Macroeconomics Revision May 2019 HL
Terms in this set (74)
The payments to the factors of production
The value of final output produced by various industrial sectors
Y = C + I + G + (X-M)
The total value of output produced in an economy in a given time period.
GDP+net property income from abroad
Nominal GDP/GDP Deflator x 100
GDP per capita
GDP divided by population
Gross domestic product which has been adjusted to take account environmental destruction and/or health consequences of environmental problems.
Problems with GDP as a measure of national income
1. Negative spillover effects.
2. Degradation of natural resources.
3. Failure to measure informal economy.
4. Does not take into account improvements in quality, as opposed to quantity, of output.
The investment, government spending and export revenues that add spending to the circular flow of income.
The savings, taxes and import spending that remove spending from the circular flow of income.
Four factors of production and their respective payments
Depicts a pattern of growth (around a long-term trend rate of growth), illustrating booms, recessions, troughs, recoveries measured by changes in real GDP.
A period of reduced economic activity characterized by two consecutive quarters of negative GDP growth.
Falling unemployment, increasing consumption, increasing investment, rising inflation.
Accelerating inflation, shortage of scarce factors (skilled labour), rapidly rising property and equity values.
Widespread long-term unemployment.
Equilibrium level of national income
Where AD is equal to AS.
Why AD slopes downwards
Pigou's wealth effect: the nominal value of money is fixed, but the real value is dependent upon the price level. This is because for a given amount of money, a lower price level provides more purchasing power per unit of currency. When the price level falls, consumers are wealthier, a condition which induces more consumer spending. Thus, a drop in the price level induces consumers to spend more, thereby extending the aggregate demand.
Interest rate effect: with increase in overall price level, consumers' savings also fall. They have to spend greater proportion of their income on consumption because of rising prices. They have to spend more to purchase same amount of goods. This has a negative effect on savings. As a result, investment falls which leads to fall in aggregate demand.
Exchange rate effect: increase in Overall price level increases interest rates because the investment falls due to lack in supply of loanable funds. This causes foreign investors to demand their domestic assets more, increasing the demand of their currency. Thus, foreign currency value falls. It has the effect of increasing imports and declining exports. As a result, net exports fall and aggregate demand also falls.
Why AD slopes downward (concise)
AD is downwards-sloping because as prices rise, the demand for an economy's goods and services will be less. Goods will be less competitive in international markets, and real income is less.
Factors that influence consumption
1. Level of consumer confidence.
2. Interest rates.
4. Income taxes.
Factors that influence investment
1. Interest rates.
2. Taxes on profits and investments.
3. Business confidence.
4. Corporate debt.
Factors that influence government expenditure
Political and economic priorities.
Factors that influence net exports
1. Exchange rates
3. Income levels of trading partners.
The total value of goods and services that an economy can produce in a given time period.
Aggregate supply that varies with the demand for goods and services, and that is shifted by changes in costs of factors of production.
potential output in an economy; full employment.
Factors that shift SRAS
1. Changes to raw material and component costs.
2. Business taxes and subsidies to large sectors.
3. Changes to labour costs.
4. Supply-side shocks.
Factors that shift LRAS
change in quantity of resources, changes in quality of resources, technological progress, institutional changes.
Keynesian view of LRAS
Different levels of spare capacity in an economy give the aggregate supply curve three distinct sections.
There are "sticky downwards wages" (horizontal section of LRAS). There is also section B, shortages of some factors exist and so increases in output will cause prices to rise as the cost of hiring these scarce factors increases.
There is the section wherein the economy is at full employment, and so any attempt to increase output will be purely inflationary.
Monetarist view of LRAS
As the potential output is based on their quantity and quality, the price level does not affect LRAS. Employment is determined in factor markets and this determines the total level of output in an economy.
Keynesians believe that:
1. Markets are slow to adjust.
2. An economy can be in equilibrium below full employment.
3. Governments should and can effectively intervene to stabilise the economy.
4. Fiscal is more effective than monetary policy.
Monetarists believe that:
1. Markets work
2. Economies tend towards full employment.
3. Inflation is caused by excessive money supply growth.
4. Governments should intervene really only to control inflation by controlling money supply growth.
The Keynesian Multiplier Effect
The proportion by which an initial increase in injections, or reduction in leakages, causes a greater final increase in the level of national income.
Government policy that attempts to alter the level of AD in an economy.
The use of government spending (current, capital and transfer payments) and taxation (direct and indirect) to influence AD, raise revenue, redistribute income and influence consumption patterns.
Current government expenditure
Spending on factor payments and goods.
Capital government expenditure
Investment spending and spending on capital goods/assets.
A payment from the government to an individual where no output is generated. It is a means of redistribution of income.
As GDP grows, government spending decreases (falling benefit payments), and taxation increases (progressive taxes). As output and GDP fall, government spending increases and taxation falls. This process seeks to help stabilise short-term fluctuations in GDP.
