Terms in this set (97)

  • Microeconomics
    a small, individualistic scale
  • macroeconomics
    a measure of total productivity of a nation/region's economy
  • stock
    a measure at one point in time
  • flow
    a measure of a period of time
  • leakage (3 leakages)
    money leaving the circular flow Taxation Saving Expenditure on imports
  • injections (3 injections)
    money entering the circular flow Investment Government spending Revenues on exports
  • Aggregate output
    the total VALUE of output of final goods and services in a country
  • Expenditure approach (what's included and what's not)
    C,G,I,X-m Not counting public transfer payment, private transfer payment, stock, and second handed sales
  • Income Approach
    Wages Interest Rent Profits
  • Why GDP/GNI do not accurately measure the true value of output
    1. No non-marketed output: repairing by oneself 2. No underground market 3. Doesn't reflect the improvement of the quality of output 4. Doesn't measure externalities 5. Doesn't consider environmental impact
  • Why measures of the value of output (GDP/GNI) cannot accurately measure standards of living
    1. No reflection of income distribution 2. No achievements on education, health care etc. 3. Decrease in working hours and increase in leisure time 4. Doesn't consider factors of living (happiness etc) 5. Composition of output (lower GDP per capita, but higher proportion spent on merit goods provision and health care)
  • GDP
    all product generated within the geographical boundaries of a country, regardless of who owns it
  • GNP
    all products generated by citizens of a country
  • nominal GDP
    at current prices
  • Real GDP
    when value is adjusted for price changes
  • Green GDP
    GDP that accounts for the value of resource and environmental destruction GDP - the value of environmental degradation & expenditures spent on cleaning up pollution, avoiding further damage and health care etc.
  • Genuine Saving
    Estimates of the amount of natural capital destroyed; to estimate how much national income and output is being saved for future generations, after the destruction of natural capital is accounted for
  • the business cycle
    the patterns of growth
  • trough
    where contraction come to an end and things pick back up
  • peak
    where growth comes to an end and things begin to slow
  • recession
    generally means a downturn in economy but more accurately is 2 consecutive quarters of a decrease in GDP
  • expansion
    an upswing in the economy but more accurately when it grows beyond its previous level
  • long-term trend line
    tends to be upward sloping but questionable today
  • AD
    The amount of goods and services that consumers, firms, the government, and foreigners want to buy at each possible price level, over a particular time period the sum of total spending for ALL goods and services in all FINAL markets
  • Explain the shape of AD curve
    1. Wealth effect: as price goes higher, same amount of wealth can buy less → buy less 2. Interest effect: as price goes higher, more people want to borrow money to buy these goods → higher demand of money → higher interest rate → less easy to borrow money → decrease in demand 3. International trade effect: domestic prices increase while others remain the same → imports become cheaper while exports become cheaper
  • Causes of Changes in AD
    Consumption: 1. Confidence 2. Change in interest rates 3. Level of indebtedness 4. Change in wealth 5. Income tax rates Government spending: 1. Change in political priorities 2. Change in economic priorities Investment: 1. Level of indebtedness 2. Business confidence 3. Business taxes 4. interest rates 5. technology 6. Legal/institutional changes 7. Degree of excess capacity X-m: 1. Tastes and preferences 2. Exchange rate 3. Trade regulation 4. Changes in national income abroad
  • AS
    the sum total of all FINAL goods and services, which firms plan to produce
  • SRAS curve
    shows the relationship between the price level and the quantity of real GDP produced by firms when RESOURCE PRICES DO NOTCHANGE (WAGES), but final prices do
  • 3 sections of the AS curve
    1. Horizontal: recessionary gap, AD is too weak to induce AS; lots of labor and resources are unemployed. Firms can just use the unused resources and not big up prices 2. Curved: increase in GDP = increase in price level, cost of production increases → full employment equilibrium 3. Vertical: inflationary gap, firms have reached their full capacity, supply will not change even if prices keep increasing
  • Factors to shifts in SRAS curve
    1. Changes in wages 2. Changes in the cost of non-labor resources 3. Changes in business taxes 4. Changes in subsidies offered to businesses 5. Supply shocks
  • SRAS Macro Equilibrium
    where SRAS is equal to AD
  • LRAS Curve
    vertical, supply is independent of changes in prices; in the long run, wages will adjust accordingly to the changes in price level; only price level changes
  • Factors that shift AS curves over the long term (increase in potential output
    1. increase in quantities of factors of production 2. improvements of the quality of factors of production 3. technological improvement 4. Increases in efficiency 5. Institutional changes (private & public ownership) 6. Reduction in natural rate of employment
  • Unemployment
    people of working age who without work, available for work, and are actively seeking employment
  • labor force
    total population that is employed or seeking employment
  • unemployment rate
    unemployed divided by the labor force time 100
  • Difficulties in measuring unemployment
    Hidden unemployment 1. discouraged workers → so not counted as active 2. full-time and part-time 3. no distinction on types of work done 4. those in training program who previously lost their jobs 5. those that retire early overestimate true unemployment 1. employment in the underground economy Different population groups 1. regional - industrial level 2. gender: women 3. ethnic groups 4. age: youth the the aging face higher unemployment rate 5. occupation and educational attainment
