Flashcards · YEC11 · AS Topic 2

Macroeconomic performance and policy (AS Level) flashcards

42 cards on AS Topic 2, subtopics 2.3.1 to 2.3.6. Pick a subtopic or study them all.

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2.3.1 Measures of economic performance

GDP vs GNI: GDP: the value of goods and services produced within a country's borders. GNI: income earned by a country's residents and businesses wherever it was earned. Profit sent abroad by foreign-owned firms reduces GNI, not GDP.
Real vs nominal, and why use per capita and PPP figures?: Real figures are adjusted to remove inflation; nominal are not. Per capita divides by population to compare countries of different size. PPP adjusts for differences in the cost of living.
Recession (Edexcel definition): Two consecutive quarters of negative economic growth (falling real GDP). One negative quarter is not a recession.
Country A: real GDP $2 trillion, population 200 million. Country B: $500 billion, 20 million. Which has the higher real GDP per capita?: A: $10,000 per head. B: $25,000 per head. B is higher, although A's total GDP is four times larger.
Limits of GDP as a measure of living standards: It ignores income distribution, non-market activity (unpaid work), environmental costs and subjective wellbeing. Beyond a certain income, extra income is less strongly linked to reported happiness.
How is inflation measured, and the inflation rate from an index?: By the consumer prices index (CPI): a weighted basket of goods and services bought by households. Inflation rate = (new index − old index) ÷ old index × 100. CPI 131.0 to 134.9 is a 3.0% rise.
The unemployment rate, and two ways unemployment is measured: Unemployed ÷ labour force × 100 (labour force = employed + unemployed). The ILO (Labour Force Survey) measure counts those without work, available and seeking it. The claimant count counts those claiming unemployment-related benefits.
Demand-pull vs cost-push inflation: Demand-pull: aggregate demand grows faster than the economy's capacity to supply. Cost-push: rising costs (wages, raw materials, import prices) shift short-run aggregate supply left.
Inflation vs disinflation vs deflation: Inflation: a sustained rise in the general price level. Disinflation: a fall in the rate of inflation; prices are still rising, more slowly (6% to 3%). Deflation: a sustained fall in the general price level.
Why is the producer price index watched alongside the CPI?: It measures the prices firms pay for inputs and charge for output. Rises in producer prices are usually passed on to consumers later, so it is an early indicator of future CPI inflation.
The five causes of unemployment in the specification: Frictional: between jobs. Seasonal: demand varies with the seasons. Structural: decline of an industry; skills or location mismatch. Demand deficiency: too little aggregate demand. Real wage inflexibility: the real wage held above the market-clearing level, so labour supply exceeds demand.
Unemployment vs underemployment vs economic inactivity: Unemployed (ILO): no job, looking and available for work. Underemployed: in work but wanting more hours, or in a job below their skills. Economically inactive: working age but neither employed nor unemployed, for example students, carers or the long-term sick.

2.3.2 Aggregate demand (AD)

Aggregate demand: definition and components: Total planned spending on a country's output at a given price level in a given period. AD = C + I + G + (X − M).
Why are transfer payments left out of G?: G is state spending on goods and services. Transfers such as pensions and benefits buy no output in return; they show up in AD only when recipients spend them (in C).
Gross investment 80, depreciation 50. Net investment? And if gross were 40?: Net = 80 − 50 = 30. With gross 40, net = −10 and the capital stock shrinks. Only positive net investment raises capacity.
Influences on consumption: Disposable income, interest rates (cost of borrowing and reward for saving), consumer confidence, wealth effects (house and share prices) and the availability of credit.
The accelerator: Investment depends on the rate of change of output (demand), not its level. When demand growth slows, net investment can fall even though output is still rising.
Movement along the AD curve vs shift of AD: Movement along: caused only by a change in the price level. Shift: caused by a change in any component (C, I, G, X or M) at every price level, for example a cut in interest rates.

