Flashcards · 9708 · AS Topic 4

The macroeconomy (AS Level) flashcards

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4.1 National income statistics

GDP: Total value of final goods and services made inside the country over a year, whoever owns the factors.
GNI and NNI: GNI = GDP plus net primary income from abroad (income earned abroad by residents less income paid to foreign owners of factors in the country). NNI = GNI minus depreciation.
Market prices versus basic prices: Market price: what the buyer pays, including taxes on products and net of product subsidies. Basic price: what the producer receives = market price − product taxes + product subsidies.
GDP at basic prices 350; product taxes 52; subsidies 12; income earned abroad 31; paid abroad 24; depreciation 41. Find GDP at market prices, GNI and NNI.: GDP at market prices = 350 + 52 − 12 = 390. Net primary income = 31 − 24 = +7, so GNI = 397. NNI = 397 − 41 = 356.
Why can GNI be below GDP?: Foreign-owned firms produce in the country, so their output counts in GDP, but their profits are sent abroad and are not income of residents. Net primary income is negative, so GNI is below GDP.

4.2 Introduction to the circular flow of income

Injection and leakage (withdrawal): Injection: spending that enters the circular flow from outside household consumption. Leakage: income that leaves the flow without returning as spending on domestic output.
The three leakages and three injections: Leakages: savings (S), taxes (T), imports (M). Injections: investment (I), government spending (G), exports (X).
Equilibrium condition in the two-sector, three-sector and open-economy circular flow: Two sectors: S = I. Three sectors: S + T = I + G. Open economy: S + T + M = I + G + X.
S = 30, T = 50, M = 40, I = 45, G = 55, X = 20. Then exports fall to 8. What happens?: At first leakages and injections are both 120: equilibrium. With X = 8, injections are 108 against leakages of 120, a net leakage of 12, so national income falls until leakages fall to match injections.
Why is saving a leakage even though banks lend savings to firms?: Saving removes income from the spending loop when it happens. It becomes an injection only when firms actually borrow and spend it on capital goods (investment).

4.3 Aggregate Demand and Aggregate Supply analysis

Aggregate demand (AD) and its components: Total planned spending on an economy's output at each price level in a given period. AD = C + I + G + (X − M). Example: C 540, I 150, G 210, X 180, M 200 gives AD = 880.
Why does the AD curve slope downward?: Wealth effect: a lower price level raises the real value of savings. Interest rate effect: less money is needed for transactions, so rates fall. International trade effect: domestic goods become cheaper than foreign ones. (Not single-good substitution.)
The two LRAS shapes in the syllabus: Vertical: output set by capacity, not the price level. Three sections: highly elastic (spare capacity), upward sloping (bottlenecks), vertical (full capacity). On the elastic section a rise in AD mostly raises output; on the vertical section only the price level.
What shifts SRAS, and what shifts LRAS?: SRAS: costs of production, e.g. wages, raw materials, energy, business taxes, subsidies, imported input prices. LRAS: the quantity and quality of factors, technology and institutions (capacity).
AD: Y = 1,000 − 2P. SRAS: Y = 400 + 4P. Energy costs rise and SRAS becomes Y = 340 + 4P. Find the effect.: Before: 6P = 600, so P = 100, Y = 800. After: 6P = 660, so P = 110, Y = 780. Price level +10%, real output −2.5%, employment falls.
Effect on real output and the price level of: AD right, SRAS left, LRAS right: AD right: output up, price level up. SRAS left: output down, price level up. LRAS right: output up, price level down (or rises more slowly).

4.4 Economic growth

Economic growth: An increase in the real output of goods and services over time, measured by the percentage change in real GDP.
Real GDP versus nominal GDP, and the formula linking them: Nominal GDP is at current prices, so it rises with output and with prices. Real GDP is at constant prices. Real GDP = nominal GDP ÷ price index × 100.
Nominal GDP rises from 3,000 to 3,339 while the price index rises from 100 to 106. Find real growth.: Real GDP in year 2 = 3,339 ÷ 106 × 100 = 3,150. Real growth = 150 ÷ 3,000 × 100 = 5.0%, against nominal growth of 11.3%.
Real GDP rises from 900 to 936 while population rises from 30.0 to 30.6 million. Find growth of GDP per capita.: GDP +4.0%, population +2.0%. Per capita: 30.00 → 30.59, growth of 1.96%. The shortcut 4.0 − 2.0 = 2.0 is only close.
Growth is +3%, −1% and +2% in three years. Find total growth.: Multiply the factors: 1.03 × 0.99 × 1.02 − 1 = 0.0401, so 4.0%. Compounding is the correct method; adding the rates is only close when they are small.
Short-run and long-run causes of economic growth: Short run: higher C, I, G or net exports shift AD right, raising output while there is spare capacity. Long run: LRAS shifts right through more or better labour, more capital, better technology, more resources and better institutions.

4.5 Unemployment

Unemployment rate and participation rate: Unemployment rate = unemployed ÷ labour force × 100 (labour force = employed + unemployed). Participation rate = labour force ÷ working-age population × 100. Example: 1.1 m unemployed, 18.4 m employed: rate 5.6%.
Labour force survey versus claimant count: Labour force survey: a sample of households; comparable across countries and years, but has sampling error. Claimant count: people receiving benefit; cheap and quick, but depends on benefit rules and misses those who are ineligible or do not register.
Five types of unemployment and their causes: Frictional: time to match workers and vacancies. Structural: skills or location mismatch after an industry declines. Cyclical: a fall in aggregate demand. Seasonal: demand varies by time of year. Technological: machines replace labour.
Exam trap: unemployment falls from 1.1 to 0.9 million because 0.2 million give up looking. Has the problem improved?: The rate falls from 5.6% to about 4.7%, but nobody gained a job: discouraged workers left the labour force. Measured unemployment can understate the true problem.
Consequences of unemployment for individuals, government and the economy: Individuals: lower income, poverty, lost skills, stress. Government: more benefit spending, less tax revenue. Economy: output below potential, wasted resources, wider inequality. Firms face weaker demand but less wage pressure.

4.6 Price stability

Inflation, deflation and disinflation: Inflation: a sustained rise in the general price level. Deflation: a sustained fall in it. Disinflation: a fall in the rate of inflation; prices are still rising, but more slowly.
Weights 30, 35, 15, 20 and category indices 108, 104, 112, 100. Find the CPI, then inflation if the next CPI is 108.2.: CPI = (3,240 + 3,640 + 1,680 + 2,000) ÷ 100 = 105.6. Inflation = (108.2 − 105.6) ÷ 105.6 × 100 = 2.5%.
Demand-pull versus cost-push inflation on an AD/AS diagram: Demand-pull: AD shifts right; output and employment rise. Cost-push: SRAS shifts left; output and employment fall (stagflation). Tell them apart by what happens to output.
Real value and real growth: formulas: Real value = nominal value ÷ price index × 100. Exact real growth = (1 + nominal growth) ÷ (1 + inflation) − 1; nominal growth minus inflation is a close approximation. A wage up 5.0% with 5.6% inflation has fallen about 0.6% in real terms.
Consequences of inflation: Redistribution (savers, lenders and fixed incomes lose; borrowers gain), menu and shoe-leather costs, uncertainty that delays investment, lost international competitiveness, and a possible wage-price spiral. It depends on the rate and whether it was anticipated.
Difficulties in measuring inflation with a CPI: The basket and weights age, substitution is ignored, quality changes and new goods are hard to capture, no household is typical, and regional and informal prices are missed.