  • Economic consequences of unemployment
    1. Less AD since people are earning less & lower AS since firms produce less 2. Government: loss of tax revenues & more unemployment benefits 3. Loss of income for individuals 4. Greater disparity in income. 5. Under utilisation of (labor) resources 6. Hysteresis: workers might partly lose their skills; new skills that they can't keep up; firms manage a way with fewer workers
  • Personal consequences of unemployment
    1. Reduced household incomes: less consumption 2. increased indebtedness 3. Loss of self-esteem
  • Social consequences of unemployment
    1. Crimes & social unrest 2. Transformation of traditional societies: from traditional to more modern societies 3. increased homelessness
  • frictional unemployment
    people between jobs
  • structural unemployment
    the structure of the economy changes 1. Skills no longer needed 2. Firms move location 3. Declining industry 4. Labor market rigidities: minimum wages, labor unions, employment protection laws = encourage firms to hire less; generous unemployment payment = discourage people to look for work Serious type of unemployment since it can be long term
  • seasonal unemployment
    jobs that are only available during certain times of the year (tourism)
  • disequilibrium unemployment
    when the labor market doesn't clear so there is both regular unemployment and natural unemployment
  • classical Real Wage Theory
    labor unions or Government minimum wage laws prevent the market from clearing because the wage rate is equivalent to a price floor
  • Demand-deficient/cyclical unemployment
    a decrease in AD creates a decrease in D for labor because real wages don't change
  • the ratchet effect
    labor resists wage cuts, even in recession
  • inflation
    sustained upward movement of average level of prices
  • deflation
    sustained downward movement of average level of prices
  • disinflation
    a reduction in the rate of inflation
  • price stability
    prices don't move up or down/ remain consistent
  • price level
    average level of prices
  • CPI
    measures the change in prices of a basket of goods and services consumed by the average household (to determine inflation)
  • Problems with CPI
    1. different rates of inflation for different income earners: different consumers have different consumption patterns 2. different rates of inflation depending on regional/cultural factors 3. Changes in consumption patterns due to consumer substitutions when relative prices change 4. Increasing use of discount stores and sales: consumers buy as lower prices → overstate inflation 5. introduction of new products 6. International comparisons → hard to compare 7. Comparability over time: change base year (10 years)
  • Core rate of inflation
    a CPI that does not include food and energy products with highly volatile prices
  • PPI
    estimates input prices to producers so its estimates the final cost of the good in the future
  • Consequences of inflation
    1. Redistribution effects: Better off: payers of fixed income/increase of income less than inflation rate, borrowers Worse off: Receivers of fixed income, money lenders (creditors), cash holders, depositors 2. Menu cost 3. Uncertainty 4. International competitiveness: higher price compared to other products and more expensive than imports 5. Money illusion
  • Hyperinflation
    When the price level increases by more than 50% per month (government printing money) e.g. Germany and Zimbabwe
  • Inflationary spiral
    Consumers increase spending to benefit from lower prices& encourage borrowing since real value of debt decreases → demand-pull inflation Workers demand higher nominal wages to maintain real value of incomes → cost-push inflation
  • Consequences of hyperinflation
    • Businesses began to invest in assets instead of productive activities • Firms withhold goods so that they can sell them at higher prices later • Lenders suffer as the real value of debts falls · Extreme = barter
  • Consequences of deflation
    1. Rising unemployment 2. Redistribution effects 3. Uncertainty 4. Menu cost 5. Deflationary spiral with rising cyclical unemployment 6. Bankruptcy and financial crisis
  • Demand-pull inflation
    sustained increase in AD (Keynesian) / an increase in money supply (Monetarist)
  • Cost-push inflation
    decrease in SRAS, only in Keynesian model stagflation
  • economic growth
    an increase in GDP
  • a change in actual output
    when moving from inside the PPF curve to closer to the PPF curve
  • An increase in potential output
    an increase in productivity or efficiency or both, outward shift of the PPF curve
  • Causes to increase in actual output
    Reduction in unemployment (of both labor and resources) Increase in productive efficiency
  • Causes to increase in potential output
    Increase in quality and quantity of factors of production
  • nominal growth
    calculated using current prices so its is not accounting for inflation and is not an accurate reflection of the growth of the economy
  • real growth
    calculated using deflated prices so it is accounting for inflation and is an accurate reflection of the growth of the economy
  • Consequences of economic growth
    Negative: 1. Externalities (sustainability) 2. Inflation 3. Structural unemployment 4. Composition of output 5. Unequal distribution of income Positive: 6. Living standards 7. Stimulates employment 8. Balance of payment (government receive more tax revenues & pay less unemployment payments) 9. Accelerator effect (encourage investment)
  • equity
  • equality
  • Reason to inequality
    unequal ownership of factors of production, the market system may not result in an equitable distribution of income.
