Measuring macroeconomics Flashcards Preview

Macroeconomics 1002 > Measuring macroeconomics > Flashcards

Flashcards in Measuring macroeconomics Deck (99)
Loading flashcards...
1
Q

Value added method

A

Calc GDP using value added for each good produced - by summing values added GDP can be calculated

2
Q

Transfer payment

A

govt payments to businesses or households designed to meet a specific objective

3
Q

capital income

A

payment to owners of physical and intangible income (25% GDP)

4
Q

Four groups of users (exp. method)

A
  1. Households 2. Firms 3. Government 4. Foreign sectors (purchasing domestic goods)
5
Q

labour income

A

wages, salaries, incomes of self employed (75% GDP)

6
Q

National income accounting identity

A

Y = C + I + G + NX

7
Q

Final Goods and Services

A

Goods and services consumed by the ultimate user- because they are end products of the production process they are counted as part of GDP

8
Q

Investment

A

spending by firms on F G&S primarily capital goods an d housing

9
Q

Why do firms purchase capital goods

A

to increase their capacity to produce

10
Q

Purchases spent by 4 groups of users = market value of those goods and services in the

A

exp. method

11
Q

Consumption expenditure

A

spending by households on goods and services such as food, clothing, entertainment

12
Q

Govt Purchases

A

Purchases by govts. on F G&S do not inc. transfer payments which are payments made in govt. in return for which no current goods or services are received.

13
Q

Economics define

A

The study of how society allocates its scarce resources

14
Q

Macroeconomics

A

The study of economy wide phenomena instead of individual markets

15
Q

Income method

A

considers that when a good or service is sold the revenue from its sale is dist. to the workers and owners of capital in prod

16
Q

Comparative Advantage

A

Everyone does best when each person concentrates on the activities for which his/her opportunity cost is the lowest. I.e. Someone staying home to do house chores while possessing a medical degree has a high opportunity cost of forgoing practicing medicine

17
Q

What are the 3 ways of measuring GDP

A
  1. Production method (value added) 2. Expenditure method 3. Income method
18
Q

Examples of govt. expenditure

A

social security benefits, welfare, pensions paid to govt workers etc.

19
Q

Structural unemployment

A

Unemployment due to no demand

20
Q

Inventories

A

Items which have been produced but not sold in a given period

21
Q

Frictional unemployment

A

Temporary unemployment i.e. between jobs

22
Q

Income method can be summarised as

A

GDP = labour income + capital income

23
Q

Non- durables

A

Shorter lived goods such as food or clothing. Services from haircuts through to education

24
Q

Durables

A

Long lived consumer goods such as cars and furniture- houses are not inc. treated as investment

25
Q

Four categories of expenditure

A
  1. Consumption expenditure C 2. Investment I 3. Government purchases G 4. Net exports NX
26
Q

criteria which allows macroeconomic criteria to be gauged

A

measure- aggregate output average level of prices

27
Q

The relationship between GDP and expenditure is expressed by

A

the national income accounting identity

28
Q

(1) consumes (2) invests (3) makes govt purchases (4) buys national exports

A
  1. households 2. firms 3. govt 4. foreign sector
29
Q

Expenditure method

A

Calc GDP by looking at the amount of money spent on goods and services produced in a country in a given period

30
Q

Cyclical unemployment

A

Unemployment due to a recession this is the type of unemployment we want to avoid in the economy

31
Q

What suggests an economy is performing well

A

Inc living std Avoiding short term macroeconomic extremes - cons unemployment rate, GDP not too high/low Sust. lev. public and foreign debt Balance expenditure / need to provide resources for the future

32
Q

Residential investment

A

the consturction of new homes and apartment buildings, for GDP accounting purposes residential investment is treated as an investment by the business sector which then sells homes to households

33
Q

GDP

A

the market value of final goods and services produced in a country in a given period> usually a quarter or year

34
Q

Business fixed investment

A

Purchases by firms of new capital goods such as machinery, factories and office buildings > for the purpose of calc GDP long lived cap goods are treated as final goods not int. goods

35
Q

Nominal GDP

A

a measure of GDP in which the quantities produced are valued at current year prices; measures the current dollar value of production

36
Q

Real GDP

A

a measure of GDP in which the quantities produced are valued at prices in the a base year rather than at current prices; real GDP measures the actual physical volume of production

37
Q

Why is GDP different than measuring wellbeing

A

It may be an indicator how an economy is performing it does not represent
1. the distribution of wealth per capita

  1. environment or resource depletion
  2. black market activity or underground economies
  3. non market activities- e.g. stay at home parents, volunteering etc. how that contributes to economic growth or contraction
  4. quality of life e.g. air quality, crime rate, leisure time
38
Q

Consumer price index

A

we use the CPI to measure inflation- the change in prices of goods and services between periods

