Terms in this set (60)
Is concerned with the allocation of a nation's resources and is concerned with five main variables:
Circular flow of income model
Simplified representation of how the basic decision-making units of an economy interact.
Leakages and injections
Gross domestic product
The value of all final goods and services produced within an economy over a certain period of time, usually a year or a quarter.
Does not include:
- transfer payments
- financial transactions
Measure of GDP which takes into account any environmental costs incurred from the production of the goods and services included in the GDP figures.
> The output method: All domestically produced final goods and services are added
> The expenditure method: All expenditures on the domestically produced final goods and services are added
> The income method: Incomes generated in the domestic production process are added
Gross National Income
The total income earned by a country's factors of production regardless of where the assets are located.
GNI = GDP + net income property from abroad
The short-term fluctuations of real GDP around its long-term trend.
Total spending on domestic goods and services per period of time.
Spending by households on durables, non-durables and services per period of time.
> consumer confidence
> interest rates
personal income taxes
> level of household indebtedness
Spending of firms on capital goods per period of time.
> interest rates
> business confidence
> business taxes
> corporate indebtedness
>public policy toward investment
> overall macroeconomic environment
> income and its growth
1) Current spending on goods and services
2) Capital spending on infrastructure, education, healthcare
3) Transfer payments- payments made to individuals which do not contribute to the increase in actual output in an economy.
> Government spending
> Interest rates
> Money supply
The total amount of goods and service that all industries in the economy will produce at every given price level.
New classical LRAS
> Belief in efficiency of market forces
> Belief in minimum government intervention
> Potential output based entirely on the quality and quantity of factors of production and not on price level
The level of output that could be produced if the economy produced at full capacity.
> Does not really distinguish between short run and long run
1) Producers in an comity can raise their levels of output without incurring higher average costs because of spare capacity.
2) The spare capacity of the economy is used up and the producers have to compete for it. Increase the price level to compensate for their higher costs.
3) Impossible to increase output unless the technology and quality improves or quantity.
> Investment in human capital
> Provision and maintenance of infrastructure
> Industrial policies/ direct support for businesses
> Unemployment benefits
> Corporate taxes
> Labour market reforms:
- Trade union power
- Minimum wage
> Policies to increase competition
Increase in any infection will lead to a greater increase in national income.
Income earned will then be partly saved and spent on other goods and services and that will become some else's income.
Marginal propensity to consume
The proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
People of working-age who are without work, available for work, and actively seeking employment.
The number of people who are unemployed expressed as a percentage of the total labour force.
> Unemployed for a long period of time and have given up the search
>People who have part-time jobs but would really like to work full time
> People working jobs they are over-qualified for
When there are any conditions that prevent the labour market equilibrium.
- Some unemployment is caused by trade unions and government intervention.
- Trade unions negotiate wages and minimum wages which are above equilibrium.
- AS of labour is higher than AD and unemployment ab is created
Demand- deficient unemployment
- As economy moves into a period of slower growth, AD tends to fall as consumers spend less on goods and services.
- So firms cut back on production and thus need less labour.
- Firms cannot reduce wages because of:
} minimum wages
} lower wages will lead to discontent
Other types of unemployment that occur even if the labour market is in equilibrium.
- There are jobs available but ab people are either not willing or unable to take the jobs.
Short- term unemployment that occurs web people are in between jobs or they have left education and are waiting to take up their first job.
Demand for certain workers falls at certain times of the year.
A result of changing structure of an economy. When there is a permanent fall in demand for a particular type of labour.
1) To run a budget deficit the government has to borrow money by selling government bonds.
So they are increasing demand for the savings or loanable funds that are in the economy.
2) The increased interest for loanable funds results in an increase in interest rates.
3) The higher interest rates may decrease the incentive of businesses to invest so it will fall.
4) So aggregate demand was supposed to increase but it actually decreased.
Keynesian economists say crowding out will not occur if the economy is producing at less than full employment.
New classical economists who are opposed to demand management policies, argue that crowding out is a significant problem of increased government spending.
A persistent increase in the average price level in the economy usually measured through the calculation of a consumer price index (CPI).
Costs of inflation
> Loss of purchasing power
> Discourages saving as they are less worth over time
> Raised nominal interest rates
> Decreased international competitiveness - exports down, imports up from lower-inflation trading partners- worsening the trade balance.
>Decreased business and consumer confidence
> Labour unrest
A persistent fall in the average level of prices in the economy.
Comes from improvements in the supply side of the economy and/or increased productivity.
Comes from the fall in aggregate demand which results in the fall in price level and real output.
Falling rate of inflation
Costs of deflation
> Increased unemployment rate
> Decreased investment
> Increased costs to debtors
Occurs as a result of increasing aggregate demand in the economy. Could be due to change in any components in AD.
Cost- push inflation
Occurs as a result of an increase in the costs of production.
A continuous rise in prices that is sustained by the tendency of wage increases and cost increases to react on each other
Inflation due to excess monetary growth
Excessive increases in the money supply by the government are the cause of inflation. They result in higher aggregate demand and because the economy tens at the full employment level of output in the long run, such increases in AD are purely inflationary.
The condition in which people in a labor force are employed at less than full-time or regular jobs or at jobs inadequate with respect to their training or economic needs
There is an inverse relationship between the rate of change in the economy and the rate of unemployment.
The combination of high inflation and high levels of unemployment
Connected with the long run Phillips curve. When the nominal wages of workers rise but the real wages don't.
Natural rate of unemployment
A combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.
When individuals lose their jobs as a result of a downturn in aggregate demand
When the economy' resources are not used to the fullest extent possible.
> unemployment of resources/ factors of production
Maybe the result of a fall in economic growth or negative economic growth in the short run and may be solved using demand management policies.
- Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
- Or it is closing a deflationary gap because of increased AD, by employing unemployed or underemployed resources.
- Equal to an increase in national income.
Non- inflationary growth
The movement for AD1 to AD2 indicates a normal increase in aggregate demand due to growing populations and rising incomes. As long as the economy also makes improvements on the supply side to shift out the LRAS, then the GDP will increase without any upward pressure on the price level.
A condition characterised by severe deprivation of access to the basic necessities to sustain life.
A condition characterised by being below the observed average in an economy.
A graphical representation of the cumulative distribution function of the empirical probability distribution of wealth.
A tool used in measuring the income inequality in an economy. Households are ranked in ascending order of income levels and the share of total income going to groups of of households is calculated.
Taxes imposed on people's income or wealth, and on firms' profits.
A tax that is paid to the government by one entity in the supply chain, but it is passed on to the consumer as part of the price of a good or service.
The average rate of tax rises as income rises.
The average rate of tax falls as income rises.
The average rate of tax is the same for all income levels.
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