Macroeconomics and Economic Growth 2.1

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

Demand -pull inflation

Inflation caused by a rise in AD faster than the economy’s capacity to produce

What causes demand pull inflation

AD increases due to C I G X or fall in imports

What happens to AD during demand pull inflation

It shifts right AD1 to AD2

What happens to price level with demand pull inflation.

The price level rises

What happens to real output with demand pull inflation

Real ur put rises in the short run

What is cost push inflation

Inflation caused by rising production costs reducing firms willing ness to supply

What happens to SRAS ( short run aggregate supply)

SRAS shifts left SRAS1 to SRAS2

What causes cost push inflation

Higher wages raw material costs energy prices tastes or imported costs

What happens to price level when Sras shifts left

The price level increases

What happens to real output after SRAS shifts left

Real output falls

Why is stagflation

Prices rising while economy struggles and unemployment increasing

Why can cost push inflation cause stagflation

Prices rise while real output falls potentially increasing unemployment

Demand pull what happens to AD

Ad shifts right

Cost push what happens to SRAS

Shifts left

Economically inactive

Not employed and not actively seeking work or unable to start within 2 weeks

What are discouraged workers

Someone who wats work but has stopped looking because they believe they cannot find a job

What is unemployment

Encomically active people willing and able to work but without employment

What is underemployment

Workers in a second choice job or working part time who want more hours

What is seasonal unemployment

Unemployment caused by demand being lower at certain times of the year

Wha is cyclical unemployment

Unemployment caused by insufficient AD during an economic downturn

What is frictional unemployment

Short-term unemployment while workers move between jobs

What is structural unemployment

A mismatch between workers skills and available jobs

Give an example of structural unemployment

Manufacturing workers loosing jobs because industry demand or technology advances

What is the claimant count

A measure based on people eligible to claim jobseeker allowance and related benefits

What does the labour force survey measure

Unemployment using the ILO definition though survey data

Why can the LFS unemployment figure exceed claimant count

It includes unemployed people who do not claim unemployment related benefits

How do you calculate The unemployment rate

Unemployed / economically active x 100

What is the economically active population

Those employed plus those unemployed

How does unemployment affect government spending

May rise due to higher benefit payments

Hw does unemployment affect government tax revenue

Tax revenue may fall because fewer people earn income and firms produce less

How can unemployment affect economic growth

Lower employment reduces potential output and can reduce actual economic growth

How can umeployment affect living standards

Unemployed households may have lower incomes reducing consumption and living standards

How can unemployment affect government borrowing

Higher spending +lower tax revenue can increase the budget deficit and borrowing

Balance of payments

A record of all financial dealing over a period of time between one country and all other counties

What are three components of the current account

-Trade in goods and services

-investment income

-current transfers

What is the current account balance

The value total value of gdp minus the value net imports plus net primary and secondary income

What is current account deficit

When the value of imports and other outflows exceed exports and other inflows

What is the capital account

Records capital transfers and transactions in non- produced non financial assets (dont confuse with finiancial account which records investment flows)

Why might balance of payments BoP deficit be a problem

It may need financing through borrowing,selling assets or using forging exchange reserves. Persistant deficits can weaken confindinc in currency and increase foreign liabilities

How can a current account deficit be financed

Through financial account inflows such as foreign investment or borrowing, and potentially by using foreign exchange reserves.

Three reasons why a BoP deficit might be beneficial

-consumers gain more choice and cheaper goods.

-imported machinery and tech can raise productivity

-imported raw materials can help firms increase production

Why might a BoP deficit reflect a strong economy

Rising incomes and spending can increase demand for imports. A deficit does not automatically mean the economy is performing badly

Give three risks of a persistent current account deficit

-growing foreign liabilities or debt

-downward pressure on the exchange rate

-dependence on continued foreign investment to finance it

What are expenditure- reducing policies

Policies that reduce aggregate demand therefore reducing spending on imports

Three expenditure- reducing policies

Higher interest rates higher taxes and lower government spending

What are expenditure-switching policies

Policies that encourage consumers to buy domestic goods instead of imports and/or encourage foreign consumers o buy exports

How can depreciation reduce BoP deficit

Exports become cheaper for foreign buyers and imports become more expensive for domestic buyers. Export revenue may ri and imports become spending may fall.

What are direct controls

Government measures that restrict imports such as tariffs quotas and import restrictions

What i a tariff what is a quota

Tariff:tax on imports

Quota:a limit on the quantity of a good that can be imported

What is one disadvantage of direct controls

Other countries may retaliate with their own trade barriers reducing exports and potentially causing a trade war

How can supply-side policies reduce a BoP deficit

Education,traning,infrastructure and technology can improve productivity and copetititivness helping domestic firms increase exports

What is deflation and how might it affect the BoP

Deflation is a sustained fall in the general price level

if domestic goods become relatively cheaper exports may rise an imports may fall. Deflation can also reduce growth and employment

What is devaluation

A deliberate reduction in a currency’s official value under a fixed exchange rate system

How can devaluation reduce a BoP deficit

Exports become cheaper to foreign buyers and imports more expensive to domestic n buyers potentially improving net exports

What is the Marshall-Lerner condition

A depreciation or devaluation is more likely to improve the trade balance in the long run if the sum of the absolute price elasticities of demand for exports and imports is greater than 1

A disadvantage of devaluation

Importe raw materials and components become more expensive increasing firms costs and potentiallly causing cost-push inflation

What is a floating exchange rate

An exchange rate determined by demand and supply of a currency in the foreign exchange market

What is a fixed exchange rate

An exchange gate where the government or central bank maintains the currency at a set value against another currency or asset intervening when necessary

Product differentiation

Long- run aggregate supply

Represents the maximum possible output an economy can produce determined by available land,labour,capital an enterprenrial resources