39
Q

who gathers information for CPI

A

the ABS

40
Q

CPI formula =

A

cost of base year consumption of basket goods and services in current year

divided by

cost of base year consumption of basket goods and services in base year

41
Q

What is inflation

A

inflation is the changes in price for an economy over a given period of time

42
Q

Inflation is calculated by

A

measuring CPI change

inflation yr 2 = CPI yr 2 - CPI yr 1 / CPI yr 1

x 100

43
Q

CPI is used to

A

adjust real vs nominal GDP

a useful

44
Q

Does CPI represent true inflation

A

suggested that it can overestimate by 1-2%

  1. quality adjustment bias: sometimes price increases is associated wirh improved quality of products
  2. substitution bias: CPI focuses on a fixed basked of goods, consumers may switch more to less/ more expensive goods
45
Q

Indexing

A

CPI can be used to calcculate real quantities into nominal quantities

46
Q

Costs of inflation on the economy

A

Shoe leather costs

Noise in the price system

Distortion in the tax system

Unexpected redistribution of wealth

Interference with long term planning

Menu Costs

47
Q

Shoe leather costs

A

money has the adv of being universally accepted

inflation though > increases the cost of holding money to consumers and businesses

Because it erodes the real purchasing power of any given amount of cash

The longer the cash is held the larger is the reduction in purchasing power

48
Q

Noise in the price system

A

Adjusting the price of goods + services in response to demand and supply forces

When inflation is high it is difficult to see if price change is demand or supply or overall change in price level.

Can make the market inefficient - i.e. is demand high or has the cost of the item increases (inflation)

49
Q

Distortion in the tax system

A

Taxes in AUS are not indexed to inflation

As inflation increases ~nominal wages may inc but real wages may not

Therefore ppl may pay inc income tax even if their real wages have fallen

50
Q

Unexpected redistribution of wealth for INFLATION

A

Inf can cause unexpected winners and losers

Money lending hurts banks because the purhcasing power or value of the $ has decreased and therefore lenders are paying back a decreased amount

Note that redistribution of wealth doesn’t destroy wealth it just transfers it from one group to another in the economy

51
Q

Interferance long term planning

A

Inflation can interfere with the ability of households and firms to plan for the long-run

i.e. how does a university student need to save for retirement in an erratic economy

52
Q

Menu costs

A

Cost of having to change prices

includes: reprinting menu’s, posters, changing website prices

53
Q

Interest rate

A

the proportion of a loan that is charged as interest to the borrower typically expressed as an annual percentage of the loan outstanding

NOTE: when you have money sitting in a bank account the bank is effectively a borrower

54
Q

Real interest rate

A

the percentage inc in the real purchasing power of a financial asset or investment

55
Q

Deflation

A

is a situation in which the prices of most goods and services are falling over time so inflation is -ve

56
Q

The effect of deflation on RIR is concern because

A

It discourages various types of important expenditure i.e. firms are less willing to invest

57
Q

Nominal interest rate

A

refers to the interest rate before taking inflation into account

58
Q

What happens when deflarion = real interest rate

A

nominal IR would = 0 which one could do the same by holding cash which pays 0% interest

If deflation inc then infl would become -ve

0% is the lower limit for nominal interest then any inc in deflation = inc in the real interest rate therefore discouraging expenditure and making monetary policy harder to implement

59
Q

Savings

A

current income - spending

can apply to ind, households, firms, govt

60
Q

Saving rate

A

important to macro ec

is the amount of savings divided by the income

i.e. 60/600

61
Q

Wealth

A

assets - liabilities

where

assets are anything of value a person owns

liabilities are debt that someone owes

62
Q

Balance sheet

A

Used by accountants to work out wealth

63
Q

Stock

A

a measure that is defined at a point in time

eg. wealth on the 20th of march

64
Q

Flow

A

a measure that is defined per unit of time

e.g. 20$ per week

65
Q

Capital gains and losses

A

wealth can change because of change in the value of assests

66
Q

Change in wealth =

A

savings + capital gains - capital losses

67
Q

Three types of saving

A

Lifecycle saving

Precautionary saving

Bequest saving

68
Q

Lifecycle saving

A

to meet long term objectives

69
Q

Precautionary saving

A

protect oneself against unexp setbacks such as a job loss

70
Q

Bequest saving

A

to leave money or inheritence to your heirs e.g. children or charity

71
Q

Australias savings have declined because

A

age pension and superannuation reduce need to save for retirement

availability of mortgages increase

unemployment decreased

home ownerships with smaller deposits

good performing stock market = large capital gains

72
Q

People save because

A

making financial investments -govt bonds, stocks ect

people recieve interest on their investment which increases wealth

in savings RIR = most relevant

73
Q

Measurement of national saving inc

A

firms , households, govt

74
Q

Firms pay:

Firms save

A

pay a proportion of sales, reciepts as wages - payments to suppliers, interest, rent divendends and tax

save or retain a propotion of proceeds as retained earnings and an allowance for depreciation of equipment ect = business savings

