how the macro economy works
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how the macro economy works - Leaderboard
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| 🇬🇧 | 🇬🇧 |
| Whats real national income | Countries total income adjusted for inflation |
| Whats the expenditure method | Adding up all the spending over time |
| Income method | Adding up all the spending over a period of time |
| Output method | = totalling the value of all output produced in the economy for a period of time in each sector of the economy. |
| Real national income equation | Real NI = nominal NI x (price level in prev yr / price level in current yr) |
| Uses of real national income | • It’s a measure of how successful the economy is • It shows how well off the population is • Allows a gov to estimate how much can be collected during taxation. |
| Aggregate demand | Sum of all planned expenditures in the economy |
| What does the AD curve do | Gives the total of all goods and services at various price levels |
| Ad formula | AD = C + I + G + (X – M) consumption + investment + gov ex (exports - imports) |
| Reasons for change in consumption | Change in income |
| 4 possible ways of using income | A) Consuming b) Paying it out as taxes c) Donating it as gifts or charity d) Saving it |
| What is consumption | The use of goods and services by households |
| Factors affecting Consumption | A) Income after the deduction of gov taxes b) Family circumstances – the larger the family, the more will be consumed c) Past income – spending habits d) Future prospects – ppl can often borrow and spend if they expect promotion at a higher pay e) Savings / assets – no savings, only debts ppl will be unable to consume so much, as they will be forced to devote part of their income to debt payments f) Credit facilities g) Level of state services |
| Average propensity to consume / marginal propensity to consume formula | APC or MPC = C / Y Consumption = c Income = y |
| Apc / Mpc formula pt 2 | Disposable income. MPC + MPS = 1 (all the time) |
| Why is MPC important t | Measures changes in consumer spending following a change in someone's real disposable income |
| Saving | Disposable income that's not spent |
| Literally what | Yd = c + s S = Yd – c Marginal propensity to save – change in saving bc of change in household disposable income |
| Whats consumer confidence | Measures changes in consumer attitudes, including expectations of economic situation and households own financial positions, and their views on making major purchases |
| Whats like the og basis unspoken rule | More confident = spend more |
| Base interest rate | Set by the bank of England, rate of interest used by commercial banks as the basis for their own lending rates |
| Saving ratio | – ratio of personal saving to household disposable income (%) |
| FTSE - 100 index | – tracks share prices of the 100 largest comparison listed on the London stock exchange. |
| Factors affecting household saving | 1. Real interest rate 2. Price expectation 3. Availability of credit 4. Unemployment / job security 5. Consumer confidence 6. Tax of savings 7. Trust in banks. |
| What does the house hold debt - to - income ratio measure | Scale of debt in an economy |
| Multiplier process | Where an initial spending leads to a larger and more widespread final impact on an economies total output or income. |
| Why does the multiplier effect come | Bc of injections of demand into the circular flow of income stimulate further rounds of spending – bc of one person’s spending is another income. |
| Positive multiplier effect | – initial increase in injections (or decrease in leakage) leads to greater financial increase in the level of real GDP |
| Negative multiplier effect | – initial decrease in injections (leads to greater final decrease in the level of real GDP. |
| Multiplier formulas | Multiplier = 1 / marginal propensity to save. Multiplier = 1 / (1- MPC) Multiplier = 1 / MPS + MPM + MRT MPS = Marginal propensity to save MPM = marginal propensity to import MRT = marginal rate of tax |
| Capital investment | Is spending on machinery, equipment, factories, tech and infrastructure to create new capital goods. |
| Gross investment | – total amnt that the economy spends on new capital. Includes an estimate for the value of capital depreciation since some investment is needed each yr to replace tech. |
| Net investment | Gross investment – capital depreciation. |
| Gross investment | – all investment including offset depreciation |
| Fixed investment | – spending on fixed assets, such as vehicles or machinery. |
| Planned investment tends to do what | To rise when firms expect rising demand and have limited spare capacity to supply goods and services. |
| How can gov lift investment | By lowering corporation tax or offering other tax incentives as part of their fiscal policy. |
| Whats the accelerator effect | Positive relationship between planned capital investment and the rate of change of capital income. |
| Animal spirit | – mix of confidence, trust, mood and expectations. |
| Significance of investment for the economy | 1. Injection of demand for capital goods industries 2. Investment can lift productivity / incomes 3. Investment helps to sustain export led growth 4. Economies of scale and better competitiveness. |
| Determinants of investment | A. Investments take time. Large projects take yrs b. Investments are planned on future expectations. c. Spirit of entrepreneurs d. Profitability e. Rate of interest – if high it mean cost of investing is more than profit, customer credit is expensive, credit hard to obtain. |
| Agg supply | = total output of goods and services that firms in an economy are willing and able to supply at a given price level. |
| Long run AS | Supply represents a max output when all factors of production are full and efficiently employed. |
| Short run AS | The relationship between planned national output and the general price level We assume that productivity and costs of production and the state of tech is constant in the short run when drawing the sras. |
| What does rising demand stimulate | Expansion of supply |
| Factors causing shift in SR AS | • Unit wage costs perhaps arising from higher minimum wage • Labour productivity • Less raw materials • Business indirect taxes, subsidies, vat, environmental and employment taxes • Cost of imported materials • Supply shocks – like environmental stuff. • Net migration |
| Supply shock | When the supply of a good or commodity changes abruptly, which suddenly changes the price of the good or commodity. |
| LR AS | – LRAS max possible output, like a country’s ppf. Represents the max output when all factors of production are fully and efficiently employed. |
| Infrastructure | – includes physical capital such as transport networks, energy, power and water supplies and telecommunication networks. |
| Explaining an outward shift in the ppf (Production Possibilities Frontier) 0 | • Increase in natural resourced • Tech advances • Human capital development • Investment in capital |
| Factors affecting LR AS | • High productivity of labour and capital • Growing population and increased labour market participation • Innovation and enterprise • Capital investment • Stock of natural resources. |
| ,explanation on AS | 1. When spare capacity is high, aggregate supply will be elastic, this means that a rise in agg demand can be met easily by increased output and there is little threat or prices rising 2. Amount of space capacity declines 3. There is a possibility of diminishing returns in production 4. Bottlenecks appear in the supply of key inputs including skilled labour 5. When AS is perfectly inelastic, an economy is at full capacity; this means that further increases in AD are purely inflationary in the short run with little extra real output. |