Knowt
Ch 13 - The Level of Economic Activity
Macroeconomics: larger scale economy which is concerned with the allocation of a nation’s resources
Five main variables:
Economic growth
Employment
Price stability
External stability
Income stability
Circular flow of income model:
Output method: actual value of the goods and services produced
Income method: measures the value of all the incomes earned in the economy
Expenditure method: measures the value of all spending on goods and services in the economy
GDP: monetary value of all of the final goods and services produced in a year in a country
GDP = national output = national income = national expenditure
in a sophisticated economy, households do not trade with each other
These factors have to be equal in order to encourage equilibrium. If they are unequal, flow increase and more money flows in than out
Leakages: a diversion of funds from a process. It is the money that escapes an economy in a circular flow of income
imports are a leakage (income that is spent and not returned to firms)
Taxes are a leakage
Injections: introduction of income into the flow
Firms have access to savings by borrowing money from banks
Investments allow the amount of income circulating in the economy to rise
Exports are injection (source of income not coming directly from households)
Government spending is an injection
National income is measured with: GDP = C+I+G+(X-M)
C: consumption
I: investment
G: government spending
(X-M), net import: export - import
Real GDP: GDP which has been adjusted for inflation
Nominal GDP / GDP deflator * 100
NNI (net national Income): income of households, businesses, and the government
NNI = GNI - depreciation
GNI/GNP: total income earned by a country’s factors of production regardless of where the asses are located
GNP = GDP + net property income
GNI = GDP + net factor income from abroad - income paid to foreign assets
Real GNI = normal income * price deflator
GDP deflator: GDP*100 / (100 + inflation rate) = real GDP
GDP per capita: GDP divided by the size of the population
The business cycle: its fluctuations in economic activity are measured by changes in real GDP
Fluctuations in practice → regular
Recovery:
Economic expansion driven by aggregate demand as households + consumers spend more
Firms increase their output as demand increases
Newly employed workers spend their income on goods and services
Boom:
Increased demand for goods and services pushes up average price (inflation)
Rate of growth of GDP falls as the economy nears its potential output
Policy makers may try to slow down growth (to reduce inflation) causing a fall in total demand, recession could begin
Recession:
Two consecutive quarters of negative GDP growth
Falling aggregate demand → laying off workers so unemployment rises
Less spending → lower rates of inflation or deflation
Trough: when contraction comes to an end, aggregate demand will pick up and enter recovery phase
Negative output gap: economy producing below its trend and unemployment will is likely to be an issue
Positive output gap: economy producing above its trend and inflation is likely to be an issue
Ch 13 - The Level of Economic Activity
Macroeconomics: larger scale economy which is concerned with the allocation of a nation’s resources
Five main variables:
Economic growth
Employment
Price stability
External stability
Income stability
Circular flow of income model:
Output method: actual value of the goods and services produced
Income method: measures the value of all the incomes earned in the economy
Expenditure method: measures the value of all spending on goods and services in the economy
GDP: monetary value of all of the final goods and services produced in a year in a country
GDP = national output = national income = national expenditure
in a sophisticated economy, households do not trade with each other
These factors have to be equal in order to encourage equilibrium. If they are unequal, flow increase and more money flows in than out
Leakages: a diversion of funds from a process. It is the money that escapes an economy in a circular flow of income
imports are a leakage (income that is spent and not returned to firms)
Taxes are a leakage
Injections: introduction of income into the flow
Firms have access to savings by borrowing money from banks
Investments allow the amount of income circulating in the economy to rise
Exports are injection (source of income not coming directly from households)
Government spending is an injection
National income is measured with: GDP = C+I+G+(X-M)
C: consumption
I: investment
G: government spending
(X-M), net import: export - import
Real GDP: GDP which has been adjusted for inflation
Nominal GDP / GDP deflator * 100
NNI (net national Income): income of households, businesses, and the government
NNI = GNI - depreciation
GNI/GNP: total income earned by a country’s factors of production regardless of where the asses are located
GNP = GDP + net property income
GNI = GDP + net factor income from abroad - income paid to foreign assets
Real GNI = normal income * price deflator
GDP deflator: GDP*100 / (100 + inflation rate) = real GDP
GDP per capita: GDP divided by the size of the population
The business cycle: its fluctuations in economic activity are measured by changes in real GDP
Fluctuations in practice → regular
Recovery:
Economic expansion driven by aggregate demand as households + consumers spend more
Firms increase their output as demand increases
Newly employed workers spend their income on goods and services
Boom:
Increased demand for goods and services pushes up average price (inflation)
Rate of growth of GDP falls as the economy nears its potential output
Policy makers may try to slow down growth (to reduce inflation) causing a fall in total demand, recession could begin
Recession:
Two consecutive quarters of negative GDP growth
Falling aggregate demand → laying off workers so unemployment rises
Less spending → lower rates of inflation or deflation
Trough: when contraction comes to an end, aggregate demand will pick up and enter recovery phase
Negative output gap: economy producing below its trend and unemployment will is likely to be an issue
Positive output gap: economy producing above its trend and inflation is likely to be an issue