2.3.3 Aggregate supply (AS)

SRAS vs LRAS: SRAS: aggregate supply in the period when at least one factor, usually capital, is fixed; shifted by costs. LRAS: the economy's productive capacity when all factors can change; shifted by capacity.
What shifts SRAS?: Changes in firms' costs at every price level: wage rates, raw material and energy prices, the exchange rate (import prices), indirect taxes and productivity.
What shifts LRAS?: Changes in the quantity or quality of factors of production: technology, education and skills, investment in capital, migration, institutions. Education shifts LRAS, not SRAS.
Keynesian vs classical LRAS curve: Classical: vertical at full-capacity output. Keynesian: three sections: horizontal (lots of spare capacity), upward-sloping (bottlenecks), then vertical at full capacity.
A higher price level: does it shift AS?: No. A change in the price level causes a movement along AS. A shift needs a change in costs or capacity.

2.3.4 National income

Income vs wealth: Income is a flow: the amount received per period. Wealth is a stock: the value of assets owned at a point in time.
Injections and withdrawals in the circular flow: Injections: investment (I), government spending (G), exports (X). Withdrawals: saving (S), taxation (T), imports (M). Saving and tax are not injections.
Multiplier: definition: The final change in real national income divided by the initial change in injections. Each round of spending becomes income, part is re-spent, and the rounds shrink.
Multiplier formulae: Full: k = 1 ÷ MPW, where MPW = MPS + MPT + MPM. Simple (no tax or trade): k = 1 ÷ (1 − MPC) = 1 ÷ MPS. Change in income = k × change in injection.
MPS 0.2, MPT 0.1, MPM 0.2. Government spending rises by 12bn. Change in income?: MPW = 0.5, so k = 2. Income rises by 2 × 12 = 24bn. Tax revenue rises by 0.1 × 24 = 2.4bn, so the net cost is 9.6bn.
Equilibrium real output, and the evaluation point on the multiplier: Where AD = AS (planned injections = planned withdrawals). The multiplier is smaller when there is little spare capacity (prices rise instead of output), and its size depends on confidence and leakages.

2.3.5 Economic growth

Actual growth vs potential growth: Actual: the percentage change in real GDP. Potential: the rate of increase in productive capacity (LRAS or the PPF shifting outwards).
Output gap: formula, positive and negative: Output gap = (actual − potential) ÷ potential × 100. Positive: actual above potential (inflationary pressure). Negative: actual below potential (spare capacity, unemployment).
Actual output 485, potential output 500. Output gap?: (485 − 500) ÷ 500 × 100 = −3%, a negative output gap. Divide by potential, not actual.
Causes of economic growth: Short run: rising AD (C, I, G or net exports, for example export-led growth). Long run: more or better factors: investment, productivity, technology, a larger labour force (net migration), FDI.
Costs of economic growth: Environmental damage and resource depletion, wider income inequality, inflation if AD outstrips capacity, and current account deficits as imports rise. The effect depends on the source of the growth.
Trend growth: The long-term average rate of growth of productive capacity. Growth is a recovery only if actual output is catching up on the trend.

2.3.6 Macroeconomic objectives and policies

The main macroeconomic objectives: Economic growth, low and stable inflation, low unemployment, current account equilibrium, a balanced budget, greater income equality, and protecting the environment.
Fiscal vs monetary policy: Fiscal: changes to government spending and taxation. Monetary: changes to the price, availability or quantity of money and credit, such as the policy interest rate and quantitative easing.
Quantitative easing (QE): The central bank creates money to buy assets, mainly government bonds, lowering long-term interest rates and raising spending. It is not printing notes.
What happens to AD when the central bank cuts interest rates?: Borrowing is cheaper and saving less rewarding, so C and I rise; mortgage payments fall; the currency may depreciate, raising net exports. AD shifts right. Lags and confidence affect the size.
Short-run Phillips curve: Unemployment on the horizontal axis, inflation on the vertical; downward sloping. A change in AD moves the economy along it. A supply shock or higher expected inflation shifts it outwards.
Free-market vs interventionist supply-side policies: Free-market: cutting taxes, deregulation, privatisation, reducing trade union power, cutting benefits. Interventionist: spending on education, training, infrastructure, and subsidies for investment.
Real interest rate: Nominal interest rate − inflation rate. A 5% rate with 3% inflation is a real rate of about 2%.