Fiscal Policy strengths
2. Direct impact on AD.
3. Role in recession (according to Keynesian thinking).
Fiscal policy weaknesses
1. Time lags.
2. Political influence.
4. Budget deficits can lead to increase in interest rates (to encourage bond sales) and taxation in the future.
5. Crowding out: when government bond sales result in the public sector needing to compete with the private sector for funds. They will have to offer higher rates of interest to sell bonds, and the availability of funds in the loanable fund market will decrease. Thus the private sector will be forced to offer high interest rates as well, discourage investment and spending. However, some economists argue that this will only happen when an economy is at full capacity.
Fiscal policy and potential output (LRAS)
Creates incentives via the tax system for firms to invest and individuals to work, creating an environment that is favourable for business and employment and actual government spending on infrastructure.
The use of the rate of interest predominantly to influence AD (the money supply control and targeting the exchange rate can also be used).
Monetary policy strengths
1.Independence of central banks removes political influence
2. Incremental changes are possible.
3. Relative speed of change.
Monetary policy weaknesses
1. Quicker than fiscal policy but still takes time.
2. Ineffective against cost-push inflation.
3. Low confidence levels may over-ride low interest rates.
4. Investment can be interest-inelastic.
5. One policy fits all.
Supply side policies.
A variety of policies that focus on increasing long-run aggregate supply. There are market-based policies and interventionist policies.
Interventionist supply-side policies
Government led attempts to increase the productive capacity of the country, done through investment in human capital, new technology, infrastructure, and industrial policy.
Market-based supply-side policies
Policies that involve reducing government intervention in markets to increase the productive capacity of the economy, done through deregulation, privatisation, encouraging competition, labour market reforms, and creating incentives to work and invest for firms.
Evaluation of supply side policies
2. the ability to create employment.
3. the ability to reduce inflationary
4. the impact on economic growth
5. the impact on the government budget,
6. the effect on equity,
7. effect on the environment.
Measures the number of people who are willing, able, and available to work at the market-clearing wage, but do not have a job during a period of time.
the percentage of the labor force that is unemployed.
workers are overqualified for their jobs or work fewer hours than they would prefer.
unemployment that includes people not counted in the traditional unemployment categories.
Costs of unemployment
1. Loss of output (economic growth).
2. Waste of productive potential
3. loss of skills.
4. government finances (loss of tax revenue, increased benefit spending)
5. social problems.
6. loss of consumer spending.
7. increased income disparity.
Natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates.
The sustained increase in the average price level of an economy over a given period of time.
a reduction in the rate of inflation.
CPI minus food and energy costs.
Producer Price Index
a measure of the cost of a basket of goods and services bought by firms (e.g., capital, raw materials, and energy prices). This measure gives an indication of the extent to which SRAS might be affected by price changes.
The consequences of inflation
1. Redistribution of income (savers versus borrowers, weak versus strong bargainers in the labour market, fixed incomes).
2. Devaluation of money/loss of purchasing power.
3. Reduction of investment.
4. Reduction of international competitiveness.
5. A potential for wage-price spiral if inflation runs out of control.
Overall, impact of inflation is therefore a reduction of economic growth combined with an increase in unemployment.
When prices rise due to an increase in the cost of production.
Cost-push inflation can be caused by:
1. Rising raw material costs.
2. Rising labour costs.
3. Increased direct taxation.
4. Currency depreciation.
inflation that is caused by an increase in aggregate demand.
Demand-pull inflation can be caused by:
1. Reduced taxation
2. Increased government expenditure
3. Reduced interest rates
4. Rising consumer confidence stimulated by rising asset prices.
5. Economic growth in other countries.
6. Depreciation of a country's exchange rate.
The sustained decrease in the average price level of an economy over a given period of time.
Benefits of economic growth
1. Per capita income growth and increased consumption.
2. Higher living standards
3. Fiscal dividend (reduced government spending and increased tax revenue)
4. Reduced unemployment/increased employment.
5. Easier to redistribute income/care for the environment.
Costs of economic growth.
2. Externalities and resource depletion.
3. Increased importing and current account deficit.
4. Unbalanced growth from a focus on consumption.
5. Unequal distribution of income.
The sustained increase in real GDP over a given period of time. Can be both actual and potential.
Measuring the distribution of income
Shows the proportion of a nation's income that is earned by any given percentage of the population. A Gini coefficient of 0 is perfect equality, whereas a gini coefficient of 1 is perfect inequality.
Lorenz curve axes
Y axis (cumulative proportion of income), X axis (cumulative proportion of population).
Causes of poverty
1. Low incomes.
3. Unequal distribution of ownership of land and resources.
4. Age, gender and other forms of discrimination.
5. Lack of human capital.
6. Poverty cycles.
Consequences of poverty
1. Social problems
2. Lack of access to health care and education
3. Low living standards
4. Higher levels of preventable disease and illness, infant mortality, child and maternal mortality.
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