Macro - Economics, - Coggle Diagram
Macro - Economics
The Circular Flow Of IncomeThis is a simple model of the economy showing the flow of goods, services and factors of payment around the economy.Expenditure = Output = Income Injections = enter the flow
Leakage = leaving the flow
- Government spending
The increase in the real value of goods and services produced as measured by percentage change in GDP.
Ways of measuring Economic growth
- GDP - Gross Domestic Product
The financial value of all goods and services produced in an economy even if a company is based in another country if the good or service is manufactured in that country it is part of that countries GDP. .
- GNP - Gross National Product
This is the financial value of all goods and services produced by a countries firms even if the good or service is manufactured in another country, if the company is based in that country it is counted as part of its GNP.
- Real GDP - GDP taking inflation into account
- GDP per capita - Output of the economy divided by the population
Causes of economic growth Increase in AD
Increase in C+I+G+X and/or a decrease in -M
Only leads to short-run growth (not sustainable) Increase in AS
Increases in productivity (output per unit of inputs employed) of labour and capital often drive economic growth Decrease in corporation tax will increase investment
- Decrease in cost of production
- Increase in productivity
- New technology
- New resources
This will cause a shift right of the AS curve and result in long-run and short-run economic growth. This will also lead to a shift of YFE and the AS curve to shift right.
Impacts of Economic GrowthBenefits
- In the short run - Ad shifts right, increase in output
- In the long run - new machinery and an increase in efficiency, increase in productivity shift right of AS curve
- Increase in life expectancy
- Higher level of education
- Improvements in health
- Improvements in living standards
- Fewer people going hungry
Impacts on :
- Growth is unsustainable - Increases in pollution, increased pace in using natural resources leading to economic collapse in the future because the productive potential will be increased in the short run but decrease for future generations, however as this increases people will use renewable energy and pollution and climate change may decrease with new technology.
- Increasing inequalities
- Rising incomes does not necessarily improve happiness
Sustainable growth - Growth in productive potential of the economy today which does not lead to a fall in the productive potential of the economy for future generations.
- Firms - Increase sales with customers' rising incomes
- Government - More tax better education, health, infrastructure
- Environment - In HIC's often leads to less pollution with people switching to renewable alternatives, In LIC's there will be increased pollution
- The economy - Larger economy, higher GDP more jobs or fewer as technology improves
7 Determinants of consumer spendingDefinition - The total amount of spending by all households in an economy
Pneumonic - DICE WII
- Saving is affected in an inverse way by many of the factors of consumer spending, saving is real disposable income minus spending
Useful terms :
- Income - The amount of money which is earned by households
Disposable income - income after tax has been deducted
Discretionary income - Income after tax and basic living costs
Increase in YD leads to an increase in consumer spending and an increase in AD increasing demand pull inflation, increase in output less unemployment
Vice versa for a decrease in income, increase in malignant deflation
- Wealth - Total value of all assets you own, an increase in wealth increases consumer spending and AD
- Interest rates - Cost of borrowing and benefit on saving
Increase in interest rates - decrease in consumer spending
Decrease in interest rates - increase in consumer spending
- Expectations - How confident consumers are about the economy, positive expectations during a boom, increase in consumer spending
vice versa for a recession
- Inflation - A sustained rise in the weighted average of all prices.
Creeping inflation - low levels of inflation, consumers think this is bad therefore buy less
Hyper inflation - Above 100% consumers will buy products now in the short run there will be an increase in C
- Availability of credit - How easy loans are to acquire by consumers
Easy to acquire a loan, increase in consumer spending and vice versa for harder loans to acquire
- Demography - Age structure of a population increase in saving for those who are older therefore if there is an ageing population consumer spending would be low and the opposite for a youthful population.
- Average propensity to consumer - the proportion of disposable income that is spent
- Average propensity to save - The proportion of disposable income saved
- Dissave - Spending more than disposable income
- Savings ratio - Saving as a proportion of disposable income
Definition - Spending on capital goods
Pneumonic - GENICCP
- Interest rates
Increase in I/R would result in an increase in saving and a decrease in borrowing resulting in a decrease in investment
The theory linking I/R and I is called the marginal efficiency of capital theory, there is an inverse relationship between the two (diagram)
- Government policy - An economic policy introduced by the government aimed at increasing the level of investment. The policy reduces corporation tax. A decrease in corporation tax increases investment and increase AD because of equation C+I+G+X-M.
- Cost of capital goods - The more expensive (machinery and infrastructure) less investment and a decrease in AD.
- Expectations - In a boom, high confidence, increase in investment, increase in AD, opposite for recession
- New technology - E.g computer revolution, efficient and a requirement increases investment and increases AD
- Changes in consumer spending - More consumer spending, more sales, more profits, more investment and an increase in AD
- Past changes in income - In macroeconomics income refers to national income, Level of investment determined by past changes in income- accelerator theory It= a(Yt - Yt-1) It = investment, a =capital to output ratio, (Yt - Yt-1) is GDP in year t - GDP in previous year. Large change in GDP, investment will be high, small change investment will be lower.
The MultiplierAn increase in Investment or any other injection will lead to an even greater increase in income. This is the multiplier process (one persons spending is another's income)E.g - Government injection of 10bn, spent in shops etc, income for some, this in turn will be spent, leading to a larger increase in output and AD to shift from AD1 to AD2 and further to AD3 (AD diagram). Increasing AD more than the initial injection.Calculating the multiplier Multiplier formula = 1 ÷ 1 - MPC
- Marginal propensity to consume - Increase in consumption ÷ increase in income
- Marginal propensity to save - Increase in saving ÷ increase in income
- Marginal propensity to tax - Increase in tax ÷ Increase in income
- Marginal propensity to import - Increase in imports ÷ increase in income
- Marginal propensity to withdraw - (S+T+M) ÷ Increase in income
Relationship between PL and ADReasons why the AD curve is downward sloping
- The wealth effect - Decrease in PL (Average prices fall) more goods and services people can buy with their wealth AD rises- Opposite for increase in PL
- Interest rates - PL decreasing no inflationary pressure, I/R stay low encourages C and I increasing AD - opposite for an increase in PL
- International trade effect - Decrease in PL the country's products are more competitive decrease in imports, increase in exports, increase in AD - opposite for a increase in PL
The four determinants of AS Cost of production (short run)
- Price of labour
- Price of raw materials
- Education and training
- Working practises