2.1 The Level Of Overall Economic Activity Flashcards Preview

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Flashcards in 2.1 The Level Of Overall Economic Activity Deck (38)
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1
Q

What is the circular flow of income model?

A

Macroeconomic tool used to explain how economic activity and national income are determined.

2
Q

What are households and firms in the circular flow of income model?

A

Households are individuals with effective demand for goods and services.
Firms are businesses that supply goods and services.

3
Q

What are the three types of withdrawal?

A

Savings (S) to banks, taxation (T) to government, and import expenditure (M) to foreign sector.

4
Q

What are the three types of injection?

A

Government spending (G), investment expenditure (I) and export earnings (X).

5
Q

What is the condition for income equilibrium?

A

S + T + M = G + I + X

6
Q

What does the level of economic activity depend on?

A

Size of injections (J) and withdrawals (W).

If W > J economic activity declines.

7
Q

What is income?

A
Sum of returns for use of four factors of production:
return for land (rent)
return for labour (wages)
return for capital (interest)
return for enterprise (profit)
8
Q

What happens in a closed economy?

A

Households supply factors of production to firms - generate output of goods and services.
Firms provide factor incomes to households.
Households spend income on goods and services produced by firms creating expenditure revenue for firms.
Income flow is numerically same as expenditure flow and output flow.

9
Q

What happens in an open economy?

A

There is a government sector, financial markets and foreign trade.
In financial sector saving (S) represent a withdrawal, investments (I) are injections.
With a government sector taxes (T) represent a withdrawal, government spending (G) is an injection.
Foreign sector with international trade, export revenue (X) represents injection, whereas import expenditure (M) is a leakage.

10
Q

What is gross domestic product (GDP)?

A

Value of all final output of goods and services produced by firms within a country per year.

11
Q

What is gross national product (GNP)?

A

Value of all final output of goods and services produced by a country’s citizens both domestically and abroad.

12
Q

What are the three ways to measure economic activity?

A
The value of national output (O)
National income (Y)
National expenditure (E)
13
Q

What does the output method of measuring economic activity involve?

A

Adds up final value of newly produced goods and services during the year.

14
Q

What does the national income method of measuring economic activity involve?

A

Adds up total value of all factor incomes earned during the year.

15
Q

What does the expenditure method of measuring economic activity involve?

A

Adds up the total spending on newly produced goods and services during the year.

16
Q

Why do all three methods give the same numerical result?

A

Value of national output equals value of what is spent on the output (national expenditure). This expenditure becomes national income to households and firms that produced the output.

17
Q

What is the formula for calculating GDP?

A

GDP = C + I + G + (X-M)

C is consumption expenditure
I is investment expenditure 
G is government expenditure 
X is export earrings 
M the amount spent on imports
18
Q

What else does GNP account for?

A

Uses GDP but accounts for net property income from abroad ie. difference between what residents earn from overseas investments minus income earned by foreign residents within domestic economy.

19
Q

What is the formula for GNP?

A

GNP = GDP + net property income from abroad.

20
Q

What is net property income from abroad?

A

Refers to difference in value between incomes earned and incomes paid abroad. .

21
Q

How is nominal GDP measured?

A

By using current market prices - value of GDP at the time of measurement.

22
Q

How is real GDP measured?

A

Takes account of fluctuations in prices (inflation over time).

23
Q

What is the benefit of using real GDP?

A

Allows better comparisons of economic activity over time by using constant market prices, values are adjusted for inflation over time.

24
Q

What is GDP per capita?

A

Expressing GDP per head of the population ie. averages out total GDP per person in the country.

25
Q

How is GDP per capita measured?

A

GDP per capita = total GDP/population size

26
Q

How is GNP per capita measured?

A

GNP or GNI per capita is calculated in the same way - dividing the total GNP or GNI by country’s population size.

27
Q

What do national income statistics give an indication of?

A

Standards of living in a country, higher real GDP per capita is associated with higher standards of living for average person. A persons standard of living is directly dependant upon amount of goods and services they are able to consume.
Reveal average persons social and economic wellbeing.

28
Q

What are some limitations of using national income statistics to measure standards of living in a country?

A

Distribution of income and wealth in the country.
Varying rates of direct and indirect taxes between countries.
Differences in cost of living.
Extent of social welfare benefits varying between countries.
Exchange rate fluctuations making international comparisons of GDP over time less meaningful.
Composition of national output.
Extent to which national output generates negative externalities limiting sustainability of economic activity and quality of life in the country.
Variations in the rise of unofficial economy for goods and services that are not officially traded.
Consideration of alternative measures of GDP to measure standard of living eg HDI.

29
Q

What is green GDP?

A

Measure of GDP that accounts for environmental destruction of economic activity by deducting environmental costs associated with output of goods and services.

30
Q

How is green GDP calculated?

A

green GDP = nominal GDP - environmental productions costs.

31
Q

What is the business cycle?

A

Describes fluctuations in economic activity in a country over time which create a long term trend of growth in the economy.

32
Q

What does a peak show on the business cycle?

A

There is an economic boom where economic activity is at highest level. Unemployment is low, consumer and business confidence levels are very high.

33
Q

What does a slump show on the business cycle?

A

There is a recession where level of economic activity declines. Occurs when GDP falls for two consecutive quarters. Business failure is common and unemployment rises. Recession creates uncertainty for firms and damage consumer confidence levels. Slump occurs at the bottom of recession. There is mass unemployment as consumption, investment and net export earnings remain low.

34
Q

When does a recovery on the business cycle occur?

A

When the level of GDP rises after a slump. Consumption, investment and net exports gradually rise, thus creating employment opportunities and increasing business confidence.

35
Q

What is shown by the long term trend in the business cycle?

A

Potential national output (potential GDP) of an economy.

36
Q

What are exogenous shocks?

A

Outside factors that affect potential growth of an economy eg. global financial crises, outbreak of infectious diseases and natural disasters.

37
Q

What is economic growth?

A

The increase in level of economic activity.

38
Q

Why is economic growth good for an economy?

A

Increases long term productive capacity of economy, illustrated by an outwards shift of PPC. Suggests economy is more prosperous so average person earns more income.