theme 2

• Income - Rent, interest, wages and profits earned from wealth owned by economic agents
• wealth - A stock of assets which can be used yo generate a flow of production or income. For eg. physical wealth such as factories and machinery is used to make goods and services.
• circular flow of income: overview of how the entire economy works.

  • assumes households are in control of all of the factors of production
• Positive Output Gap


  Actual GDP is greater than potential GDP
• Negative Output Gap


  Potential GDP is greater than actual GDP
• Benefits of Economic Growth

  • Rising incomes
  • Fall in levels of absolute poverty
  • Increased consumption
  • Fiscal surplus
  • Low unemployment rate
• Limitations of Economic Growth

  • Demand pull inflation
  • Unequal distribution of income
  • Fall in export sales due to inflation can lead to trade deficit
  • Increased consumption of demerit goods
• multiplier effect:

  1. initial AD shift to the right
  2. real GDP inc from y1 to y2
  3. inc in real GDP = inc in real output
  4. leads to higher derived demand for labour
  5. unemployment falls
  6. people have a higher disposable income
  7. leads to an increase of consumption
  8. as consumption is a part of AD formula, AD shifts to the right again to the value of the multiplier
• multiplier effect formula:

  1 / (1 - MPC)

  MPC = marginal propensity to consume
• multiplier effect evaluation:

  • if a country has a high marginal propensity to save, which is common among higher income households/countries, they will not spend their extra income earned/or very little, which means the AD shift will be very small
  • the inc in unemployment could be due to an increase of 0 hour contracts, which could mean people are not in a stable income
  • if people are in debt this money would not be used for consumption of goods and services
• multiplier effect evaluation- an increase in AD would not cause an increase in real GDP due to it staying at y1 (equilibrium) as the economy is at is productive potential
• AD shift right = strong sustainable economic growth
• increase in real GDP means the price level moves from pe to p1, which means there is inflation, which fails the macro economic objective of low and stable inflation
• evaluation for an increase of AD:

  • Keynesian, on vertical point on curve- no economic growth, just a rise in inflation (no Y change)
  • Keynesian, horizontal point on curve- no inflation but economic growth (no P change)
• ceteris paribus- everything else stays the same (put it in brackets alongside explaining one factor to show everything else stays the same)

  evaluation use:

  we cant assume ceteris paribus, use a change in another factor and how it affects this

  ie. if there is a fall in investment, there will not be any change in AD if consumption is increasing
• national income effect on economic welfare:

  national income increase = higher consumer spending and investment which leads to multiplier effect, more tax revenue = increase spending on public services.

  evaluation: you dont know where government will spend the increase in tax revenue. for eg. in corrupt governments like Kenya, they could steal the money. In stronger governments they could use this money for other spendings such as subsidies or paying back debt
• economic growth can also be seen as not being a representation of economic welfare, HDI is a stronger representation of this.

  Evaluation:

  • HDI is not accurate as it is very generalised, rural cities and areas are not taken into account, along with the wealthier areas.
• output gap: difference between actual GDP and potential GDP
• positive output gap:

  real GDP is increasing, people are richer, wealth effect, more consumption= high inflation, low unemployment, strong sustainable economic growth
• government has automatic stabilisers to reduce the affects of these output gaps
• negative output gap:

  falling real GDP, less output, lower derived demand for labour, fire workers = higher unemployment (failed macro objective) = inc gov budget deficit due to more spending on benefits such as job seekers allowance.

  also means increase in income inequality, failed macro objective
• circular flow of income

  
• Economic Growth


  One of the macro economic objectives
• Macro Economic Objectives


  • Economic Growth
  • Low and stable inflation
  • Low unemployment
  • Income equality
  • Environmental impact
  • Balance of payments on the current account
  • Balanced fiscal budget
• GDP


  Total value of goods and services produced in an economy, a measure of economic output
• GNI


  Total income earned by a country from its residents and assets all around the world
• GNP


  Value of all products and services produced by the hands of the country both domestically, and internationally
• Nominal GDP


  Value of final goods/services in an economy that adjusting for inflation
• Real GDP


  Found after stripping out the effect of inflation, also known as constant prices
• Basic Economic Problems


  • Consumer objectives
  • Maximise welfare
  • Scarcity
  • Opportunity cost
  • Worker objectives
  • Stable employment
  • Reasonable work burden
• The existence of only leads to the need for, forms and you to make choices
• Economic good


  One which then an opportunity cost
• Free good


  A good with no opportunity cost
• Recession is defined as a decline in economic growth over 2 consecutive quarters
• Characteristics of a Recession

  • High level of economic growth
  • Negative growth
  • Low unemployment
  • High unemployment
  • High spending
  • Low spending
  • Rising inflation
  • Falling investment
  • Falling inflation
• Output gap


  Difference between the actual level of GDP and the estimated long term value
• Production Possibility Frontier (PPF)


  • Shows the maximum possible output combination of goods or services an economy can achieve when all resources are fully and efficiently employed
• Factors of Production


  • Labour
  • Capital
  • Enterprise
  • Land
• Inflation


  A sustained general rise in prices across an economy
• Deflation


  A sustained general fall in prices across an economy