75
Q

Households recieve

A

recieve income in the form of wages, interest, rent and divendends

proportion used for consumption and depreciation of white goods while the rest = savings and taxes

76
Q

Government recieve

A

tax payments from firms and households and the budget represents the govt saving

77
Q

Aggregate spending categories

A

investment is easiest to classify because it is done to expand the economy’s future productive capacity or to produce future housing capacity

Household and government spending meets a combination of current consumption and future needs

78
Q

Measurement of national savings

A

NIAI suggests that for the economy as a whole

production (and income) = total expenditure

We can use this eqn to work out national savings

assuming NX= 0

therefore Y=C + G + I

79
Q

To work out savings for Y= G + I + C we =

A

Savings = Y (GDP) - (C) Consumption - (G) Government

80
Q

S= Y-C-G+T-T includes:

taxes paid from priv sec to govt minus transfer payments and is rearranged to give us

A

S= (Y-T-C) + (T-G_

Hence Spriv = Y-T-C

Spub = T-G

and National Savings = Spriv + Spub

81
Q
A
82
Q

Govt budget deficit

A

the excess of govt spending over tax collections

83
Q

Govt budget surplus

A

the excess of govt tax collectiions over govt spending the govt budget surplus equals public saving

84
Q

Investment

A

Investment is the creation of new capital goods and housing. It is critical to increasing productivity and improving living standards.

85
Q

What determines a firms decision to invest

A

the cost benefit principle- is the expected costs less than the benefit (equal to the value of the marginal product it provides)

86
Q

Financial Market

A

Through the workings of the financial markets, the supply of savings (by households, firms and the government) fund the demand for savings (by firms that want to buy new capital)

87
Q

Supply and demand model

A

Allows us to analyse the financial markets

hence in equilibrium national savings= investment

88
Q
A

Supply of savings (S) is an upward sloping curve

Ilustrates the amount of national savings that households, firms and govt are willing to supply at each value of the interest rate

Evidence suggests that increases in the real interest rate stimulates savings

89
Q
A

Savings are demanded by firms wishing to invest in new capital goods,

Firms make capital inv by:

a. borrowing in the financial market
b. using its own accumulated profits

Demand for saving is the curve (I)

It is downward sloping because a higher RIR raises the cost of borrowing and decreases firms willingness to invest

90
Q
A

In equilibrium the desired inv (deman for savings) and desired national savings (supply of savings) are equal

Where the two curves intersect gives us the economys level of savings and investments and the real interest rate that will ‘clear’ the market for savings, r. The real interest rate acts as the ‘price’ for savings

91
Q

If s > I

A

There would an excess supply of savings which would push down the real interest rate

92
Q

If S < I

A

there would be an excess of demand for savings which would psh up the real interest rate

change/ RIR causes movement along the curve

93
Q

Factors which cause the demand for investment to change

A

New tech- shift of demand

Inv tax credit policy -shift of demand

Anything changing marginal product of inv will shift the demand for inv funds bcoz-

i. anything that dec the marginal product of the inv will reduce the demand for inv funds
ii. anything that inc the marginal product of the inv will raise the demand for inv funds

Inc in demand > shift right
Dec in demand > shift left

94
Q

Factors which will cause the supply of savings to change

A

Change in govt budget

Any factor that changes saving in the economy will shift the supply of savings- because

Spub and Spriv so anything that causes groups of users to change their saving rate will shift the supply curve

An inc in the supply of savings > shift right

A dec in the supply of savings > shift left

95
Q
A

A govt budget surplus (T- G > 0) inc supply of savings and shift out the savings curve

A govt budget deficit implies (T-G <0) would dec the supply of savings and will shift the savings curve from S1 to S2

96
Q

Perfectly Competitive Labour Market Model

A

Assumes the firms and workers are ‘price takers’

i.e. firms cannot influence the price they recieve for their products or workers similarly the price (wages) they recieve in return for their services but that these are decided by the overall conditions of the market

97
Q

Demand for labour

A

Depends on both the productivity of the workers and the price the market sets on workers output

98
Q

Key labour market trends

A
  1. since the 1970s Australia and other industrial countries have enjoyed substantial growth in REAL earnings
  2. Since the 1970s real wage growth has slowed particularly for men- attributed to one of the reasons for inc labour force participation of women
  3. there has been an increase in inequality among top earners and bottom earners with top earners having a higher inc in real wages- this has caused a two-tier labour market with lots of jobs for the educated and minimal jobs for unskilled
  4. The proportion of the population working has inc from 58% to 65% over the last 50 years
  5. Diff countries have experienced diff unemployment rates ~aus is 6% compared to 10% in Europe
99
Q

Productivity of workers

A

the more productive workers are the greater the value of the goods and services they make, the greater number of workers an employer will want to higher at a given wage rate

Firms can do cost benefit analysis to determine the number of workers they employ considering

i. additional cost of hiring one more worker (marginal cost)

ii. the benefit of hiring one more worker (value of marginial product)
A worker is hired if marginal benefit > marginal cost