  • the lorenz curve
    measures income distribution over a population
  • the gini coefficient
    area between the diagonal and the curve ➗ total area below the diagonal The closer to 1, the more unequal
  • relative poverty
    compared to society's norm
  • absolute poverty
    unable to meet the basic needs for life
  • Causes of poverty
    Low incomes Unemployment Low level of human capital Low level of capital or land ownership Discrimination Geography Age Limited social services (merit goods) Poverty cycle
  • Consequences of poverty
    Low living standards Lack of access to education and health services Higher infant, child, and maternal mortality Higher level of preventable diseases Social problems like crime Inability to realize one's full potential (waste of human talent & result in lower economic growth)
  • Measures to promote equality
    Transfer Payments Subsidized provision Government intervention in markets (minimum wages, price floors and ceilings on necessirites) Taxation Direct taxes (personal and business income taxes, wealth taxes, payroll taxes income tax (personal & business) → redistribute income Indirect taxes (General expenditure taxes = VAT → regressive; excise taxes on particular goods, determined by PED; Custom duties/tariffs)
  • progressive tax
    tax increases with higher income
  • regressive tax
    tax decreases with higher income
  • proportional tax
    tax at a constant rate
  • laffer curve
    a representation of the relationship between rates of taxation and the resulting levels of government revenue
  • Direct taxes and consequences
    1. disincentive for workers 2. lower savings → less investment → slower economic growth 3. Business → less disposable profits to invest and improve technology
  • Indirect taxes and consequences
    Sales tax: • No change in relative prices = no impact on resource allocation • Consistent with the goal of allocative efficiency • However, it is regressive → more unequal distribution of income Excise tax: • Some are exempted from taxes to make them more affordable → consistent with increasing equity, but affects allocation of resources • Some are set to correct negative externalities → improve efficiency ○ However, are regressive and make income distribution more unequal If excise taxes are not imposed in order to correct negative externalities (maybe for government revenues), they worsen both allocation of resources and distribution of income
  • expansionary fiscal poicy
    1. tax decreases 2. government spending increases 3. transfer payments increase
  • Contractionary fiscal policy
    1. tax increases 2. G decreases 3. transfer payments decrease
  • Advantages of fiscal policy
    Indirect impact on potential output → stability for plans Direct impact on potential output Proportion of government spending to invest on both capital and human capitals Encourage firms to invest through lower income taxes 1. Pull a country out of recession 2. Stabilise fast inflation 3. Direct impact on AD 4. Ability to target specific industries 5. Ability to affect potential output
  • Disadvantages of fiscal policy
    1. Time lag & political constraints 2. Inability to "fine tune" the economy 3. Ineffective in supply-side problems 4. Crowing out: increase in demand of money → increase in interest rate → discourage borrowing thus less consumption 5. Ineffective in a deep recession: increase in disposable income might be saved and firms were unwilling to invest
  • expansionary monetary policy
    increase money supply → decrease interest rate → less saving, more lending, stimulating financial activities
  • contractionary monetary policy
    decrease money supply → increase interest rate → more saving, less loan and hence less consumption → contracts economic activities
  • Advantages of monetary policy
    1. Central bank independence & no political restraints 2. Ability to fine tune the economy 3. Relative quick implementation 4. No crowding out
  • Disadvantages of monetary policy
    1. Time lag 2. Ineffective in a deep recession: no confidence to lend out 3. In conflict with other government objectives 4. Inability to deal with stagflation (supply-side problems)
  • interest rate
    the price of money
  • supply-side policy
    focus more on long term economic sustainability rather than short term gratification A. Interventionist 1. Government investment in human capital, new technology, infrastructure 2. industrial policies B. Market-based 1. encourage competition 2. labor market 3. incentive-related policies