X - M$ = Net exports (exports minus imports).

How is Gross Domestic Product calculated using the expenditure method?

Consumer spending + investment expenditure + government spending = total domestic expenditure; + exports = Total final expenditure; - imports = Gross domestic product.

What is the difference between nominal values and real values?

Nominal values express economic figures in current prices (the number you see), while real values are adjusted for the effects of price changes or inflation (what it is actually worth).

What formula is used to calculate a Price index?

$$\text{Price index} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$$

What formula is used to calculate Real value using Nominal value and an Index?

$$\text{Real value} = \frac{\text{Nominal}}{\text{Index}} \times 100$$

What base value is always given to the base year when working with index numbers?

A base value of $100$.

What potential problems exist when using national income and economic growth figures?

Inequality, hidden economy, accuracy, exchange rates, social indicators, and the fact that it is all theoretical.

How do GDP and GNI differ regarding the location of production versus ownership of income?

GDP measures production inside the country, whereas GNI measures income earned by a country's residents and businesses regardless of whether the production occurred inside or outside the country.

What is potential economic growth?

an increase in an ecomonys productive capacity for the future.

What is actual economic growth?

The annual percentage increase in output.

What is Purchasing Power Parity (PPP)?

Comparing the purchasing power of different currencies based on the cost of the same goods or services.

Why do governments pursue economic growth?

To increase living standards, employment, and tax revenue.

What is productive efficiency?

Producing goods or services at the lowest possible average cost.

How are labour productivity and capital productivity defined?

Labour productivity is output produced per worker or per hour worked, while capital productivity is output produced per unit of capital.

What is investment in the context of economic growth?

Expenditure by firms that adds to the capital stock.

What factors can cause an economy's productive capacity to grow?

Capital, labour, enterprise, natural resources, technology, investment, productivity, demographics, international migration, and improved healthcare.

Inflation

The general sustained increase in price

Deinflation

The general level of prices falling (whole economy or one sector)

Creeping inflation

Small rises in the price level (eg 100% per year)

Hyper inflation

Large increases in the price level

Disinflation

The fall of the rate of inflation

Aggregate supply

How much firms in the economy are willing to produce